How would you feel if someone offered to sell you $100 worth of minerals for $0.54? I know, if it sounds too good to be true, it probably is. Well, probably is not exactly the same thing as always and today you are going to learn how to do exactly that. Okay, maybe not exactly that; it could actually be better than that! Based upon current pricing, Seabridge Gold, Inc. (USA) (NYSE:SA) offers just such an opportunity today.
Today, Seabridge Gold, Inc. (USA) (NYSE:SA) is knocking on our door and we need to let it in! Seabridge has two major properties currently under extensive exploration: KSM (Kerr, Sulphurets, Mitchell) and Courageous Lake. Just take a look at these startling numbers:
- Proven and probable reserves of 44.7 million ounces of gold
- Proven and probable reserves of 9,888 million pounds of copper
- Proven and probable reserves of 191 million ounces of silver
- Proven and probable reserves of 213 million pounds of molybdenum
This represents one of, if not the largest, undeveloped gold resources in the world located in a mining friendly region, in this case, Canada. To find this kind of resource in a politically stable area presents a golden opportunity for us! The value of these in-the-ground resources are as follows:
44.7 million ounces of gold at $1,500/ounce: $67,050,000,000
9.888 billion pounds of copper at $3.00/pound: $29,664,000,000
191 million ounces of silver at $30/ounce: $5,730,000,000
213 million pounds of molybdenum at $23,000/ton: $2,449,500,000
Total Proven and Probable Value: $104,893,500,000
Yes, that is billions with a “b!” What is truly astonishing is that the current market capitalization of Seabridge Gold is currently only $569,000,000. That’s right, we can buy this company for $0.54/$100 of proven and probable resources in the ground. It just doesn’t get much better than this!
Building a mine, however, is a risky proposition and contains a great many uncertainties that cannot be known prior to being encountered. In many cases that would be an additional concern; in the case of Seabridge, not so much. Seabridge Gold has no intention of building a mine; it plans to sell itself once the resource is fully established, and this is how we will get paid as investors. But how do we know what price to expect from the sale of an undevloped mineral deposit?
Cerro Castle was a non-producing exploration company that was acquired by the large mining concern, Barrick Gold Corporation (USA) NYSE:ABX). Barrick is a very successful mine operator and, like the vast majority of the large miners, needs to add new resources to its portfolio of mines to maintain production levels. At the time of this acquisition, gold was trading at around $1,100/ounce; right now the price is hovering just above $1550/ounce, 40% higher than 2010. If you were to take the price to resource value that Barrick paid for Cerro Castle, it would result in a 7.45% valuation of assets in the ground. If we were to apply that valuation to Seabridge’s 44.7 million ounces with today’s $1,500/ounce gold price, we would value the KSM and Courageous Lake gold resources of Seabridge at approximately $4.99 billion. That would result in a fair valuation of Seabridge’s 43,450,000 shares of $114.84/share.
However, no matter how good this number sounds, it does not assign any value to the copper, silver and molybdenum contained in the proven and probable resources of KSM and Courageous Lake. Adding those resources at 7.45% of current value as shown above, would add another $2,819,340,750, or $64.89 per share to the fair value of this company’s resources bringing, the potential value to $179.73 per share. This represents an approximate increase of 1,334% from today’s $12.50 per share price! Do I expect Seabridge Gold to reach $179.73/share? No, but my point is that the case can be made. Do I think Seabridge could become a 10-bagger in the next three to five years from this level? I certainly believe that is possible.
To add a bit of confidence to my evaluation, I can look to the recent actions of gold royalty streaming company Royal Gold, Inc USA) (NASDAQ:RGLD). Royal Gold is in the business of purchasing the right to buy a percentage of the future mine production from early stage gold projects, and they are one of the best in the world at this. They provide cash that is needed by the exploration or mining company to move their project forward now, in exchange for the right to purchase an agreed upon percentage of future production at a discounted price. They are truly experts in assessing the future prospects of exploration companies like Seabridge. On December 13, 2012, Royal Gold increased its existing stake in Seabridge Gold by 1,004,491 shares at a price of $17.92 per share, which increased its total position to 2,023,491 shares with an average cost of Canadian $23.72 per share. The price paid was well above recent share price of around $12.50.
We have in front of us a situation where one of the most successful gold mining companies in the world has established a value of undeveloped mineral assets in the ground that would result in a price for Seabridge Gold that is over 10 times today’s share price and the actual share price purchases of one of the top gold royalty streaming businesses at a price 90% higher than today’s price. While there are never any guarantees, Seabringe Gold certainly looks like an opportunity to get a lot for a little!
The article Get a lot for a little with Seabridge Gold originally appeared on Fool.com and is written by Ken McGaha.
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