Executive Summary
Skeena Resources Limited (“Skeena”) (TSX:SKE)(NYSE:SKE) is a Canadian company with mineral properties in British Columbia, Canada. The Company has a market capitalisation of C$561 million (“M”) (US$423 M) and, as of 30 September, C$27.2 M in cash and cash equivalents.
The main asset is the Eskay Creek Revitalization Project (“Eskay Creek”), which has published a Feasibility Study showing handsome numbers dating from September. Average annual production in Years 1-5 of 431,000 gold equivalent (“AuEq”) ounces, and average annual after-tax free cash flow (Years 1-9) of C$293 M. Very nice.
Some challenges, however, remain. The old mine famously had complex geology and metallurgy along with the high grades. Crux Investor feels that Skeena could potentially take a lower risk approach to the project by lowering planned throughput. And several gaps within the 2022 report make it feel more like a Pre-Feasibility Study than a Feasibility Study. For example, drilling in the project area was incomplete, the geotechnical "model require[s] additional validation and testing…before…[it] can be used for detailed design”, and the hydrogeological model is conceptual. Skeena also indirectly acknowledges additional metallurgical test work is needed, by planning a 10,000 t bulk sample in Year -3.
2023 will see an updated Feasibility Study published. Good. Exploration to better define new zones of mineralisation inside and outside the current planned pit shells is ongoing. A new Mineral Resource Estimate (“MRE”) is expected in H1 2023. The new resources are likely to add operational flexibility and potentially mine-life to the project. With a new MRE, and incorporating new metallurgical, geotechnical and mine planning data, the Feasibility Study planned for H2 2023 should be more ‘final’.
In modelling, Crux Investor has increased operating costs by 20% over the 2022 Feasibility Study numbers, and the project still has an NPV8 of C$860 M. Given the weak capital markets of 2022, Skeena has held its value remarkably well, trading at 0.56x of NPV8. Crux Investor believes that this reflects the high grade, the high average gold production over the life of mine, and the general quality of the project.
Technical risks remain and the new Feasibility Study should address many of the areas of concern. Crux Investor believes that a less aggressive ramp-up and final throughput rate would further reduce operational risk. Even using 20% higher operating costs the Eskay Creek project returns robust economics at current metal prices and is highly leveraged to any improvement in gold and silver prices.
Introduction
Skeena Resources Limited (“Skeena”) (TSX:SKE)(NYSE:SKE) is a Canadian company with mineral properties in British Columbia, Canada. The Company has a market capitalisation of C$561 million (“M”) (US$423 M) and, as of 30 September, C$27.2 M in cash and cash equivalents.
The main asset is the Eskay Creek Revitalization Project (“Eskay Creek”), which has a robust Feasibility Study dating from September. Drilling, however, in the project area was incomplete. Exploration to better define new zones of mineralisation inside and outside the current planned pit shells is ongoing. A new Mineral Resource Estimate (“MRE”) is expected in H1 2023. The new resources are likely to add operational flexibility and potentially mine-life to the project. On the back of the new MRE, an updated Feasibility Study is planned for H2 2023. Crux Investor expects the 2023 Feasibility Study to be marginally, not materially, better than the 2022 Feasibility Study.
Skeena has other exploration projects. Chief among these is the historic Snip Mine and surrounds. Hochschild Mining Holdings Limited (“Hochschild”) is investing C$100 M for the right to own a 60% undivided interest in Snip. The look-through value for Snip, attributable to Skeena’s 40%, is therefore C$67 M. Crux Investor uses C$67 M as a nominal value for the wider exploration portfolio outside of the Eskay Creek Revitalization Project.
The historic operation at Eskay Creek mined a high-grade epithermal volcanogenic massive sulphide (“VMS”). The ore was rich in gold and silver, but it also came with deleterious antimony, mercury, and arsenic. The previous operator of the mine, Barrick Gold Corp mined the main ‘mudstone’ ore underground and largely processed off-site. From 1994 to 2008 Eskay Creek produced at an average grade of 45 g/t gold and 2,224 g/t silver. The geometry, the metallurgy, and the logistics of the ore were complex, but the grades sufficiently high to make it a profitable operation.
The Skeena strategic approach
Skeena’s strategy has been to explore extensions of the deposit, identifying a larger tonnage of lower grade material underneath and adjacent to the main mudstone mineralisation. The definition of resources close to surface and in mineral assemblages with slightly simpler metallurgy has meant that Skeena been able to just concentrate on an open pit plan. Of the total contained gold of 4.1 Moz and silver (98.4 Moz) more than 95% is present in the open pit resources. The feasibility study ignored underground mining options.
A large, high-grade resource - at surface
On an ounce-weighted basis, 55% of the pit-constrained resource estimate is contained within the rhyolite with the remaining 42% hosted within the unmined mudstones/hanging wall Andesite and 4% in the footwall Dacite. The mineralisation in the rhyolite lithology is not enriched with mercury, arsenic and antimony. Rhyolite resources are typically lower grade but with easier metallurgy and the mudstone resources are typically higher grade but with more complex metallurgy.
The reserve statement has 2.9 M ounces (“Moz”) gold and 76 Moz silver at a grade of 3.0 g/t Au and 79 g/tAg. These are excellent grades for an open pit operation with a prospective stripping ratio of 7.5:1 using a gold price of US$1,700/oz. The Feasibility Study highlights are: a pay-back period of less than one year, an after-tax IRR of 50% and an after-tax NPV at 5% of C$1.4 billion (“B”) assuming pre-production capital expenditure of less than C$0.6 B.
Crux Investor identifies some areas of concern within the Feasibility Study; mine-life, reserve grades anomalously higher than resource grades especially silver, metallurgy, an apparently skinny geotechnical dataset, and input costs.
The dangers of having a short mine-life
Skeena has elected a relatively high production rate for the size of the ore body with mining completed after eight years and processing after nine years. Commercial production starts after two years of pre-production ‘mining’. The pre-production work, starting at 2.7 Mtpa, will generate ballast to be used in construction and will also access material for further metallurgical tests and commissioning. Note that 2.7 Mtpa from a standing start is a very aggressive ramp-up. After commissioning, mining will continue at 3.5-3.7 Mtpa for eight years. The relationship of mine-life to throughput rate exposes the project to considerable risk from teething problems.
Theoretically, a high-production rate depleting a deposit within ten years is financially beneficial, but it leaves little time to deal with any negative surprise and carrying out corrective measures. Given the very complex nature of the Eskay Creek deposits it would be more prudent to produce at a lower rate, in particular in the early years with much Mudstone being mined. Perhaps the new MRE and new Feasibility Study will address this issue? Crux Investor certainly hopes so.
Resource conversion to reserve ‘grade’ concerns
The 2022 Feasibility Study shows significantly higher grades in the reserve tables than in the resource tables, despite the modelled contact dilution of 1.25 m around the 10 m x 10 m x 10 m blocks, when adjacent to waste. Grades can rise due to the application of more conservative input parameters than those used for general resources.
What does not make sense, however, is the much larger upgrade in silver-grades than gold-grades in Probable Reserves. This is especially concerning as the value of each block is dominantly determined by gold. If there would be a preferential upgrading, one would expect this to be for gold, not silver. Crux Investor hopes that this is clarified in the 2023 Feasibility Study.
Table 2 gives the Mineral Reserve Statement, effective 30 June 2022, below which are presented the calculated conversion rates from the M&I Resources statistics.
Challenging metallurgy and rock mechanics
Defining metallurgical domains will be difficult at Eskay Creek due to significant heterogeneity in rock type and mineralogy. The various deposits differ much in host rock composition and with mineralisation of chaotic composition with varying dimensions of beds of clastic sulphides and sulphosalts containing variable amounts of barite, rhyolite, and mudstone clasts. Gold and silver occur as electrum (an alloy of gold and silver with trace amounts of copper and other metals) and amalgam (bonded with mercury) while silver mainly occurs within sulphosalts. Precious metal grades generally decrease proportionally with decrease in total sulphides and sulphosalts. Clastic sulphoside beds contain fragments of coarse-grained sphalerite (ZnS), tetrahedrite ((Cu,Fe)12Sb4S13), lead-sulphosalts with lesser freibergeite (Ag,Cu,Fe)₁₂(Sb,As)₄S₁₃, galena (PbS), pyrite (FeS2), electrum, amalgam, and minor arsenopyrite (FeAsS). Stibnite (Sb₂S₃) occurs locally in late veins.
The mineralogy is complex and therefore there is associated metallurgical risk. Although there has been substantial metallurgical test work to date, it is evident that managing the feed will be a complex process. Results show widely varying characteristics for hardness, recovery, deleterious elements and difficulties achieving a sufficiently dry product. The chosen process route involves two stages of milling and flotation to avoid overgrinding. To some extent the 2022 study acknowledges the technical challenges by planning to take a 10,000-tonne bulk sample three years before production for metallurgical test work.
Crux Investor notes that the rock mechanical conditions are also complex with many different lithologies and eleven tectonic structural domains. Given that ten geotechnical units of similar rock mass properties were identified, it raises the question whether 26 holes supporting the geotechnical study provided sufficient data.
Indeed, the technical report observes p.255 that “the geotechnical model interpretations require additional validation and testing with higher data density before they can be used for detailed design”. Crux Investor hopes that this is addressed in the 2023 Feasibility Study. Similarly, the 2022 report notes that the hydrogeological model is currently “conceptual” (p.255), so test work will need to be incorporated into the next Feasibility Study.
Input costs are too low
The feasibility study input costs are low given the complexities inherent in the Eskay Creek Revitalization Project. The challenges include:
· the isolated and northerly location
· complex mining requiring strict grade control and stockpile management
· having to deal with old workings
· complex metallurgy of many different ore types
· the disposal of a considerable amount of Potentially Acid Generating (“PAG”) waste.
· the need for a river diversion, and
· highly fluctuating mining production levels.
When modelling, Crux Investor adjusted some unit cost rates resulting in an increase of 20% for the overall operating cost, varying across mining, processing, and G&A costs. This may well prove still too optimistic. Regarding capital expenditure, the initial cost of the plant at US$600/t monthly capacity (or C$592 M in total) is low considering the complexity of the process and the remoteness of the site. Crux Investor has not made a primary input adjustment in the model, but CapEx increases were addressed in the Sensitivity Analysis. An investment in working capital of C$73M was included in the model.
Valuation
The Crux Investor valuation uses the precious metal spot prices on 25 November 2022 of US$1,755/oz Au and US$21.5/oz Ag and an exchange rate of C$1.338 per US$. Gold accounts for three quarters of the at-mine revenue received. A parallel model using Skeena metal price and offtake assumptions was also created.
Crux Investor numbers indicate an NPV8of C$949 M. The diluted Enterprise Value of Skeena Resources is diluted Mkt Cap (C$584 M) – Cash (C$27 M) – Cash from options & warrants (C$6 M) = C$550 M. If one adjusts for the look-through value of Snip (C$67 M), it means that the market value of Eskay Creek is C$483 M(550-67), attributable to Skeena. In other words, Eskay Creek is trading at a discount of 49% to NPV.
Given the weak capital markets of 2022, Skeena has held its value remarkably well. Crux Investor believes that this reflects the high after-tax IRR of 25%, and the high average gold production over the life of mine. Skeena reports LOM production of 3.2 Moz gold equivalent (“AuEq”) ounces from 2.4 Moz gold and 66.7 Moz silver. The average annual production for years 1-5 is 431,000 AuEq ounces.
Leveraged to metal prices, insensitive to costs
The high margin project means that project economics are relatively insensitive to changes in operating and capital costs. For every percentage point increase in the precious metal prices the NPV8 improves by C$23 M (or 2.4%) and for every percentage point increase in the operating cost (C$6.1/t milled) the NPV drops by C$6.8 M(-0.8%). Similarly for 1% rise reduces the NPV by C$5.8 M (-0.7%). What this means is that the project is most sensitive to gold price. For example, even if the capital expenditure ends up being 30% higher, the NPV will be still C$0.68 B, which is 29% lower than the diluted Enterprise Value ofC$550 M on 25 November 2022, ignoring the value of Snip.
Crux Investor modelled the feasibility study using Skeena Resources data (costs, metal prices, recoveries) and also using independent inputs (higher operating costs, spot metal prices, etc). By remodelling the feasibility study cash flows, it is possible to check for the presence of tax breaks or other opportunities that might not be in the public domain. In the case of Eskay Creek, Crux Investor arrived at payment of higher overall taxes. In this case, the higher tax rates used in the Crux Investor valuation introduces additional conservative bias.
Conclusion
The 2022 Feasibility Study highlighted further areas for study and most of the issues should be addressed in the upcoming 2023 Feasibility Study. Nevertheless, technical risk remains and Crux Investor feels that the project would be more secure and still economically robust if a less aggressive mine schedule were to be adopted.
Still, Eskay Creek is a deposit that can produce a lot of profitable ounces if the technical risks are managed well. Annual production in excess of 431,000 AuEq ounces, and annual after-tax free cash flow C$293 M makes for a powerful asset.
The Crux Investor valuation using 2022 study data shows that even using 20% higher operating costs the Eskay Creek project returns robust economics at current metal prices. Eskay Creek is highly leveraged to any improvement in gold and silver prices, and relatively insensitive to capital and operating costs. Eskay Creek is currently trading within Skeena Resources at a discount of 49% to NPV.
If you are a Family Office investor, or an Institutional investor, and you would like the full report behind this article, please contact matthew@cruxinvestor.com
Executive Summary
Skeena Resources Limited (“Skeena”) (TSX:SKE)(NYSE:SKE) is a Canadian company with mineral properties in British Columbia, Canada. The Company has a market capitalisation of C$561 million (“M”) (US$423 M) and, as of 30 September, C$27.2 M in cash and cash equivalents.
The main asset is the Eskay Creek Revitalization Project (“Eskay Creek”), which has published a Feasibility Study showing handsome numbers dating from September. Average annual production in Years 1-5 of 431,000 gold equivalent (“AuEq”) ounces, and average annual after-tax free cash flow (Years 1-9) of C$293 M. Very nice.
Some challenges, however, remain. The old mine famously had complex geology and metallurgy along with the high grades. Crux Investor feels that Skeena could potentially take a lower risk approach to the project by lowering planned throughput. And several gaps within the 2022 report make it feel more like a Pre-Feasibility Study than a Feasibility Study. For example, drilling in the project area was incomplete, the geotechnical "model require[s] additional validation and testing…before…[it] can be used for detailed design”, and the hydrogeological model is conceptual. Skeena also indirectly acknowledges additional metallurgical test work is needed, by planning a 10,000 t bulk sample in Year -3.
2023 will see an updated Feasibility Study published. Good. Exploration to better define new zones of mineralisation inside and outside the current planned pit shells is ongoing. A new Mineral Resource Estimate (“MRE”) is expected in H1 2023. The new resources are likely to add operational flexibility and potentially mine-life to the project. With a new MRE, and incorporating new metallurgical, geotechnical and mine planning data, the Feasibility Study planned for H2 2023 should be more ‘final’.
In modelling, Crux Investor has increased operating costs by 20% over the 2022 Feasibility Study numbers, and the project still has an NPV8 of C$860 M. Given the weak capital markets of 2022, Skeena has held its value remarkably well, trading at 0.56x of NPV8. Crux Investor believes that this reflects the high grade, the high average gold production over the life of mine, and the general quality of the project.
Technical risks remain and the new Feasibility Study should address many of the areas of concern. Crux Investor believes that a less aggressive ramp-up and final throughput rate would further reduce operational risk. Even using 20% higher operating costs the Eskay Creek project returns robust economics at current metal prices and is highly leveraged to any improvement in gold and silver prices.
Introduction
Skeena Resources Limited (“Skeena”) (TSX:SKE)(NYSE:SKE) is a Canadian company with mineral properties in British Columbia, Canada. The Company has a market capitalisation of C$561 million (“M”) (US$423 M) and, as of 30 September, C$27.2 M in cash and cash equivalents.
The main asset is the Eskay Creek Revitalization Project (“Eskay Creek”), which has a robust Feasibility Study dating from September. Drilling, however, in the project area was incomplete. Exploration to better define new zones of mineralisation inside and outside the current planned pit shells is ongoing. A new Mineral Resource Estimate (“MRE”) is expected in H1 2023. The new resources are likely to add operational flexibility and potentially mine-life to the project. On the back of the new MRE, an updated Feasibility Study is planned for H2 2023. Crux Investor expects the 2023 Feasibility Study to be marginally, not materially, better than the 2022 Feasibility Study.
Skeena has other exploration projects. Chief among these is the historic Snip Mine and surrounds. Hochschild Mining Holdings Limited (“Hochschild”) is investing C$100 M for the right to own a 60% undivided interest in Snip. The look-through value for Snip, attributable to Skeena’s 40%, is therefore C$67 M. Crux Investor uses C$67 M as a nominal value for the wider exploration portfolio outside of the Eskay Creek Revitalization Project.
The historic operation at Eskay Creek mined a high-grade epithermal volcanogenic massive sulphide (“VMS”). The ore was rich in gold and silver, but it also came with deleterious antimony, mercury, and arsenic. The previous operator of the mine, Barrick Gold Corp mined the main ‘mudstone’ ore underground and largely processed off-site. From 1994 to 2008 Eskay Creek produced at an average grade of 45 g/t gold and 2,224 g/t silver. The geometry, the metallurgy, and the logistics of the ore were complex, but the grades sufficiently high to make it a profitable operation.
The Skeena strategic approach
Skeena’s strategy has been to explore extensions of the deposit, identifying a larger tonnage of lower grade material underneath and adjacent to the main mudstone mineralisation. The definition of resources close to surface and in mineral assemblages with slightly simpler metallurgy has meant that Skeena been able to just concentrate on an open pit plan. Of the total contained gold of 4.1 Moz and silver (98.4 Moz) more than 95% is present in the open pit resources. The feasibility study ignored underground mining options.
A large, high-grade resource - at surface
On an ounce-weighted basis, 55% of the pit-constrained resource estimate is contained within the rhyolite with the remaining 42% hosted within the unmined mudstones/hanging wall Andesite and 4% in the footwall Dacite. The mineralisation in the rhyolite lithology is not enriched with mercury, arsenic and antimony. Rhyolite resources are typically lower grade but with easier metallurgy and the mudstone resources are typically higher grade but with more complex metallurgy.
The reserve statement has 2.9 M ounces (“Moz”) gold and 76 Moz silver at a grade of 3.0 g/t Au and 79 g/tAg. These are excellent grades for an open pit operation with a prospective stripping ratio of 7.5:1 using a gold price of US$1,700/oz. The Feasibility Study highlights are: a pay-back period of less than one year, an after-tax IRR of 50% and an after-tax NPV at 5% of C$1.4 billion (“B”) assuming pre-production capital expenditure of less than C$0.6 B.
Crux Investor identifies some areas of concern within the Feasibility Study; mine-life, reserve grades anomalously higher than resource grades especially silver, metallurgy, an apparently skinny geotechnical dataset, and input costs.
The dangers of having a short mine-life
Skeena has elected a relatively high production rate for the size of the ore body with mining completed after eight years and processing after nine years. Commercial production starts after two years of pre-production ‘mining’. The pre-production work, starting at 2.7 Mtpa, will generate ballast to be used in construction and will also access material for further metallurgical tests and commissioning. Note that 2.7 Mtpa from a standing start is a very aggressive ramp-up. After commissioning, mining will continue at 3.5-3.7 Mtpa for eight years. The relationship of mine-life to throughput rate exposes the project to considerable risk from teething problems.
Theoretically, a high-production rate depleting a deposit within ten years is financially beneficial, but it leaves little time to deal with any negative surprise and carrying out corrective measures. Given the very complex nature of the Eskay Creek deposits it would be more prudent to produce at a lower rate, in particular in the early years with much Mudstone being mined. Perhaps the new MRE and new Feasibility Study will address this issue? Crux Investor certainly hopes so.
Resource conversion to reserve ‘grade’ concerns
The 2022 Feasibility Study shows significantly higher grades in the reserve tables than in the resource tables, despite the modelled contact dilution of 1.25 m around the 10 m x 10 m x 10 m blocks, when adjacent to waste. Grades can rise due to the application of more conservative input parameters than those used for general resources.
What does not make sense, however, is the much larger upgrade in silver-grades than gold-grades in Probable Reserves. This is especially concerning as the value of each block is dominantly determined by gold. If there would be a preferential upgrading, one would expect this to be for gold, not silver. Crux Investor hopes that this is clarified in the 2023 Feasibility Study.
Table 2 gives the Mineral Reserve Statement, effective 30 June 2022, below which are presented the calculated conversion rates from the M&I Resources statistics.
Challenging metallurgy and rock mechanics
Defining metallurgical domains will be difficult at Eskay Creek due to significant heterogeneity in rock type and mineralogy. The various deposits differ much in host rock composition and with mineralisation of chaotic composition with varying dimensions of beds of clastic sulphides and sulphosalts containing variable amounts of barite, rhyolite, and mudstone clasts. Gold and silver occur as electrum (an alloy of gold and silver with trace amounts of copper and other metals) and amalgam (bonded with mercury) while silver mainly occurs within sulphosalts. Precious metal grades generally decrease proportionally with decrease in total sulphides and sulphosalts. Clastic sulphoside beds contain fragments of coarse-grained sphalerite (ZnS), tetrahedrite ((Cu,Fe)12Sb4S13), lead-sulphosalts with lesser freibergeite (Ag,Cu,Fe)₁₂(Sb,As)₄S₁₃, galena (PbS), pyrite (FeS2), electrum, amalgam, and minor arsenopyrite (FeAsS). Stibnite (Sb₂S₃) occurs locally in late veins.
The mineralogy is complex and therefore there is associated metallurgical risk. Although there has been substantial metallurgical test work to date, it is evident that managing the feed will be a complex process. Results show widely varying characteristics for hardness, recovery, deleterious elements and difficulties achieving a sufficiently dry product. The chosen process route involves two stages of milling and flotation to avoid overgrinding. To some extent the 2022 study acknowledges the technical challenges by planning to take a 10,000-tonne bulk sample three years before production for metallurgical test work.
Crux Investor notes that the rock mechanical conditions are also complex with many different lithologies and eleven tectonic structural domains. Given that ten geotechnical units of similar rock mass properties were identified, it raises the question whether 26 holes supporting the geotechnical study provided sufficient data.
Indeed, the technical report observes p.255 that “the geotechnical model interpretations require additional validation and testing with higher data density before they can be used for detailed design”. Crux Investor hopes that this is addressed in the 2023 Feasibility Study. Similarly, the 2022 report notes that the hydrogeological model is currently “conceptual” (p.255), so test work will need to be incorporated into the next Feasibility Study.
Input costs are too low
The feasibility study input costs are low given the complexities inherent in the Eskay Creek Revitalization Project. The challenges include:
· the isolated and northerly location
· complex mining requiring strict grade control and stockpile management
· having to deal with old workings
· complex metallurgy of many different ore types
· the disposal of a considerable amount of Potentially Acid Generating (“PAG”) waste.
· the need for a river diversion, and
· highly fluctuating mining production levels.
When modelling, Crux Investor adjusted some unit cost rates resulting in an increase of 20% for the overall operating cost, varying across mining, processing, and G&A costs. This may well prove still too optimistic. Regarding capital expenditure, the initial cost of the plant at US$600/t monthly capacity (or C$592 M in total) is low considering the complexity of the process and the remoteness of the site. Crux Investor has not made a primary input adjustment in the model, but CapEx increases were addressed in the Sensitivity Analysis. An investment in working capital of C$73M was included in the model.
Valuation
The Crux Investor valuation uses the precious metal spot prices on 25 November 2022 of US$1,755/oz Au and US$21.5/oz Ag and an exchange rate of C$1.338 per US$. Gold accounts for three quarters of the at-mine revenue received. A parallel model using Skeena metal price and offtake assumptions was also created.
Crux Investor numbers indicate an NPV8of C$949 M. The diluted Enterprise Value of Skeena Resources is diluted Mkt Cap (C$584 M) – Cash (C$27 M) – Cash from options & warrants (C$6 M) = C$550 M. If one adjusts for the look-through value of Snip (C$67 M), it means that the market value of Eskay Creek is C$483 M(550-67), attributable to Skeena. In other words, Eskay Creek is trading at a discount of 49% to NPV.
Given the weak capital markets of 2022, Skeena has held its value remarkably well. Crux Investor believes that this reflects the high after-tax IRR of 25%, and the high average gold production over the life of mine. Skeena reports LOM production of 3.2 Moz gold equivalent (“AuEq”) ounces from 2.4 Moz gold and 66.7 Moz silver. The average annual production for years 1-5 is 431,000 AuEq ounces.
Leveraged to metal prices, insensitive to costs
The high margin project means that project economics are relatively insensitive to changes in operating and capital costs. For every percentage point increase in the precious metal prices the NPV8 improves by C$23 M (or 2.4%) and for every percentage point increase in the operating cost (C$6.1/t milled) the NPV drops by C$6.8 M(-0.8%). Similarly for 1% rise reduces the NPV by C$5.8 M (-0.7%). What this means is that the project is most sensitive to gold price. For example, even if the capital expenditure ends up being 30% higher, the NPV will be still C$0.68 B, which is 29% lower than the diluted Enterprise Value ofC$550 M on 25 November 2022, ignoring the value of Snip.
Crux Investor modelled the feasibility study using Skeena Resources data (costs, metal prices, recoveries) and also using independent inputs (higher operating costs, spot metal prices, etc). By remodelling the feasibility study cash flows, it is possible to check for the presence of tax breaks or other opportunities that might not be in the public domain. In the case of Eskay Creek, Crux Investor arrived at payment of higher overall taxes. In this case, the higher tax rates used in the Crux Investor valuation introduces additional conservative bias.
Conclusion
The 2022 Feasibility Study highlighted further areas for study and most of the issues should be addressed in the upcoming 2023 Feasibility Study. Nevertheless, technical risk remains and Crux Investor feels that the project would be more secure and still economically robust if a less aggressive mine schedule were to be adopted.
Still, Eskay Creek is a deposit that can produce a lot of profitable ounces if the technical risks are managed well. Annual production in excess of 431,000 AuEq ounces, and annual after-tax free cash flow C$293 M makes for a powerful asset.
The Crux Investor valuation using 2022 study data shows that even using 20% higher operating costs the Eskay Creek project returns robust economics at current metal prices. Eskay Creek is highly leveraged to any improvement in gold and silver prices, and relatively insensitive to capital and operating costs. Eskay Creek is currently trading within Skeena Resources at a discount of 49% to NPV.
If you are a Family Office investor, or an Institutional investor, and you would like the full report behind this article, please contact matthew@cruxinvestor.com
Executive Summary
Skeena Resources Limited (“Skeena”) (TSX:SKE)(NYSE:SKE) is a Canadian company with mineral properties in British Columbia, Canada. The Company has a market capitalisation of C$561 million (“M”) (US$423 M) and, as of 30 September, C$27.2 M in cash and cash equivalents.
The main asset is the Eskay Creek Revitalization Project (“Eskay Creek”), which has published a Feasibility Study showing handsome numbers dating from September. Average annual production in Years 1-5 of 431,000 gold equivalent (“AuEq”) ounces, and average annual after-tax free cash flow (Years 1-9) of C$293 M. Very nice.
Some challenges, however, remain. The old mine famously had complex geology and metallurgy along with the high grades. Crux Investor feels that Skeena could potentially take a lower risk approach to the project by lowering planned throughput. And several gaps within the 2022 report make it feel more like a Pre-Feasibility Study than a Feasibility Study. For example, drilling in the project area was incomplete, the geotechnical "model require[s] additional validation and testing…before…[it] can be used for detailed design”, and the hydrogeological model is conceptual. Skeena also indirectly acknowledges additional metallurgical test work is needed, by planning a 10,000 t bulk sample in Year -3.
2023 will see an updated Feasibility Study published. Good. Exploration to better define new zones of mineralisation inside and outside the current planned pit shells is ongoing. A new Mineral Resource Estimate (“MRE”) is expected in H1 2023. The new resources are likely to add operational flexibility and potentially mine-life to the project. With a new MRE, and incorporating new metallurgical, geotechnical and mine planning data, the Feasibility Study planned for H2 2023 should be more ‘final’.
In modelling, Crux Investor has increased operating costs by 20% over the 2022 Feasibility Study numbers, and the project still has an NPV8 of C$860 M. Given the weak capital markets of 2022, Skeena has held its value remarkably well, trading at 0.56x of NPV8. Crux Investor believes that this reflects the high grade, the high average gold production over the life of mine, and the general quality of the project.
Technical risks remain and the new Feasibility Study should address many of the areas of concern. Crux Investor believes that a less aggressive ramp-up and final throughput rate would further reduce operational risk. Even using 20% higher operating costs the Eskay Creek project returns robust economics at current metal prices and is highly leveraged to any improvement in gold and silver prices.
Introduction
Skeena Resources Limited (“Skeena”) (TSX:SKE)(NYSE:SKE) is a Canadian company with mineral properties in British Columbia, Canada. The Company has a market capitalisation of C$561 million (“M”) (US$423 M) and, as of 30 September, C$27.2 M in cash and cash equivalents.
The main asset is the Eskay Creek Revitalization Project (“Eskay Creek”), which has a robust Feasibility Study dating from September. Drilling, however, in the project area was incomplete. Exploration to better define new zones of mineralisation inside and outside the current planned pit shells is ongoing. A new Mineral Resource Estimate (“MRE”) is expected in H1 2023. The new resources are likely to add operational flexibility and potentially mine-life to the project. On the back of the new MRE, an updated Feasibility Study is planned for H2 2023. Crux Investor expects the 2023 Feasibility Study to be marginally, not materially, better than the 2022 Feasibility Study.
Skeena has other exploration projects. Chief among these is the historic Snip Mine and surrounds. Hochschild Mining Holdings Limited (“Hochschild”) is investing C$100 M for the right to own a 60% undivided interest in Snip. The look-through value for Snip, attributable to Skeena’s 40%, is therefore C$67 M. Crux Investor uses C$67 M as a nominal value for the wider exploration portfolio outside of the Eskay Creek Revitalization Project.
The historic operation at Eskay Creek mined a high-grade epithermal volcanogenic massive sulphide (“VMS”). The ore was rich in gold and silver, but it also came with deleterious antimony, mercury, and arsenic. The previous operator of the mine, Barrick Gold Corp mined the main ‘mudstone’ ore underground and largely processed off-site. From 1994 to 2008 Eskay Creek produced at an average grade of 45 g/t gold and 2,224 g/t silver. The geometry, the metallurgy, and the logistics of the ore were complex, but the grades sufficiently high to make it a profitable operation.
The Skeena strategic approach
Skeena’s strategy has been to explore extensions of the deposit, identifying a larger tonnage of lower grade material underneath and adjacent to the main mudstone mineralisation. The definition of resources close to surface and in mineral assemblages with slightly simpler metallurgy has meant that Skeena been able to just concentrate on an open pit plan. Of the total contained gold of 4.1 Moz and silver (98.4 Moz) more than 95% is present in the open pit resources. The feasibility study ignored underground mining options.
A large, high-grade resource - at surface
On an ounce-weighted basis, 55% of the pit-constrained resource estimate is contained within the rhyolite with the remaining 42% hosted within the unmined mudstones/hanging wall Andesite and 4% in the footwall Dacite. The mineralisation in the rhyolite lithology is not enriched with mercury, arsenic and antimony. Rhyolite resources are typically lower grade but with easier metallurgy and the mudstone resources are typically higher grade but with more complex metallurgy.
The reserve statement has 2.9 M ounces (“Moz”) gold and 76 Moz silver at a grade of 3.0 g/t Au and 79 g/tAg. These are excellent grades for an open pit operation with a prospective stripping ratio of 7.5:1 using a gold price of US$1,700/oz. The Feasibility Study highlights are: a pay-back period of less than one year, an after-tax IRR of 50% and an after-tax NPV at 5% of C$1.4 billion (“B”) assuming pre-production capital expenditure of less than C$0.6 B.
Crux Investor identifies some areas of concern within the Feasibility Study; mine-life, reserve grades anomalously higher than resource grades especially silver, metallurgy, an apparently skinny geotechnical dataset, and input costs.
The dangers of having a short mine-life
Skeena has elected a relatively high production rate for the size of the ore body with mining completed after eight years and processing after nine years. Commercial production starts after two years of pre-production ‘mining’. The pre-production work, starting at 2.7 Mtpa, will generate ballast to be used in construction and will also access material for further metallurgical tests and commissioning. Note that 2.7 Mtpa from a standing start is a very aggressive ramp-up. After commissioning, mining will continue at 3.5-3.7 Mtpa for eight years. The relationship of mine-life to throughput rate exposes the project to considerable risk from teething problems.
Theoretically, a high-production rate depleting a deposit within ten years is financially beneficial, but it leaves little time to deal with any negative surprise and carrying out corrective measures. Given the very complex nature of the Eskay Creek deposits it would be more prudent to produce at a lower rate, in particular in the early years with much Mudstone being mined. Perhaps the new MRE and new Feasibility Study will address this issue? Crux Investor certainly hopes so.
Resource conversion to reserve ‘grade’ concerns
The 2022 Feasibility Study shows significantly higher grades in the reserve tables than in the resource tables, despite the modelled contact dilution of 1.25 m around the 10 m x 10 m x 10 m blocks, when adjacent to waste. Grades can rise due to the application of more conservative input parameters than those used for general resources.
What does not make sense, however, is the much larger upgrade in silver-grades than gold-grades in Probable Reserves. This is especially concerning as the value of each block is dominantly determined by gold. If there would be a preferential upgrading, one would expect this to be for gold, not silver. Crux Investor hopes that this is clarified in the 2023 Feasibility Study.
Table 2 gives the Mineral Reserve Statement, effective 30 June 2022, below which are presented the calculated conversion rates from the M&I Resources statistics.
Challenging metallurgy and rock mechanics
Defining metallurgical domains will be difficult at Eskay Creek due to significant heterogeneity in rock type and mineralogy. The various deposits differ much in host rock composition and with mineralisation of chaotic composition with varying dimensions of beds of clastic sulphides and sulphosalts containing variable amounts of barite, rhyolite, and mudstone clasts. Gold and silver occur as electrum (an alloy of gold and silver with trace amounts of copper and other metals) and amalgam (bonded with mercury) while silver mainly occurs within sulphosalts. Precious metal grades generally decrease proportionally with decrease in total sulphides and sulphosalts. Clastic sulphoside beds contain fragments of coarse-grained sphalerite (ZnS), tetrahedrite ((Cu,Fe)12Sb4S13), lead-sulphosalts with lesser freibergeite (Ag,Cu,Fe)₁₂(Sb,As)₄S₁₃, galena (PbS), pyrite (FeS2), electrum, amalgam, and minor arsenopyrite (FeAsS). Stibnite (Sb₂S₃) occurs locally in late veins.
The mineralogy is complex and therefore there is associated metallurgical risk. Although there has been substantial metallurgical test work to date, it is evident that managing the feed will be a complex process. Results show widely varying characteristics for hardness, recovery, deleterious elements and difficulties achieving a sufficiently dry product. The chosen process route involves two stages of milling and flotation to avoid overgrinding. To some extent the 2022 study acknowledges the technical challenges by planning to take a 10,000-tonne bulk sample three years before production for metallurgical test work.
Crux Investor notes that the rock mechanical conditions are also complex with many different lithologies and eleven tectonic structural domains. Given that ten geotechnical units of similar rock mass properties were identified, it raises the question whether 26 holes supporting the geotechnical study provided sufficient data.
Indeed, the technical report observes p.255 that “the geotechnical model interpretations require additional validation and testing with higher data density before they can be used for detailed design”. Crux Investor hopes that this is addressed in the 2023 Feasibility Study. Similarly, the 2022 report notes that the hydrogeological model is currently “conceptual” (p.255), so test work will need to be incorporated into the next Feasibility Study.
Input costs are too low
The feasibility study input costs are low given the complexities inherent in the Eskay Creek Revitalization Project. The challenges include:
· the isolated and northerly location
· complex mining requiring strict grade control and stockpile management
· having to deal with old workings
· complex metallurgy of many different ore types
· the disposal of a considerable amount of Potentially Acid Generating (“PAG”) waste.
· the need for a river diversion, and
· highly fluctuating mining production levels.
When modelling, Crux Investor adjusted some unit cost rates resulting in an increase of 20% for the overall operating cost, varying across mining, processing, and G&A costs. This may well prove still too optimistic. Regarding capital expenditure, the initial cost of the plant at US$600/t monthly capacity (or C$592 M in total) is low considering the complexity of the process and the remoteness of the site. Crux Investor has not made a primary input adjustment in the model, but CapEx increases were addressed in the Sensitivity Analysis. An investment in working capital of C$73M was included in the model.
Valuation
The Crux Investor valuation uses the precious metal spot prices on 25 November 2022 of US$1,755/oz Au and US$21.5/oz Ag and an exchange rate of C$1.338 per US$. Gold accounts for three quarters of the at-mine revenue received. A parallel model using Skeena metal price and offtake assumptions was also created.
Crux Investor numbers indicate an NPV8of C$949 M. The diluted Enterprise Value of Skeena Resources is diluted Mkt Cap (C$584 M) – Cash (C$27 M) – Cash from options & warrants (C$6 M) = C$550 M. If one adjusts for the look-through value of Snip (C$67 M), it means that the market value of Eskay Creek is C$483 M(550-67), attributable to Skeena. In other words, Eskay Creek is trading at a discount of 49% to NPV.
Given the weak capital markets of 2022, Skeena has held its value remarkably well. Crux Investor believes that this reflects the high after-tax IRR of 25%, and the high average gold production over the life of mine. Skeena reports LOM production of 3.2 Moz gold equivalent (“AuEq”) ounces from 2.4 Moz gold and 66.7 Moz silver. The average annual production for years 1-5 is 431,000 AuEq ounces.
Leveraged to metal prices, insensitive to costs
The high margin project means that project economics are relatively insensitive to changes in operating and capital costs. For every percentage point increase in the precious metal prices the NPV8 improves by C$23 M (or 2.4%) and for every percentage point increase in the operating cost (C$6.1/t milled) the NPV drops by C$6.8 M(-0.8%). Similarly for 1% rise reduces the NPV by C$5.8 M (-0.7%). What this means is that the project is most sensitive to gold price. For example, even if the capital expenditure ends up being 30% higher, the NPV will be still C$0.68 B, which is 29% lower than the diluted Enterprise Value ofC$550 M on 25 November 2022, ignoring the value of Snip.
Crux Investor modelled the feasibility study using Skeena Resources data (costs, metal prices, recoveries) and also using independent inputs (higher operating costs, spot metal prices, etc). By remodelling the feasibility study cash flows, it is possible to check for the presence of tax breaks or other opportunities that might not be in the public domain. In the case of Eskay Creek, Crux Investor arrived at payment of higher overall taxes. In this case, the higher tax rates used in the Crux Investor valuation introduces additional conservative bias.
Conclusion
The 2022 Feasibility Study highlighted further areas for study and most of the issues should be addressed in the upcoming 2023 Feasibility Study. Nevertheless, technical risk remains and Crux Investor feels that the project would be more secure and still economically robust if a less aggressive mine schedule were to be adopted.
Still, Eskay Creek is a deposit that can produce a lot of profitable ounces if the technical risks are managed well. Annual production in excess of 431,000 AuEq ounces, and annual after-tax free cash flow C$293 M makes for a powerful asset.
The Crux Investor valuation using 2022 study data shows that even using 20% higher operating costs the Eskay Creek project returns robust economics at current metal prices. Eskay Creek is highly leveraged to any improvement in gold and silver prices, and relatively insensitive to capital and operating costs. Eskay Creek is currently trading within Skeena Resources at a discount of 49% to NPV.
If you are a Family Office investor, or an Institutional investor, and you would like the full report behind this article, please contact matthew@cruxinvestor.com
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