The Gold Report: Would you tell us about Seabridge Gold
Inc.'s (SEA:TSX; SA:NYSE.MKT) strategy?
Rudi Fronk: Our strategy is essentially to turn cash into gold.
When we founded the company 17 years ago, it was to give our shareholders
maximum exposure to the gold price. That meant taking a different approach to
the business. If you look at what the gold mining industry is doing, they are
turning what we believe to be a superior form of money-gold into an inferior
one-the dollar.
At Seabridge, we like to think of ourselves as modern alchemists turning
cash into gold. Over the last 17 years, we have used cash from our
shareholders to fund acquisitions and exploration of gold projects in Canada
with the aim of increasing gold ownership per share as measured by our ounces
of gold resources and reserves in the ground relative to our shares
outstanding. We think there is a place for this strategy among those
shareholders who value gold ownership over cash flow.
TGR: What level of resources does Seabridge have?
RF: We have more than 59 million ounces (59 Moz) of gold resources
in the Measured and Indicated categories and nearly 35 Moz of gold resources
classified as Inferred. Some 45 million of those ounces are reserves, with
much more to come. Meanwhile, we only have 53 million shares outstanding.
Gold ownership per share has grown every year since our inception. I think
you will find that every other public gold company has reduced its gold
ownership on a per share basis over the same period.
TGR: How did you arrive at your strategy of growing gold ownership
per share?
RF: Our strategy came from two fundamental insights. The first
insight was that the valuation of financial assets such as stocks and bonds
relative to gold was unreasonably high due to inflationary monetary policies.
These things go in cycles. In the 1970s, hard assets were overvalued against
financial assets. Then, over the next 23 years we got the reverse.
We formed Seabridge at the height of enthusiasm for financial assets. The
day we launched, in late 1999, it took 44 ounces of gold to buy the Dow-the
highest ever. Since then the ratio has gone as low as 6. It's now about 15
but we would not be surprised if it gets to a ratio of 1 to 1 yet again, as
it has done twice in the last hundred years, the last time in 1980 when the
Dow and gold crossed with gold at $850/ounce. We believe we now are in a time
when gold is increasingly needed to protect wealth.
Second, it is extremely difficult to find gold that is economic to
develop. Gold is a store of wealth-the best there is-because of that
scarcity. Cash you can get anywhere, you can even print it, but not gold. We
decided to make this scarcity value our competitive advantage by focusing on
gold ownership.
As gold potentially becomes more important as an investment, our industry
is struggling. Reserves are on the decline. Discovery rates are falling. New
projects are smaller and lower grade than the ones that are being depleted.
Some producers have been high-grading their deposits to stay in business and
meet their debt obligations, a strategy that destroys reserves. These factors
support the future value of our strategy.
If gold ownership per share is your chosen metric, then you probably can't
build and operate mines, which was a decision we made at the very beginning.
Producers have to sell their gold to pay for its extraction. Then, they have
to go out and spend enormous dollars to acquire, engineer and permit new
projects to stay in business. The result is that the equity and debt dilution
of their shareholders has been extraordinary. Studies show that over the past
ten years, common shares outstanding of the 10 largest gold mining companies
have more than doubled, while their net debt has increased by about 40-fold.
Our largest shareholder likes to say that the biggest risk in owning gold
stocks is dilution. That's the difficulty of being a miner. So we decided to
maximize gold ownership per share rather than be a miner.
TGR: You are preparing your projects to become producing mines.
Won't you then face the same dilution issues as the rest of the industry?
RF: We will face the same challenges but we have had 17 years to
develop strategies to avoid excessive dilution of our gold ownership.
It's clear that gold in the ground, which is what we have now, is worth
much less than gold in the hand. To realize the full value of our reserves,
they will have to be mined and the costs of building and operating a mine
will reduce our gold ownership. We expect to enter into joint ventures with
large, experienced producers that will take on most of the costs of financing
to production in return for a share of the project. This approach is designed
to limit equity and debt dilution but it will cost us a significant portion
of our reserves.
We think the loss of leverage to the gold price from taking on a partner
will be more than offset by the substantially higher value given to ounces
that have become reserves of a producing mine and this higher per ounce value
should be reflected in our share price. Production should also generate a
return in gold, which can be distributed to shareholders as a dividend in
physical form.
The two keys to maintaining our exceptional gold ownership per share over
time are exploration and acquisitions. Most miners give very little priority
to exploration and they generally aren't very good at it. Producers are
typically not entrepreneurial enterprises where creative exploration is
encouraged. We have a really good engineering and permitting team that has
added enormous value to our asset base but our core competency remains
exploration. When we acquired our current projects, exploration upside was
always the key criterion.
We are very confident we can replace the ounces mined at our projects from
low-cost exploration. We have proven that over the last 17 years. And we have
carefully focused our efforts on acquiring and exploring district scale
projects where there is an outstanding opportunity to grow. At KSM, we
believe that there is enormous remaining exploration potential to be shared
with our partner. You can also see this upside at our Courageous Lake
project, which consists of an entire 53-kilometer-long greenstone belt.
But our best exploration potential is probably at our newly acquired Iskut
project just 30km from KSM. This is a huge land package containing
past-producing high-grade gold mines within a very large and very powerful
mineral system. Exploration to date has been piecemeal, mostly by small,
underfunded companies. We think our top-flight team of geologists is
beginning to unravel the secrets of this system, which we think has potential
equivalent to KSM but with the strong added possibility of high grades like
Pretium Resources Inc. (PVG:TSX; PVG:NYSE) has found at Valley of the Kings.
We acquired Iskut earlier this year with the purchase of SnipGold, right
near the bottom of the gold market. The big producers are still selling
projects they bought at the top of the market but that isn't us. We bought
our existing projects near the bottom of the last gold cycle and we are doing
the same in the current market.
We remain in the hunt for special assets like Iskut that only come around
when the industry has been very stressed financially for a long period of
time.
TGR: While Seabridge's stock price has risen substantially since
the first of the year, it is still below the highs of 2011.
RF: The gold price is a teeter-totter with the stock market on the
other end from gold. As long as perceived risks are low, stocks will go up at
the expense of gold. When it goes the other way, I believe gold in the ground
will rapidly increase in value. As a gold investor, you have to be patient
and wait for the shift in sentiment. When it comes, I think you will be
rewarded. We are very patient here at Seabridge.
Seabridge is a leveraged play on gold so we tend to exceed the industry
averages both to the upside and to the downside, just as you would expect. As
you know, gold went up nearly 650% from the low in 1999 to the high in 2011.
Gold outperformed every other asset class. Gold stocks went up 1,575% from
bottom to top, which is pretty nice leverage to the gold price. Seabridge
beat the gold stock averages by rising 3,500%.
Industry valuations right now are based on the cash flow from producing
reserves. The option value imputed to gold in the ground is next to nothing.
That's what happens at the bottom of the cycle. I believe gold is now on the
way up. In our opinion, the next bull market in gold has begun, and if that's
the case, I believe you will be well rewarded by owning shares of Seabridge.
Rudi P. Fronk, chairman and chief executive officer of
Seabridge Gold, has over 30 years of experience in the gold business,
primarily as a senior officer and director of publicly traded companies. In
1999 Fronk cofounded Seabridge and has served as the company's CEO since that
time. Prior to Seabridge, Fronk held senior management positions with
Greenstone Resources, Columbia Resources, Behre Dolbear & Company,
Riverside Associates, Phibro-Salomon, Amax and DRX. Fronk is a graduate of
Columbia University from which he holds a Bachelor of Science in mining
engineering and a Master of Science in mineral economics.
