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Skeena is a gold explorer with two projects in British Columbia, Snip and Eskay Creek.
I have a long history with this stock. It was a multi-bagger for me in 2019. I was pounding the table on this stock when the company started reporting excellent drill results at Snip, but my boss at The Dollar Vigilante vetoed my recommendation saying it was “too popular”. This was the hottest drill play in Vancouver at that time, happening in his own backyard, yet he refused to look at the stock just because it was attracting investors.
Some people are contrarian for the sake of being contrarian. I finally just went ahead and wrote it up on my website.
Skeena is a gold explorer with two projects in British Columbia, Snip and Eskay Creek.
I have a long history with this stock. It was a multi-bagger for me in 2019. I was pounding the table on this stock when the company started reporting excellent drill results at Snip, but my boss at The Dollar Vigilante vetoed my recommendation saying it was “too popular”. This was the hottest drill play in Vancouver at that time, happening in his own backyard, yet he refused to look at the stock just because it was attracting investors.
Some people are contrarian for the sake of being contrarian. I finally just went ahead and wrote it up on my website.
The cross-hairs correspond to the date when I wrote it up. In general, money losing exploration stocks don’t exhibit a long-term uptrend. This stock is the exception due to the quality of its assets.
In November last year, the company reported results from its Definitive Feasibility Study (DFS) at Eskay Creek. A DFS is the highest level of economic study on a development stage project. Companies reach this stage when they are serious about proceeding with financing and construction of the mine.
The DFS showed an after-tax NPV-5 of C$2 billion and after-tax IRR of 43% at US$1800/oz gold and US$23/oz silver.
What does this mean?
It means that if the company:
Spends C$713 million in initial capex to build the mine
Pays for all the ongoing costs of running the mine
Pays income taxes
Accounts for mine closure costs at the end of the mine life
And sells its gold production at US$1800/oz and silver production at US$23/oz every year.
Over the projected 12-year mine life
The net present value (NPV) of those future cash flows, discounted at an interest rate of 5%, equals C$2 billion
The company has a current market cap of C$808.54 million at a share price of C$7.61, while the NPV says the value is closer to C$18.2 per share. Almost all companies trade at a discount to NPV. In fact, the only exception I’ve encountered is Silvercrest Metals, another past multi-bagger for me.
There are reasons for the discount. Firstly, the company will have to raise money to build the mine. The permitting process takes time, and the company could have trouble getting the final permits. As my mining mentor and former boss Lobo Tiggre likes to quip, some environmentalist might discover an endangered mosquito on the company’s property, making it a non-starter. Or they could run into trouble with the local groups and anti-mining NGOs. There’s the risk of wildfires and flash floods, both of which have plagued British Columbia plays in recent years.
In short, a lot of things can go wrong.
On the flip side, a lot of things can go right. Eskay Creek has an after-tax IRR of 43%. The bean counters at major mining firms, the ones in charge of sanctioning funds, expect a minimum IRR of 15% (the hurdle rate) to consider a project worthy. What exactly is the IRR?
If you give me $100 today and I return $143 in a year, you’ve earned an Internal Rate of Return (IRR) of 43%. If you give me $100 today and I repay $52 a year over 5 years, you’ve earned an IRR of 43%. However lumpy the cash flows are, or however long the duration, the IRR can tell you whether you’re getting a good deal. (Hint: always calculate the IRR when comparing different whole life insurance policies. If all else is equal, choose the policy with the highest IRR).
At a 43% IRR, and a payback period of 1.2 years, Eskay Creek is an exceptional project. Mine financiers agree - the company secured US$750 million (>C$1 billion) in project financing from a single investor, Orion Resource Partners. The company is now fully funded to advance Eskay Creek to production, pay for cost overruns, and have sufficient capital left over. This financing signals there will be no need for further dilution.
At US$2200/oz gold and US$27/oz silver, prices that are far lower than the current market price of the metals, the NPV and IRR look even more spectacular.
Assuming everything goes as planned, the company expects to start producing gold in H1 2027.
That’s a long time away, and the reason shares are cheap.
Think of it this way. If I asked you to lend me $50 today and I promise to repay $100 in 3 years, would you? That depends on the perceived credit risk. If you think I’m good for the money, you may even lend $85. If I’m a bum, you’d not even want to lend $10 because you doubt that I’d keep my word.
Exploration stocks trade based on investor perception of the likelihood of projects becoming profitable mines. Skeena investors are currently willing to pay 25 cents on the dollar. If the project continues to advance and the risk perception changes, they may be willing to pay 31 cents. If gold rockets higher, they may be willing to pay 50 cents, expecting to receive more than just $1. If the company runs into trouble with local communities, they may drop their bid back to 40 cents, and so on.
The point is this. That NPV number is a future promise. The share price represents the collective risk assessment of Skeena investors in the present. Mining stocks make for explosive gains if you get in when the perceived risk is high, ride the wave of de-risking, and get out when the returns taper off.
The Lassonde Curve offers a theoretical framework for thinking about this. I’d suggest Googling it to learn more.
On 13 December 2023, I wrote:
“A move like this on high volume, with buyers just taking out offers and the stock barely correcting, means someone knows something. Skeena released a DFS a month ago and hasn't announced a financing on the back of that, which again means something is brewing. Took a decent sized position at $4.35. There should be a press release after the close”.
There was no financing announcement at that time, but the stock behaved okay, so I held my position.
On Feb 8, the company put out a press release citing its 2024 exploration plans, and the stock dived as investors took that to mean the company couldn’t secure construction financing. However, the previous low held, and the stock put in a V-bottom, which is bullish. I held my position.
On June 25, the company announced it had secured financing, and I averaged up on seeing the deal terms. The stock trades on the US and Canadian exchanges under the same ticker symbol – SKE. I hold the US listing. My average entry is at US$4.52, and Skeena is now my second biggest position at a little under 7%, behind Consol Energy at 9.5%.
There’s concentration risk in my portfolio, but that’s from letting winners run rather than taking added risk due to conviction. I was able to snag a large position in Consol with a tight stop, and the trade worked right away. I averaged up on Skeena because volume and price confirmed the breakout from its trading range. Skeena was a small position before this move, one of many explorers I held.
Like Solana or Kaspa in the crypto portfolio, I accept concentration risk on winners in the stock portfolio. Sometimes it backfires as in the case of Victoria Gold, but broadly I find I’m much more successful if I let my winners run, and I bring down exposure only if the portfolio volatility gets too high for me to stomach. Sleeping better vs. making more money.
My stop loss is at $4.08. I will move up my stop to breakeven once the summer chop ends.
If I were new to Skeena and looking to build a position, I’d start much smaller, maybe 1-2%.
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Good Trading!
Kashyap