Skeena Resources (NYSE and TSX: SKE)

SKE probably will trade well above its current price within the next 12 months. However, we doubt that it will outperform GDXJ by a significant margin and there is no point taking the additional risk associated with the shares of a permitting-stage single-project company unless there is a high probability of substantial outperformance.

If you have sizable exposure to SKE and no/small exposure to US Gold Corp. (USAU), it could make sense to reduce the former and add to the latter.

Snowline Gold (SGD.V) is a stock that we would be interested in adding to the TSI List as a replacement for SKE. SGD is developing the Rogue gold project in Yukon, Canada.

The Rogue project has a huge gold resource that very likely will be of interest to a mid-tier or senior gold producer at some point in the future. The project’s current resource is around 7M ounces, but with additional drilling it almost certainly will end up being more than 10M ounces.

We were very close to adding SGD to the TSI List a few weeks ago when the stock price dropped to around C$4.00, but before we ‘pulled the trigger’ the price of this stock rocketed upward — along with the prices of other Canadian gold mining stocks with large undeveloped resources, including SKE — in reaction to the Gold Fields takeover bid for Osisko Mining.

We will wait and hope for a sizable correction.

A mine construction decision depends on permitting, which possibly won’t be complete until late next year.

Even though the Eskay Creek project is probably still more than 12 months away from being permitted for mine construction, last month SKE put in place sufficient financing to ensure that the project is fully funded through to production. This was an important de-risking event, although permitting will be a significant risk until all permits are issued.

There’s an old adage that false moves lead to big moves. Alternatively, to say it the way we normally say it, false downside breakouts tend to be more bullish than upside breakouts and false upside breakouts tend to be more bearish than downside breakouts. SKE’s recent price action is a great example of this. As illustrated by the following chart, in late-June the SKE share price broke below support to a 3-month low, only to immediately reverse direction and rocket up to a 12-month high. Note that the downside breakout occurred AFTER the positive financing news was announced.

We suspect that SKE’s upside in the short-term will be limited by last year’s highs in the US$7.00-$7.70 range, but we expect that it will be a double-digit stock within the next 12 months.

SKE’s intermediate-term risk/reward justifies its on-going inclusion in the TSI List.

1) A US$100M equity investment, including the immediate purchase by Orion of C$100M (US$73M) of “flow through” shares priced at C$8.32/share.

2) A US$200M “gold stream”. In exchange for providing US$200M of cash in tranches, Orion would be entitled to receive 10.55% of Eskay’s gold production for the life of mine of the project at a price equal to 10% of the LBMA AM gold fixing price. Importantly, since the gold stream reduces SKE’s exposure to upside in the gold price, for a period of 12 months following the project completion date SKE can choose to reduce the Stream Percentage by 66.67% by repaying Orion the proportional deposit plus an imputed 18% IRR.

3) A US$350M senior secured loan at an interest rate of SOFR + 7.75%, to be made available in four equal tranches during the construction period and to be repaid in 15 quarterly instalments following project completion.

4) A US$100M cost over-run facility with the same pro-rata terms as the Gold Stream.

The total amount of the financing package is US$750M. Along with the US$30M that SKE is estimated currently to have in its treasury, this means that the company now has access to about US$780M. According to the FS that was released last November, the Eskay project’s pre-production capital requirement is $528M, including a US$36M contingency. This means that SKE is now more than fully funded through to production, even though the company does not expect to have in hand all required permits for mine construction/operation until the end of next year.

It is strange that the company has put this financing in place well before the Eskay project becomes fully permitted. However, the fact that Orion is providing US$100M of equity financing this year suggests that it has confidence in SKE’s ability to obtain all the required permits. Also, with full construction financing now ‘put to bed’, the project has been de-risked.

We therefore consider this news to be decidedly positive.

The initial market reaction to the news on Wednesday 26th June was (inexplicably) negative and led to SKE’s share price making a new 3-month low on the day that the news was announced. However, reality then set in and the stock price gained sufficient ground over the next two trading days to end the week near a 12-month high.

SKE has intermediate-term upside potential in excess of 100% and would be a good candidate for new buying following a pullback to near its 50-day MA (the blue line on the following chart).

A mine construction decision depends on permitting, which possibly won’t be complete until H1-2025.

The company is well financed (having raised C$90M last month) and at current metal prices there is valuation-related upside potential of at least 100%, with permitting being the biggest remaining company-specific risk. We suspect that SKE will become a takeover target after it obtains the permits needed for mine construction.

SKE’s risk/reward justifies its on-going inclusion in the TSI List.

SKE has raised an additional C$10.4M by issuing 1.2M new shares at C$8.53/share. This price was 40% above the market price at the time, the reason being that the new shares are defined as “flow through” under Canadian tax law.

This news is positive, as it eliminates the main company-specific short-term risk and should mean that SKE is now fully financed through to the start of mine construction.

According to the FS completed in September of last year, at a cost of C$592M the Eskay Creek project could be developed into an open-pit mining operation with average annual production over 9 years of 350K gold-equivalent (AuEq) ounces (269K oz of gold + 7.4M oz of silver) at an AISC is US$652/oz. At gold and silver prices of US$1700/oz and US$19/oz, the post-tax NPV(5%) was estimated to be C$1400M and the post-tax IRR was estimated to be 50%.

After the close of trading last Tuesday the company published the results of an updated FS that takes into account various cost increases, improvements and a larger mineral resource. According to the updated FS:

1) The estimated pre-production capex has increased by about 20% to C$713M.

2) Average annual production has increased to 370K AuEq ounces over 10 years.

3) The estimated AISC has increased by about 5% to US$684/oz.

4) At gold and silver prices of US$1800/oz and US$23/oz, resp., the post-tax NPV(5%) is now estimated to be C$2003M and the post-tax IRR is now estimated to be 43%.

5) Using the more conservative gold and silver prices of US$1600/oz and US$21/oz, resp., the post-tax NPV(5%) is now estimated to be C$1596M and the post-tax IRR is now estimated to be 37%.

These figures indicate that the Eskay Creek project remains economically robust and suggest that it will get developed into a mine as long as the necessary permits can be obtained. Also, adding the Snip project as a satellite to Eskay Creek should improve the economics further. The extent of the potential improvement will be determined via an engineering study over the next several months.

When we added SKE to the TSI List about three months ago, we came up with a rough valuation for the stock by assuming that Eskay Creek was worth 60% of its NPV (meaning that we applied a 40% discount for execution and permitting risk) and that Snip was worth C$100M. We added these amounts to the company’s C$80M of cash to arrive at C$11.60/share (US$8.80/share using a CAD/USD rate of 0.76). Using the same methodology, the more conservative NPV figure mentioned in item 5) above and the current working capital as indicated in the latest financial statements, we arrive at a rough valuation of C$12.00/share (around US$9.00/share).

However, the company burned through an extraordinary amount of working capital during the September quarter (during the quarter its working capital shrank from C$65M to C$12M), which means that it will soon have to do a sizable equity financing. This will reduce our estimate of the per-share valuation because the new shares will be issued at a large discount to our current valuation. For example, issuing 12M new shares at C$5.00/share would reduce our estimated per-share value from C$12.00 to C$11.20. At the same time, our valuation could be increased by incorporating the Snip project into Eskay Creek and would be increased by significant progress on the permitting front.

We are comfortable with the results of the updated FS, but we would wait for equity financing news before doing new/additional buying of SKE shares.

Note that SKE’s dismal performance is not an isolated case. For example, the stock prices of i-80 Gold (IAU.TO) and Marathon Gold (MOZ.TO), which, like SKE, are development-stage gold miners with several million ounces of in-ground gold in North America, made multi-year lows over the past week despite there being no company-specific negative news.

The reality is that at the moment the market is interested only in gold miners with well over 100K ounces/year of current production. Even Minera Alamos (MAI.V), which is a well-managed junior gold producer, has a stock price that is languishing near a multi-year low.

As mentioned in previous commentaries, the stock prices of the more speculative gold miners (explorers, developers and junior producers) probably won’t do much on the upside until the HUI breaks above its H1-2023 high, which probably won’t happen until the first half of next year.

We introduced Skeena in the 24th July Weekly Update, at which time we wrote that we would add it to the TSI Stock List if it traded at US$4.40 (the market price was US$4.96 at the time). It traded as low as US$4.55 last Friday and ended the week at US$4.64. This is close enough to our previously advised buy level, so SKE has been added to the TSI List as a long-term position at last week’s closing price of US$4.64. We think that there is short-term downside risk of around 10%, but this pales in comparison with intermediate-term upside potential of at least 100%.

For ease of reference, here’s what we wrote about SKE in our 24th July commentary:

“…Eskay Creek is the company’s flagship project. According to the FS completed in September of last year, at a cost of C$592M this project could be developed into an open-pit mining operation with average annual production over 9 years of 350K gold-equivalent (AuEq) ounces (269K oz of gold + 7.4M oz of silver). The estimated AISC is US$652/oz, which is low.

With regard to the economics of proposed mine, at gold and silver prices of US$1700/oz and US$19/oz the post-tax NPV(5%) is estimated to be C$1400M and the post-tax IRR is estimated to be 50%.

The company is working on an updated FS that is scheduled to be complete in Q1-2024. The updated FS will take into account the updated Mineral Resource Estimate (MRE) that was finalised last month and showed a significant increase in the M&I resource to 5.6M ounces AuEq (4.1M oz Au + 103M oz Ag).

The bulk of SKE’s current value is associated with the Eskay Creek project, but the Snip project also has significant value. Its current total resource is 1.5M AuEq ounces.

Work on the Snip project over the coming year is planned to include an updated MRE in Q3 of this year and an initial engineering study in Q1 of next year that will assess the viability of developing Snip as an Eskay Creek satellite operation.

Also of importance is that SKE is well financed, with no debt and around C$80M of cash.

The main company-specific risks are permitting and the potential effects of inflation on the pre-production capex. The path to getting the necessary permits will be made easier due to there being other large mines within the general area and the fact that Eskay Creek is a former underground mine, but getting a large new mine permitted is becoming increasingly difficult.

To come up with a valuation for SKE, we have assumed that Eskay Creek is worth 60% of the above-mentioned NPV (meaning that we are applying a 40% discount for execution and permitting risk) and that Snip is worth C$100M. Adding these amounts to the company’s C$80M of cash gives us a rough valuation of C$1020M. Based on the current 88M share count, this equates to C$11.60/share (US$8.80/share at a CAD/USD rate of 0.76).”

The following daily chart shows that SKE is testing its low for the year and is within about 10% of last year’s low. The most important nearby resistance is around US$5.50.