Sabine Gold & Silver (OTCQX: SGSVF) has finally completed financial arrangements for its Goose project (part of the larger Back River project located in Canadian Nunavut). $520 million financing package includes $225 million senior secured debt, $75 million gold prepayment facility, sale of 4.15% gold stream to Wheaton Precious Metals (WPM) for $125 million and equity financing worth $95 million.
The $225 million credit facility will be provided by Orion Mine Finance. It will bear interest of LIBOR+5-8%, with an interest holiday until September 30, 2025 (interest will accrue and capitalize). Principal and interest payments will be made in 20 installments, with the last scheduled for June 30, 2030. Orion will also provide the $75 million gold prepayment facility, under which it will be entitled to receive 7 250 toz of gold per quarter, for 15 quarters beginning September 30, 2025. In addition, Orion will receive the offtake rights for 100% of Goose’s gold production until 5 million toz of gold are produced, 20% thereafter. Orion will pay Sabina 99% of the prevailing spot gold prices.
The 4.15% gold stream will be purchased by Wheaton Precious Metals for an upfront payment of $125 million, paid in four equal installments during mine construction. Outstanding payments will be 18% of the spot gold price. However, once the cumulative value of the gold delivered, less the cumulative value of outstanding payments, reaches the value of the initial payment ($125 million), outstanding payments will increase to 22% of the spot price of gold. Wheaton will be entitled to 4.15% of Goose’s gold production until 130,000 toz of gold is delivered. Thereafter, the flow will be reduced to 2.15% until delivery of 200,000 toz of gold, then to 1.5% for the remainder of the mine life. A detailed analysis of gold flow from Wheaton’s perspective can be found here.
Orion and Wheaton will also participate in the equity financing. Orion will buy 72,732,692 shares for $75 million in total, and Wheaton will buy 19,395,384 shares for $20 million in total. In addition, Zhaojin International Mining Company has the right to retain its 9.9% stake in the company. Therefore, he has 10 days to announce whether he will also buy additional shares.
What I like most about the financial package is the relatively low weight of equity financing (only 18.3% of the overall sum), although Sabina had to offer very favorable overall conditions to Orion ( high interest rate, prepayment facility for gold, right of withdrawal). Another positive is that CAPEX was projected at $466 million, which means that the financial package includes some reserve for potential cost overruns which are quite likely in the current inflationary environment.
Goose has measured, indicated and inferred resources of nearly 9.2 million tonnes of gold. The reserves contain nearly 3.6 million toz of gold. But these are not the final values. As can be seen in the image below, there is huge exploration potential and the numbers will almost surely increase.
According to the feasibility study updated in March 2021, the Goose mine should be able to produce 223,000 toz of gold per year at an AISC of $775/toz on average, over a mine life of 15 years. However, over the first 5 years, production should average 287,000 toz of gold per year. Production is expected to be split almost evenly between surface and underground mining operations. At a base gold price of $1,600/toz and a CAD/USD exchange rate of 0.76, the after-tax NPV (5%) equals $856 million and the after-tax IRR equals 27 .7%. At the current gold price of $1,800/toz and an exchange rate of 0.8, the after-tax NPV (5%) is approximately $1.06 billion and the after-tax IRR is about 30 %.
Sabina has a market cap of $376 million. following the equity financing, it will increase to $466 million. Based on expected cash flow, the mine is expected to produce 284,580 toz of gold in the first year of full production. AISC for the first year has not been provided, but it is possible to use the average life of mine of $775/toz, which will also help keep the calculations more conservative.
Of the 284,580 toz of gold produced in the first year, 11,810 toz will be delivered to Wheaton Precious Metals. Using a gold price of $1,800/toz, Wheaton will pay $324/toz. In addition, 29,000 toz will be delivered to Orion without any outstanding payments, under the gold prepayment facility. This means that there will be 243,770 toz of gold left for Sabina. Additionally, the AISC will effectively increase to $889/toz. As Orion has the offtake agreement and will pay 99% of the spot gold price for the gold delivered, the realized gold price will effectively drop from $1,800/toz to $1,782/toz. toz. Attributable gold production of 243,770 toz, at an AISC of $889/toz, and a realized gold price of $1,782/toz, results in cash flow of $217.7 million. The current median cash flow to operating cash flow ratio in the gold mining industry is 8.8. Using a lower value of 7, to be even more conservative, Sabina should reach a market capitalization of around $1.5 billion. This means just over 200% upside from the current share price (using post-funding share count).
The technical picture is not very nice. However, there are signs that the situation may be starting to improve. Sabina shares have been in a strong downward trend since the start of 2021. During this time, they have lost around 2/3 of their value. But it looks like a bottom has been created in the $0.95-$1.00 area. Right now, the stock price stands at $1.04. It is near the resistance at $1.15. But what is more important, it is also close to the downtrend line. If it is broken, a new uptrend should emerge.
I believe that after the bloody 2021, Sabina offers attractive long-term value. If the price of gold stays at least $1,800/toz and mine construction and ramp-up goes smoothly, there is a high probability that Sabina will generate more than 200% upside. Especially if exploration of the vast, district-wide Back River property continues successfully. The problem is that we still have to wait several years. Probably until 2025.