Rudi Fronk has been the Chief Executive Officer and President of Seabridge Gold (SA) - Get Report since 1999. In this recent interview, he talks about the company's history and two key Seabridge projects in Canada.
Tell us how Seabridge started.
We launched Seabridge in October 1999. At the time, gold was trading for well below $300 an ounce. The dollar was strong. People wanted to buy technology stocks. Gold had fallen completely out of favor. However, we thought it would eventually rebound.
With my partners at Seabridge, during this depressed gold price period, we looked to acquire uneconomic gold assets. We hoped we could convince their owners to sell these deposits to us at low prices. We wanted the gold assets to be in the ground still with low holding costs so we could wait for prices to come back. We wanted them in politically stable countries, where they weren't going to be expropriated by the government on a whim. We wanted projects that had additional exploration upside which could be exploited later. Our concept was to create a public vehicle that supplied our shareholders a high-leverage investment on the gold price.
During the early years from 1999 through 2002, we bought nine deposits after looking at more than 100. We spent $15 million on the nine deposits we purchased at which previous owners had estimated about 15 million ounces of gold still in the ground. The parties we bought the projects from had already spent $300 million to find them, so we really were getting them for pennies on the dollar.
So the approach you took with Seabridge sounds like it directly was influenced by your experience at Greenstone.
Absolutely, experience is the best teacher. I ran Greenstone from 1993 through early 1999. During that time we discovered a number of large gold deposits in Central America, totaling approximately 5 million ounces. We completed bankable feasibility studies on three projects, raised capital to build them and were going through final commissioning on two of them just when the price of gold began to collapse. To make matters worse, in 1998 hurricane Mitch came through Central America devasting our supply chain. To build these mines, we took on significant debt. In 2000, the projects were expropriated by the Honduran and Nicaraguan governments. It is interesting to note that two of these mines are still in production today.
As a result of my experience at Greenstone, three of our guiding principles at Seabridge from day one included (1) no debt, (2) North America only and (3) avoid building mines. Our plan at Seabridge is to let larger companies, with strong balance sheets and deep technical experience, develop our projects.
There was a Barron's article in February which alleged you sold a bunch of your Greenstone stock before the mine was expropriated.
I did not sell my shares in Greenstone. In fact, I lost more than $10 million in equity value. My investment, just like other Greenstone shareholders, went up in flames when the mines were expropriated. The Barron's allegations were false.
But you've also been clear from the beginning of Seabridge that you never wanted to mine your projects. Why?
It's about risk vs. reward. The process of finding a gold property and then developing it has many stages over many years. There are increasing risks and different organizational skill-sets you need at each new level of project development. We believe our core competencies lie in finding great properties at low valuations and then proving out their reserves. We're comfortable in taking our projects through the steps of defining resources and reserves, environmental assessments, and detailed engineering, but then we believe they should be handed over to a larger company.
Our goal is to advance our core projects toward feasibility which will allow us to get a reasonable value at the time of sale. We think that's just the most prudent thing to do for our shareholders. If we tried to build mines, we would be taking on a whole new set of risk factors that we are not equipped to deal with. I can point to a number of small companies that have tried to build mines, and in the process, have destroyed shareholder value. In fact, I lived through one. We believe the extra risks you take on as a producer are beyond our skill set.
How long will the new money you raised in March take the company?
It'll take us through 2012 and allow us to complete a preliminary feasibility and define reserves at our second big project, Courageous Lake, in the Northwest Territories, Canada.
Tell us about Seabridge's projects.
Our largest and most advanced project is KSM, located in British Columbia, Canada. In fact, KSM is the largest gold project in Canada, and one of the largest undeveloped reserves in the world.
We completed a preliminary feasibility study in March of this year which defined more than 30 million ounces of gold reserves, 7 million pounds of copper reserves, 133 million ounces of silver reserves and 210 million pounds of molybdenum reserves. We are continuing with our permitting process to get KSM ready for a large gold player to step in and develop the mine. The project has an estimated mine life of over 35 years and is predicted to produce gold at cash operating costs well below the existing levels of all of the major gold companies.
The other project we're very excited about is Courageous Lake. We started work on it in 2003 but shut down on-site work in 2006 as we were having huge success at KSM. When we stopped working on the project, Courageous Lake wasn't especially economically attractive at the then gold price of $690 per ounce. Now, with gold well above $1,100, we're getting back to working at Courageous Lake. By the first quarter of 2011, we expect to complete an updated preliminary assessment and by early 2012, we expect to complete a preliminary feasibility and define reserves. Previous work has indicated that Courageous Lake could produce approximately 500,000 ounces of gold a year for 12 years at cash operating costs in the low to mid $400s per ounce.
We decided to sell our remaining assets. In late 2008, we sold a Mexican project to
and Fresnillo for $25 million in cash, plus we kept a royalty and they will pay us an additional $5 million when the project is placed into production. We've entered into agreements to sell our Nevada assets. We also have 3 projects remaining which we consider non-core and we will look to sell those later this year.
That Barron's article also questioned the validity of your third-party consultants you used to come to your reserve estimates.
It really was ridiculous because we use the same consultants that the major gold companies use including
, Newmont and others. As a matter of fact, knowing that at some point our projects would be thoroughly reviewed by the majors, we selected our consultants based on their experience and track-records with the majors.
So, you have these two key projects (KSM and Courageous Lake) and the end-game is to sell them or joint venture them to a gold major?
Barrick, Newmont, or
are the big three in North America that have the financial resources and technical expertise to develop projects of this scale. There are about five other listed North American companies that we believe could successfully take on one or more of our projects. Chinese and other Asian companies have also been looking at gold/copper assets in North America. In our view, there are about five or six Asian companies that could be interested in our projects.
Would they buy the company or the projects separately?
At this time, we are not boxing ourselves into a corner on deal structure. We will do what is in the best interest of our shareholders. One possible outcome would be to sell the company to a major North American-listed gold producer in exchange for their common shares. Our shareholders remain bullish on gold, and a tax-free rollover of common shares could be preferable. We're also not adverse to a strategic joint venture, as long as it was structured to minimize project risks to Seabridge and our financial exposure going forward.
When could all this happen?
There are a lot of factors that have to come together for a deal this large. We're doing everything on our side to advance our core projects toward final feasibility because there is still a lot of value we can add at relatively low risk. There aren't many large reserves out there for these big guys to look at and they need to continue to replenish their own reserves each year, as well as find pipeline projects for their future. But market conditions also have to be right. After the meltdown in 2008, M&A deals in the gold space virtually disappeared. Metal prices were destroyed and the share prices of the major companies went to ridiculous levels. Now, that's changed. Metal prices are stronger, and the share prices of major gold companies are higher than they were back then but they are still quite low relative to the gold price and their profits. Market conditions aren't quite there yet for a deal this size.
There have been a few gold deals lately. Barrick paid $495 million recently for an additional 25% interest in the Cerro Casale project located in Chile. Cerro Casale has 23 million ounces of gold reserves, so the implied value is $82 per reserve ounce. There are striking similarities between KSM and Cerro Casale. At $82 per reserve ounce, just the KSM project would be worth about $2.5 billion.
At the time of publication, SA's market capitalization was $1.2 billion.
The gold majors could continue to wait on our assets, but by waiting we'll have advanced our projects much further and they'll be worth more -- and there's also the possibility that the price of gold keeps going up. We also have expectations in what our assets are worth.
You have to remember, with all this new money flowing into physical Gold ETFs (like GLD), there's only so much new gold produced each year, about 75 million ounces. We're sitting on 30 million ounces of gold reserves at KSM. We believe we're in a good spot.
We could see a short-term pullback in gold prices here but the long-term trends look very positive. Sovereign debt issues aren't going away and gold is finally re-emerging as an investment class of its own.
In the meantime, we'll keep drilling for new reserves. We're doing some work right now at KSM and Courageous Lake. We think there could be further discoveries at both of these projects. We'll also be in a position to file our applications for permits at KSM later this year. The closer a project is to permitting, the more valuable it is.
Jackson held a long position in SA at time of publication.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson