Skeena: Overlooked Gold Value Play
Skeena Resources (SKE.V, SKREF) is a Golden Triangle (GT) focused explorer. The company optioned the past producing Snip and Eskay Creek mines from Barrick and caught my attention with its eye-popping drill results, such as 27.7m of 43.39 g/t AuEq, with narrow high grade hits like 0.6m of 95.1 g/t Au and 14,591.5 g/t Ag.
I wish to illustrate the value in Skeena using a sum-of-parts approach.
Skeena’s value comprises the following mineral assets, all of which are in the GT area:
The PEA stage Spectrum-GJ copper-gold porphyry project
The past producing Snip mine, subject to two different option agreements
The past producing Eskay Creek mine
It’s stake in Strikepoint Gold (SKP.V), to whom it sold its Porter Idaho project
The PEA stage Spectrum-GJ copper-gold porphyry project
Using base case parameters, copper would generate approximately two-thirds of project revenue during the initial five years of production and approximately 58% over the life of the mine. From the April 2017 PEA:
C$ 216.05 million
1.61 mil oz Au, 7.54 mil oz Ag, 998.99 mil lb Cu
25 years (potential to increase to 30 years)
Average annual production
64,390 oz Au, 301.6 koz Ag, 39.96 mil lb Cu
$730.97/oz Au, $1.81/lb Cu
1 CAD = 0.75 USD
Mineral resource estimate
The company claims to have good relations with the Tahltan First Nation. Also, this is in British Columbia, one of the best mining jurisdictions.
What’s it worth? If I were running a PE fund, I would make a standing offer to buy this project at 5% of its NPV (6%) at the high end of its gold price assumption (Case 5). That works out to C$34.95 million. It would be cheap even at 10% of its NPV (6%), or C$69.9 million. The company used 8% as its discount rate in the news release; I pulled in the 6% number from the Technical Report. Management has been conservative. A copper-gold porphyry project with such a long mine life, in an excellent jurisdiction, with a low capex requirement is a rare species. In the most pessimistic scenario, it is worth C$34.95 million, with a more realistic value being closer to twice that. If they were to look to sell this asset at those prices, the interest would be crazy. Goldcorp spent $190 million acquiring Exeter Resources as a ‘sock away in the drawer’ investment. The GJ project is definitely worthy of the same treatment, and is a far better value for money. Even more so now that gold prices are grabbing mainstream headlines.
Nevertheless, I’ll put in C$34.95 million in my sum-of-parts valuation.
The Snip mine produced approximately 1.1 million ounces of gold from 1991 to 1999 at an average grade of 27.5 g/t.
Skeena is in a bind when it comes to Snip, which makes me value it more for the optionality than for what they have done with the asset. Skeena sold an option on Snip to Hochschild Mining (HOC.L), even as Skeena’s ownership of Snip is subject to an option agreement with Barrick.
The Agreement with Barrick
“Subject to Skeena delineating in excess of 2 million ounces of gold, Barrick may exercise a back-in right to purchase a 51% interest in the property in return for a payment of three times Skeena’s cumulative exploration expenditures on the property, following which the parties will form a joint venture, and Barrick would relinquish its 1% NSR.”
The Agreement with Hochschild
“Under the property option agreement, Skeena granted Hochschild an option to earn a 60% undivided interest in Snip located in the Golden Triangle of British Columbia (the “Option”). Hochschild will have three years to provide notice to Skeena that it wishes to exercise the Option. Once exercised, Hochschild shall then have three years (the “Option Period”) to:
incur expenditures on Snip that are no less than twice the amount of such expenditures incurred by Skeena from March 23, 2016 up until the time of exercise of the Option by Hochschild;
incur no less than $7.5 million in exploration or development expenditures on Snip in each 12-month period of the Option Period; and
provide 60% of the financial assurance required by governmental authorities for the Snip mining properties.
After completing a minimum spend of $22,500,000, Hochschild may extend the Option Period by a further period of 12 months by making a cash payment to Skeena of $1.0 million.”
The Hochschild agreement is subject to the Barrick agreement, i.e. it will apply only to 60% of Skeena’s interest. If Barrick claws back, Hochschild will only own 29.4% of Snip. Since there is no expiry date on Barrick’s claw-back option, until Skeena gets a definite deal done with Barrick, HOC will have no choice but to sleep on it. Nor is it in Skeena’s interest to spend the money to delineate 2 million plus ounces unless the company has some level of clarity on Barrick’s intent. As an investor in Skeena, there is no way to tell how this will progress.
I therefore choose to value it as an option.
Given the drill results, I presume they should be well over 1 million ounces if they were to put out a resource estimate. Barrick wouldn’t claw back unless they see potential for at least 5 million ounces, while HOC might be interested in carrying a smaller deposit through to production. In a long drawn resource bear market like the one we have been in until recently, I wouldn’t attribute more than a token C$1 million valuation to Snip, but with gold above $1400/oz and the market finally showing an interest in gold plays, the option is worth a lot more. Skeena is in the right address and if they resolved the Barrick agreement one way or the other, Snip alone could be a company maker. Management certainly knows this and must be working hard to come to a deal with Barrick. Even so, given we might have to wait a year or two before this resolves itself, I’ll attribute a C$2 million valuation to Snip.
Eskay Creek Mine
From 1994 until 2008, the Eskay Creek mine produced approximately 3.3 million ounces of gold and 160 million ounces of silver at average grades of 45 g/t gold and 2,224 g/t silver and was once the world’s highest-grade gold mine and the fifth-largest silver mine by volume.
Table 3: Combined pit constrained and underground resources.
As of the last mineral resource estimate, Eskay Creek has a global resource of 3 million gold ounces, with the bulk of it open pittable.
What’s it worth? How does one go about valuing ounces in the ground?
By pulling numbers out of thin air (or if you prefer, out of the posterior region of the human body). As silly as it sounds, there is a justification for it. If I’m shopping around for deposits to buy, I would naturally look for ways to buy bargains. One way to determine a bargain is comparative analysis, i.e. line up my potential buys against each other and determine how much I am paying for each ounce that has been delineated in the mineral resource estimate.
Mineral resource estimates incorporate statistics. Proven reserves have the highest confidence (a term which has a precise meaning in statistics), followed by Probable reserves, Measured and Indicated resources, and last of all, Inferred resources. If I’m valuing ounces in the ground, I’d attribute the least value to Inferred resources.
Indicated resources would rank slightly above that. Pontification aside, I am still just pulling numbers from the air, but they serve my purpose. I’m going to value each Indicated ounce at $50 and each Inferred ounce at $15, while ignoring the impressive silver resource estimate. That works out to a cool C$150.9 million.
Now here’s the catch. Barrick has a back-in right to acquire 51%. Let’s assume Skeena only gets to keep 49%. 49% of C$150.9 million works out to C$73.94 million. Barrick will also pay Skeena 3 times the incurred exploration expenses and Skeena will have to put up its share of the total bonding requirement of C$7.7 million, but for the sake of simplicity let’s leave it out. Eskay Creek is conservatively worth C$73.94 million.
The valuation might appear rather rich on surface, especially given the size of the M&A and asset acquisition deals the juniors have been through during the last few years, but that’s not the right benchmark. There will always be distressed sellers forced to liquidate assets at fire-sale prices, but good assets in the hands of cash rich companies should not be valued using that benchmark. Something to keep in mind before you say there is no way Eskay Creek is worth anywhere near C$150 million.
Strikepoint Gold (SKP.V)
Skeena sold its Porter-Idaho project to Strikepoint Gold.
“On August 15, 2018, the Company sold Mount Rainey Silver Inc. to Strikepoint Gold Inc. (“Strikepoint”). Skeena has received 9,500,000 Strikepoint common shares (including 2,400,000 special warrants convertible to shares for no additional consideration), and will receive cash payments totalling $1.5M ($250,000 received) in a series of payments culminating on December 31, 2019. Skeena has also retained a 1% NSR, half of which may be repurchased by Strikepoint for $750,000.”
At the current market price of 12.5 cents, the shares are worth C$1.1875 million. Skeena is also entitled to C$0.5 million in cash consideration. The valuation here is straightforward. Yes, they cannot sell the shares and expect it to remain at 12.5 cents. Nor is it a shoo-in that SKP won’t go bankrupt and renege on making the further payment, but I rate these risks to be low. Also, in case of default, Skeena would probably get its asset back. Or, it can exercise control and safeguard its interests. I don’t want to go all doom and gloom here; I’m just trying to come up with a valuation under normal circumstances, not run a stress test.
I value the Porter-Idaho project/SKP investment at C$1.6875 million.
Total Asset Valuation (C$)
Spectrum-GJ – $34.95 million
Snip – $2 million
Eskay Creek – $73.94 million
Strikepoint Gold – $1.6875 million
Total – $112.58 million
Working capital as of Q1 2019: $0.49 million
Proceeds from April 2019 Private Placement: $1.93 million
Sum-of-parts value of Skeena: $115 million
Current market cap: $37.611 million
Current price: 36.5 cents
If these shares are worth $1.12, why isn’t that reflected in the market?
How is it that shares worth $1.12 could sell for 36.5 cents? The markets are supposed to be efficient, at least according to tenured economists at the universities who refuse to see any evidence that conflicts with their precise mathematical models of what the world ought to be.
Am I missing something? Maybe. I can also come up with reasonable explanations as to why the market is missing this:
Skeena’s deals are complex and hard to value. Without doing the research, it is easy to dismiss it as yet another Golden Triangle play or treat it as a flunkey for Barrick and Hochschild.
There simply hasn’t been enough investor interest in the junior gold space. Lithium, cobalt, cannabis and cryptos attracted capital during their mini-bubbles, some of it at the expense of gold plays
With a sub $50 million market cap, it is overlooked by larger investors
The share price chart doesn’t instill any confidence in being long these shares
Value plays don’t always have apparent catalysts. I don’t know what will cause the shares to move towards fair value. I just know that I cannot go wrong if I consistently buy a dollar for 33 cents.
Disclosure: I am long Skeena Resources at the time of writing.