Seabridge Gold: Millions of Gold Ounces with a Copper Kicker
By Matt Badiali

The flight was as close to skydiving as I'd like to get. 

I recently took a trip to see Seabridge Gold's (AMEX: SA) Kerr-Sulphurets-Mitchell properties in a remote corner of British Columbia. I had just wrapped up a conference in Vancouver, and – since I was in the neighborhood – I thought I'd check in on Seabridge's key project.

After my visit, I'm convinced that, despite its recent growth, Seabridge remains undervalued by the market. I'll explain in a minute, but first let me tell you about the property...

The site is remote. To be specific, you can only reach this outpost by taking a beautiful, harrowing helicopter ride from the mining town of Stewart, British Columbia (pop. 700).

From the front seat of the helicopter, I watched the mountains soar above me, while glaciers, striped like pulled toffee, stretched out below. We'd be a hundred feet above snow, often with a ragged ridge of rock on either side. Then suddenly, the ground would drop thousands of feet down to the valley. 

The camp sits on a heavily wooded hill just above Sulphurets Lake. I had visions of a crystal clear, trout-filled heaven, but it's not like that. The lake is the color of concrete, with about the same consistency. The glaciers scour the rocks above as fine as flour. All that silt flows off the glacier into the lake.

Where the glacier retreats, the land is raw rock covered in scrub and cottonwood. Above the glaciers, landslide scars periodically interrupt forests of huge trees, which stop at the tree line just a few hundred feet above camp. Further up, most of the landscape is low scrub and moss.

The barren cliffs are like a geological textbook open to the chapter on giant copper-gold porphyry systems. Whole mountainsides stand out, orange and stained. Standing on the Kerr deposit, across the valley from Sulphurets, you can trace the outline of the deposits by their colors. In fact, from the helicopter, the minerals looked like a giant ribbon of orange sherbet swirled through the mountains. 

That bright orange color does not always mean economic mineralization. In fact, iron pyrite, or "Fool's Gold," causes much of the stain. The orange color is rust, as oxygen replaces the sulfur in the mineral. 

Iron pyrite is part of a family of sulfur-rich minerals called sulfides. These minerals indicate that hot, sulfur-rich water bathed the original rock and left behind copper, zinc, lead, silver, molybdenum, and gold.

There is no question that metals other than iron exist here. The helicopter also flew past several streams stained bright blue from copper leaching out of the rock. That's the kind of staining you see on copper building facades. I've never seen anything like that coming from rocks before.

Seabridge has completed few drilling campaigns at the Kerr-Sulphurets-Mitchell properties, and the big picture there is clearing up. Still, the more Seabridge drills, the more it needs to drill...

What the Geologists Know

It appears to be a huge district of alteration with five significant mineralized zones: Kerr, Sulphurets, Mitchell (from here on called KSM), Ironcap, and Snowfields. Several other smaller mineralized zones – such as Canyon, Lake, and the Main Copper – appear to be parts of the same system, separated only by geographic boundaries.

The market does not understand just how big these deposits are, nor how large they are likely to become. But the geologists know. They walk around with huge grins on their faces. It's a once-in-a-lifetime discovery, and they turn down offers from other companies at twice their current salaries to stay here and work. 

Seabridge's problem, at least in terms of its market value, is what is known as "inferred resource."

A resource estimate – or inferred resource – is a calculation of the volume of a mineral deposit and its average grade. An engineer calculates the resource from the grades and thicknesses derived from drilling results. 

The problem with inferred resources is that they are built around very few drill holes. That's why I'm usually very cautious about inferred resource estimates. In fact, I prefer to discount the inferred resource completely.

But sometimes, the estimate is solid enough to bank on. Barrick bought out Arequipa before it could even calculate a resource. The Barrick geologists visited the site and saw the size of the system and the assays from the first few holes. They knew the story right away, without any resource estimates. Arequipa's stock went from 35¢ to $30 in just 18 months with Barrick paying $1 billion to buy it.

In this case, I think the size of KSM will grow as Seabridge's drilling continues. The consistency of the assay results is among the reasons I believe this. The geologists at the site laugh about the core that comes from the new holes. It has little variation. In fact, it's so consistent that the geologists call the new locations adjacent and in between last year's holes "FBs" - as in "fish in a barrel," because the targets are so easy to hit.

And that's why the inferred resources at KSM are believable. Hole after hole has the similar material. The assays come back, one after another, with only the smallest variations, something these geologists have never seen before.

Some simple, back-of-the-envelope calculations tell me that Seabridge could add hundreds of millions of tons of economic rock this year. That equates to several million ounces of gold and hundreds of millions of pounds of copper.

The initial knock on these deposits is their grade. However, the sheer magnitude of these deposits trumps their grade. In fact, only about 20% of all the gold produced last year came from mines with grades higher than the KSM project. 

But that's just part of the story. The unrecognized value in these deposits is the copper. 

Because Seabridge presents itself as a gold company – and measures its progress in ounces of gold per common share – the market isn't giving Seabridge credit for the massive amount of copper in its deposits. If you put all of the KSM resource into the indicated category, which I think will happen eventually, then Seabridge trades for about $40 per measured and indicated ounce of gold... without including the copper.

That valuation completely ignores the 4.9 billion pounds of copper resource at KSM. In fact, if we ignore Seabridge's gold resource, then we can buy its copper for about 20¢ a pound and get all the gold for free.

We can compare KSM with Nova Gold's Galore Creek and Northern Dynasty's Pebble West.

The main difference in the three deposits is that Seabridge views KSM as a gold deposit with a copper credit. The other two projects are copper projects with gold credits. It could be semantics, since the gold grades are pretty low. 

Still, at the current grade, KSM contains two times the gold in Galore Creek at the same tonnage. In fact, at only 1.5 billion tonnes, it will contain as much gold as Pebble West. 

And remember, KSM will grow this year. The current resource model does not take into account Ironcap and Main Copper. It also does not assume any mineralization between Mitchell and Sulphurets. I can't vouch for the grade, but only the blind can't tell those two deposits are related.

In fact, it could grow by roughly 380 million tonnes this year, pushing it past the 1 billion tonne mark. Assuming a gold grade of 0.5 grams per tonne, the growth would add roughly 6 million ounces of gold.

At the current valuation of $30 per ounce, that would add about 15% to the current share price . 

And consider this: Part of this year's drilling operation is in an area called Main Copper. The geologists originally thought this zone barren, because it is rock that was forced up over the mineralized zone. However, recent drilling results show that Main Copper has marginal gold and copper values. 

In an open-pit mine, that rock will at least pay for the cost of stripping it out. That changes the economics of any proposed mine.

This is still an undervalued company. KSM is just part of the portfolio. The market places a huge discount on the company's assets. I'd be willing to pay a premium for this combination of management, skilled geologists, and world-class deposits.

Good investing,

Matt Badiali
Editor, S&A Gold Report

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