Seabridge Gold Inc

CRA Creates Buying Opportunity

Impact: Neutral

We believe that recent share price underperformance (down 18%, GDXJ down 4%), driven by the disclosure of a Canada Revenue Agency (CRA) proposals recently regarding prior flow through expenditure has created a buying opportunity in Seabridge. The underperformance implies as impact of C$157M, while the maximum liability only appears to be C$14M. This news does not impact our view, that Seabridge is one of the few, large scale Au-Cu projects that majors are chasing and we expect Seabridge to deliver a JV to fund project construction in the near-term.

  • CRA proposal implies a maximum liability of C$14M. With its year-end 2018 filings, Seabridge disclosed that the CRA had made a proposal (not a reassessment) that its C$19M of the C$60M in Canadian Exploration Expenditures (CEE) made between 2013 and 2016 were ineligible. In a worst-case scenario this could result in C$2.2M tax assessment against the company and a C$11.8M tax assessment to the original flow-through investors that Seabridge would have to also pay. The CRA has made a number of these proposal recently, and if the company can provide evidence that funds were used for CEE, the actual liability might end up being zero. Our understanding from management is that they have the evidence to refute the CRA’s proposal.
  • Recent underperformance creates an opportunity. When considering that the recent underperformance (Figure 1) represents C$157M and the maximum liability that we believe has a low probability of holding up is C$14M, the sell-off is overdone, given that we estimate Seabridge’s current cash balance and short term investments at C$22.9M and it is likely to be 1-2 years before Seabridge would need to make a payment.
  • JV is Coming. As outlined in our initiation report, we believe that increased M&A activity is likely to translate into a JV for KSM this year. We highlight that if we were to apply the same multiples that Newcrest (ASX:NCM) used to purchase an 70% interest in Red Chris, this would imply a value of C$47/sh for Seabridge.
Sell-off overdone; buying opportunity ahead of a potential JV. We are maintaining our C$29/sh fair value estimate for Seabridge based on 0.70x our C$41.21 NAVPS5% estimate (was C$41.81 prior to updating our estimates for Q4 financials). Seabridge is trading at 0.38x NAV, which is a slight discount to peers (trading 0.46x), which does not reflect what we believe to be an impending JV agreement, which our estimates suggest should materially re-rate the stock. Upcoming catalysts include 1) Updated mine plan, 2) Drilling at Snowstorm, Iskut and KSM and 3) JV agreement to fund construction.



Seabridge Gold Inc

Iron Cap Continues to Grow

Impact: Mildly Positive

Seabridge has announced an upgraded resource at Iron Cap, one of its four large Au-Cu porphyry deposits that make up the KSM project in BC. As a result, the slight increase higher-grade resources have positively impacted our estimates. As Seabridge continues to improve the size and quality of its resources, this news continues to highlight the company’s undervalued potential as it seeks a suitable JV partner.

  • Update grows resource tonnes. At a C$16 NSR cut-off for a block cave at Iron Cap, the updated resource saw an increase in tonnes by 39%, a slight decrease in grade of 3% and an overall 35% increase in ounces. The primary impact of this news is positive given the favourable logistics resulting from Iron Cap’s proximity to the proposed Mitchell Treaty Tunnel which will be used to transport ore to processing facilities.  
  • Higher-grades at Iron Cap improve our estimates. The company outlined an updated high-grade resource of 681Mt at 1.44 g/t AuEq (31,527koz AuEq) at a higher NSR cut-off of C$36 (was C$32/t). The higher cut-off results in a slight grade increase to 1.44g/t AuEq (was 1.39g/t AuEq). Our current mine plan follows the 2016 PEA with open pit operations beginning at Mitchell and Sulphurets followed by block caves at Iron Cap, Deep Kerr and Mitchell. With Iron Cap now larger and slightly higher grade, our NAVPS estimate has modestly increased to C$41.81 (was C$41.44). Our estimates reflect what we expect to be in the updated mine-plan, which is expected later this year.  
  • Ongoing work should improve KSM economics as company continues to seek JV partner. We expect Seabridge will continue improving resources at KSM to delineate the best 2.4B tonnes for which it is permitted based on current tailing facility permits. We expect the company will continue to issue exploration updates as it optimizes the project plan for mining KSM.  
Current pricing does not reflect likely JV potential. We are maintaining our C$29/sh fair value estimate for Seabridge based on on 0.70x our C$41.81 NAVPS 5% estimate (was C$41.44). Seabridge is trading at 0.43x NAV, which is a slight discount to peers (trading 0.47x); however, in our view this valuation does not reflect what we believe to be an impending JV agreement, whi ch our estimates suggest should materially re-rate the stock. Upcoming catalysts include 1) Updated mine plan, 2) Drilling at Snowstorm, Iskut and KSM and 3) JV agreement to fund construction.



Seabridge Gold Inc

JV is Coming

We are publishing our initial estimates on Seabridge Gold (TSX:SEA) and believe the stock is worth C$29.00/sh based on 0.70x our NAVPS estimate of C$41.44/sh. In our view, Seabridge with its world-class KSM project is a significantly undervalued gold-copper developer that is poised for a re-rating, which we expect to be driven by a JV announcement this year in an improving gold market.

Investment Thesis
  • Patience has paid off, the JV is coming. We believe it is coming because large Cu-Au projects are in short supply and major miners, like Rio Tinto, Sumitomo and BHP, have materially stepped up corporate activities in an effort to fill depleted development pipelines (Figure 2 & Figure 12). KSM is one of the best undeveloped Cu-Au projects in the world. It is also permitted, in a premier jurisdiction (Figure 1). In our view the combination of market forces and the systematic development efforts by Seabridge suggest that the joint-venture is likely to occur in the near-term, which we think could double Seabridge’s share price.
  • A unique stock, as it provides significant leverage to the gold price. A combination of KSM’s commodity price leverage, the company’s size (+1B market cap) and its significant inventory of in-situ ounces have made it a go to stock for investors looking for gold price leverage (Figure 4). While we are bullish on the company’s fundamentals, this leverage to an improving gold price environment, provides a second way for investors to win. 
  • Swiping right on Rudi; Seabridge has systematically created value. Throughout its existence, Seabridge has accretively acquired and disposed of assets, providing some of the funding required to bring KSM to its current stage with remarkably little share dilution. In our view, for Seabridge, management has been a good steward of capital, creating a platform that allows for significant news to create significant shareholder value.
Market is not pricing in our expectation that a JV for KSM is coming. We see US$4.6 billion in value at KSM (100% basis). After taking into account our anticipated JV terms (30% ownership, 10% of capital) for KSM and the value of its other assets our NAVPS 5% estimate for Seabridge is C$41.44/sh. With a P/NAV of 0.43x, Seabridge trades at a slight discount to peers at 0.47x. However, we believe that with a significant project like KSM, Seabridge should trade at 0.70x NAV, implying a value of C$29.00/share. Upcoming catalysts include 1) Assay results from Iron Cap, 2) New resource on Iron Cap in H1/19 and 3) JV agreement to fund construction.



Seabridge Gold Inc

Is Iskut a Fifth Deposit at KSM?

Impact: Mildly Positive

Seabridge’s summer drill program at it's Iskut Property has identified another porphyry target close to surface. Iskut is only 30 km east of Seabridge’s KSM Project which hosts four porphyry deposits with P&P Reserves of 39Moz of gold + 10Blbs of copper. These latest results support our view that Seabridge is positioning itself as a gold-copper developer to watch in a premier jurisdiction - we believe majors are taking notice.

  • Another porphyry on the way? While still early days, the Iskut Property shares similarities to the large porphyries identified at Seabridge’s core KSM asset, 30km to the east. KSM hosts substantial reserves totaling 39Moz Au, 10Blbs Cu, 183 Moz Ag and 207 Mlbs Mo. Given the company’s track record of drilling and defining large porphyry systems, we look forward to the 2019 drilling program at Iskut which will be testing this new porphyry target.  
  • Porphyry-style mineralization overlying a large IP anomaly. Holes QR-18-14 and QR-18-17 drilled at Iskut intercepted chalcopyrite-pyrite-magnetite bearing porphyritic diorite clasts within a hydrothermal breccia. These breccias are understood to be diatreme(s) venting from an intrusive source. Importantly, they occur over a large IP chargeability anomaly within 500m of surface. This combination of factors suggests to us that a sulphide-rich porphyry intrusion may exist at depth. 
  • Better logistics for drilling, suggests we should quickly learn Iskut’s potential. Initially, Seabridge was targeting an epithermal system beneath the Quartz Rise Lithocap near the peak of Johnny Mountain. Results from this year’s program are pointing to a source porphyry target to the south and southwest, on the slopes of the mountain, at considerably lower elevation. This will simplify logistics and mean Seabridge can forego helicopters for drill moves and allow for a longer drilling season in 2019.
Seabridge is actively growing the size and quality of its already substantial resources. With KSM reserves alone, Seabridge is trading at US$12/oz AuEq compared to peers at US$45/oz AuEq on a total resource basis. Given the scale of KSM, and the fact that it is permitted, we believe the company should trade closer to peers. Upcoming catalysts: 1) Iron Cap resource update (H1/19), 2) Iskut exploration results (H2/19) and 3) Updated project economics (H2/19)



Seabridge Gold Inc

Iron Cap Success Should Improve Mine Economics

Impact: Mildly Positive

Seabridge has announced that it has once again extended the Iron Cap mineralization down plunge to the northwest, which is already defined a 49Moz AuEq deposit within the wider KSM property in BC. Results align with our thesis that Seabridge is in possession of a major-scale gold-copper project in a premier jurisdiction that we expect to attract major partners.

  • Seabridge delivers on 2018 exploration objectives. The 2018 exploration program that was focused on the Iron Cap Deposit has successfully extended the mineralization down-plunge from the high-grade core and tested the southern limits of the Iron Cap Deposit, as defined by a 2018 resource update. Highlights include 548m grading 1.30g/t AuEq (0.63g/t Au and 0.44% Cu) in hole IC-18-83, which exceeded the average KSM reserve grade of 0.89g/t AuEq and average Iron Cap resource grade of 0.83g/t AuEq.
  • Expansion of high-grade core should improve project economics. With permits in-hand, that allow the company to mine +2B tonnes of ore, the objective is mine the most profitable tonnes first. We would expect that Iron Cap’s growing higher-grade core may play is likely to be mined sooner and for longer than was outlined in the 2016 PEA, which we think would improve project economics, particular since it is so close to the planned Mitchell-Treaty Tunnel.
  • Another resource update for Iron Cap is now underway. We view the growth of Iron Cap as a game-changing addition to the KSM Project as increased grades in early years with minimal development capital required allows for enhanced project economics. With a high-grade core of 635Mt grading 1.34g/t AuEq at Iron Cap already defined earlier this year, we expect that the resource update currently underway is likely to enhance the already exceptional size and grade of the deposit.
Improving grade and major scale should see this project trade closer to peers. Based on KSM reserves alone, Seabridge is trading at US$11/oz AuEq compared to peers at US$45/oz AuEq on a total resource basis. Given the scale of KSM, and the fact that it is permitted, we believe the company should trade closer to peers. Upcoming catalysts: 1) Iron Cap resource update (H1/19), 2) Iskut exploration results (Q1/19), and 3) Updated project economics (H2/19)


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