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The Shorts Got it Wrong on Seabridge Gold


The stock should resume its rally soon, continuing the short squeeze that began last week.


I've highlighted the virtual "campaign" that a group of short sellers began against Seabridge Gold (SA) back in mid-February with a Barron's article, which was then followed up by various Internet hatchet jobs. See Is There Gold in Seabridge's Hills?

Since that time, the short interest in the stock has exploded to around 8% of the outstanding. Eight days ago, the door slammed shut on this group of unfortunate individuals, as these shorts began to get squeezed and ignited a six-day nonstop rally (that's what happens when your premise for shorting a stock isn't only poorly conceived but completely wrong as well).

Then, yesterday we got the KSM pre-feasibility study, which moved 30 million ounces of Seabridge Gold's 50-million-ounce resource into proven and probable reserves and erased one of the chief arguments against the stock that this group of shorts had, namely that the company had "no reserves."

Thirty million ounces of P&P reserves is a huge deposit and is one of the largest reserves on the planet. To give you an idea, it's one-third of Newmont Mining's (NEM) entire reserve base, which is on multiple continents.

At a time when large deposits of this kind are increasingly harder and harder to find and in increasingly riskier areas from a political standpoint, it makes Seabridge Gold's KSM project (located in Canada) worth a lot to a senior producer that is seeking to not only grow its reserves but simply replace reserves.

So what is KSM potentially worth to a senior? At $1100 gold, KSM's gold reserves alone are worth $33 billion, and that gives zero value to the copper, silver, and moly reserves. After subtracting the initial $3.37 billion capex (which we'll round up to $4 billion just to be conservative) and a $500 per ounce cash cost estimate net of byproduct credits ($15 billion), which is well above the pre-feas estimate of costs based on current metals prices, we're left with a NAV of roughly $14 billion, or more than 14 times Seabridge Gold's current stock price.

Now, another way to look at it is that Newmont paid $135 per resource ounce for Miramar Mining's 10 million ounce resource back in 2007 when gold was $400 lower, which was the last large takeover of an undeveloped gold project that I can recall. That was just for resource ounces. Seabridge Gold's 30 million ounces are now classified as reserves, which are obviously worth more. Even at just $135 per ounce for Seabridge Gold's 30 million in P&P reserves though, it would make Seabridge Gold's stock worth over $4 billion, or more than four times its current stock price (which gives no value to Seabridge Gold's other assets).

Somewhere in between those two numbers is probably a good estimate of what KSM could eventually sell for to a senior, but you get the idea. In short, this study could be a game changer for Seabridge Gold.

Now, I'm not surprised that Seabridge Gold closed down a couple percent yesterday after having rallied for six straight days prior to yesterday's news because I'm sure the size of the move over the past six days prompted some people to "sell the news."

However, with the large 8% short interest underneath that has been shorting Seabridge Gold based on the premise that it has "no reserves" (whoops!), I'd be surprised if the stock came in much more before resuming its rally (especially if gold rises like I think it will), which will only exacerbate the ongoing short squeeze that began last week. That's especially the case after we get past quarter-end and more people become aware of this pre-feas, which can often have a delayed reaction effect on a stock like this after people get a chance to pore over the data.

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Position in SA and NEM

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