On Sept. 7, I published an analysis on GuruFocus evaluating the impact that a looming credit crisis could have on gold prices in general and the share price of Seabridge Gold (SA) in particular.
Someone who builds a mine here is going to have project with a life of not 10, 20 or 30 years. We are now seeing the potential for a project life of up to 100 years of mining activity because we control the whole district and already are closing in on 5 billion tonnes of resources.
Ken: Rudi, we are all aware of the fact that a significant aspect of Seabridge Gold's value is determined by gold and copper prices. Would you be kind enough to provide us with your outlook for gold and copper prices going forward and your views as to what catalysts might drive prices in the direction you see them moving as well as how that might impact the share price of Seabridge and its joint venture prospects?
Rudi: In the copper market, we believe the market is really looking at the wrong side of the equation. Everybody is focusing on demand, especially in China. They are all asking, "Is China going to grow at 5% or 7% or less?" and believe that the demand side will ultimately determine the copper price.
I believe the supply side is far more significant. A lot of the projects that the analysts and mining companies thought would be built or expanded are not happening. Traditional copper jurisdictions like Chile, Indonesia and Peru are becoming more challenging for producers due to higher taxes, higher royalties, lack of power, new environmental requirements, local opposition and, in some cases, outright expropriation.
In Chile in particular, which produces most of the world's copper, new projects and expansion of projects now have to include desalinization plants that will add at least $1 billion in new capital to the project costs. You are also seeing issues with lack of available power in Chile.
So, we think the supply side has become far more interesting now and as a result of these issues and copper will be in short supply going forward, which should result in higher prices than what we have been seeing.
On the gold side, clearly we have been in a bear market for the past four years. Most Western investors have sold their gold positions. Gold equities like Seabridge, Newmont and Barrick have been destroyed in terms of valuations. In fact, gold equities are at their lowest values relative to gold in history! Western investors have sold gold and gold equities and bought stocks because of five reasons:
1) They believe Central Banks know what they are doing. We believe the Fed is clueless and smart investors are starting to realize this.
2) The belief that quantitative easing and zero interest rate policies have helped the economy. We disagree with that. There is no evidence, other than higher stock prices, that these policies have led to economic expansion.
3) The U.S. economy is recovering and growth will accelerate. We've heard that five years in row now, that we're about to get into acceleration mode. Without real investment in plant and equipment, you are not going to see any real growth in the U.S. economy.
4) There is no apparent inflation. Our view is that QE will eventually manifest itself in higher prices, and that the Fed will be way behind the curve as it finally moves to tighten.
5) Investors still think when the Fed raises rates it will be good for the dollar and bad for gold. The fact is, if you actually look back over the past four tightening cycles, gold has gone up; it hasn't gone down.
Our view is that we are close to a major turning point right now and that gold is poised to go higher as Western investors realize they do need some insurance in their portfolios to guard against Central Bank policies and a potential market collapse.
Our share price in particular has gone up 60% to 70% from our recent bottom. We tend to be a bellwether stock and lead gold equities higher. We think we are now starting to see that breakout here in Seabridge that will soon be followed by other stocks.
Zahar: Since Ken brought up the prospect of a joint venture related to Seabridge, can you give us any update on the status of a potential sale or joint venture activity and the type of market conditions you would like to see preceding any type of move in that direction?
Rudi: Yes, Zahar. We have made it very clear that KSM is a project far too large for us to develop on our own. It's going to require the assistance of a major mining company. We now have more than 10 of the largest mining companies in the world under confidentiality agreements and looking at KSM as a joint venture opportunity. This includes not only the largest gold mining companies but, because of the copper content, some of the largest base metals mining companies in the world, too.
There's no question that market conditions today are challenging. There's no question that higher gold and copper prices would help in terms of our ability to transact. But now, having all the big companies involved and engaged, it is not impossible that we could have a partner in place before next season. However, I must caution you that terms trump timing. We are not going to give KSM away in a JV structure unless the terms are acceptable.
Ken: Rudi, I want to compliment you on a statement you just made. A lot of people your position - and I know you take heat from shareholders - they tend to get in a rush and make the convenient deal instead of the best deal. You and I have known each other for several years now, and you have always maintained you are going to be patient and only execute a deal when it is in the best interest of shareholders. As a shareholder myself, with what is, for me, a large position in the stock, I appreciate the patience you guys have shown and the way you have moved this project forward.
You and I have discussed in the past your philosophy regarding the issuance of new shares and the dilution effect that can have on existing shareholders. But I don't think we have ever covered it in one of our interviews. Since I think it is such a unique approach in the exploration industry, I was wondering if you would mind sharing it with us today and the results that approach has produced for existing shareholders over the years?
Rudi: Happy to do so and, Ken, thanks for bringing this up. I think this really is something that is unique to Seabridge. The gold industry and especially the junior exploration companies are what I call serial diluters. They just keep issuing more and more shares every year without ever offsetting that dilution with value creation.
One measure that we have put in place starting 16 years ago, and it remains as true today as it did then, is the idea of maximizing gold ownership per share. When we go out and raise money by issuing shares, we only do it with the belief that we will be able to offset that dilution by adding more ounces per share than we had before the dilution occurred.
I think maybe a brief history of this could be helpful in showing how it has developed over time. My co-founder, Jim Anthony, and I took over this shell company, Seabridge, in 1999. At that time, there were 17 million shares outstanding, and it was trading on the Vancouver Stock Exchange at about 15 cents per share and had about $200,000 in the bank.
Our goal for Seabridge was to create the best leveraged play possible to a rising gold price. And we wanted to do that by creating a vehicle that had more gold ownership per common share than anybody else out there. So we started with 17 million shares and very little cash in the bank and zero ounces.
From 1999 to 2002, we were in acquisition mode. We went out looking to acquire uneconomic deposits and advanced stage gold projects that would benefit from rising gold prices, essentially turning noneconomic deposits into economic projects. During that three-year period, we scoured the portfolios of the major mining companies. We bought nine deposits. Those nine deposits initially gave us 15 million ounces of inferred gold resources. We paid about $15 million to buy these projects and used mostly our shares to pay for them. By the end of 2002 we had 15 million ounces in the ground and our share count had grown to 27 million shares outstanding. So we had a little more than a half an ounce per share.
In 2005 and 2006, we started exploration activities. We knew that at some point, if we were right in our call on gold, it would be more difficult to find accretive acquisitions. So projects we looked to acquire on the front end had to have exploration upside.
We put that to the test. Clearly we had huge success at KSM. We also had huge success at Courageous Lake. So from 2005 to the end of 2014, our ounces grew from the 15 million ounces we acquired to 45 million ounces of gold reserves plus an additional 14 million ounces of measured and indicted resources plus another 32 million ounces of inferred resources. I would total these up for you, but under National Instrument 43-101 we have to report reserves and resources separately. These numbers don't include the copper or silver; that's just the gold. Our share count went from the 27 million at the end of our acquisitions to 50 million at the end of 2014. So, by the end of 2014, we had 45 million ounces of gold reserves plus another 46 million ounces of gold resources with 50 million shares outstanding so almost two ounces of gold per share.
Every year, we focus on that metric. We look at how we are going to spend money and what it is going to deliver to us in additional ounces. We look at the return on that spending and whether it is going to add additional ounces and whether those new ounces will be better than existing ounces. And if we can find a use of proceeds that is going to deliver additional growth in ounces per common share then we will suffer the dilution. If we can't, then we will stop drilling.
However, I might point out that the last three years have been pretty successful. We've added over 11 million ounces of gold and 10 billion pounds of copper between Deep Kerr and Lower Iron Cap offsetting less than 4 million shares of dilution.
This year in particular, we started drilling a new zone looking for the high-grade core zone underneath Mitchell. We didn't hit it right away; we stopped drilling there because we were not going to get the bang for the buck. We cut back that program by about $2 million and continued to focus on Deep Kerr.
Our industry turns gold into cash. At Seabridge, we turn cash into gold in the ground!
We will continue to manage our capital structure very efficiently.
Ken: Guys, I just glanced at my watch and realized we have completely burned through our allocated time. Rudi, I know you are on a very tight schedule today and I appreciate you allowing us to run over a bit without cutting us off. We also appreciate your candid responses to our questions. I would like to remind our readers that we currently rate Seabridge Gold as a very strong buy for our readers. Before we let you go, do you have any closing comments you would like to share?
Rudi: Yes, I do. First of all I want you to know that I always enjoy doing this with you and Zahar. Like you, I also took this recent downturn as an opportunity to add shares to my position. But perhaps more importantly, for the first time ever, my wife actually bought shares of Seabridge and my wife may be the shrewdest investor I have ever met. So, I think that's a good sign!
Just to close, if you want exposure to higher gold prices, in my opinion, there is no better stock to own than Seabridge Gold. If you look over the last two big moves in gold we have had, for example from 2004 to 2007 and then again from 2008 to 2010, Seabridge common shares significantly outperformed gold and just about every gold stock on the planet. And as a result of what we have been able to achieve over the past few years since the downturn began in 2011, that's not going to be any different this time as we move toward higher gold prices.
So, Ken and Zahar, thanks again for the time and we can look forward to catching up again soon.
This article first appeared on
GuruFocus.