Saturday, September 08, 2007

Seabridge Gold

A Visit to the Next Big Thing by Matt Badiali (geologist) September 08, 2007

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

I just took a trip to see Seabridge Gold's Kerr-Sulphurets-Mitchell (KSM) properties in a remote corner of British Columbia.

After my visit, I'm convinced that, despite its recent share price runup, Seabridge Gold 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 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 one 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 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 that you can mine profitably. 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.

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 a 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...

The stock market does not understand just how big these deposits are, nor how large they are likely to become. But the Seabridge 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."

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 often discount the inferred resource completely when valuing gold companies.

But sometimes, the estimate is solid enough to bank on. The giant gold producer 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 same looking 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.

This is still an undervalued company. 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.

Sure, Steve's readers are already up tenfold on their Seabridge Gold. But after this trip, I believe more profits lie ahead here..


Matt Badiali

Charts for SEA-vc

The monthly chart shows price to be in a strong trend up. August saw profit-taking, with buyers stepping back into the stock on the deep pullback.

The weekly chart shows support off the 34ema and the .382 fib level, with the stock regaining more than half of its losses.

The daily chart shows price gapped up on Friday after a very strong Thursday - only to hit the .786 fib level where profit-taking occurred, to close the day. Will it double top at the prior high, or will it continue higher.

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