Golden Unicorn: Eskay Creek PEA Discussion with Skeena CEO Walt Coles

 

Tommy: My guest today is about to turn heads in the gold sector and for the right reasons. Joining me is Walter Coles, CEO at Skeena Resources, a gold exploration company developing three significant projects in BC's Golden Triangle. Skeena trades as SKE on the TSX-Venture exchange with a market cap of roughly $65 million Canadian dollars (Nov 6, 2019 close). Skeena has just published results from a Preliminary Economic Asset on the Eskay Creek property and it is one of the most eye popping economic studies I have seen since closely following Canada's gold sector. Eskay Creek is potentially a significant scale gold and silver mine with a post tax payback in under one year at current metal prices. Walter, Welcome, congrats, and can you please give us an overview of the PEA results?

Walter: Sure Tommy, thanks for having me. The high-level on the PEA. It's an open pit project. It should produce around 300,000 ounces per year using a gold price of $1325 and silver price of $16. It has an after tax NPV of $638 million Canadian dollars. The IRR after tax is 51% and the initial payback on capital is just over 1 year. In my view, phenomenal numbers, and certainly very pleased with our team in house and the consultants who worked with us in putting this project together.

Tommy: I'm wondering if the results surprised you?

Walter: I had some clue. Even a few months ago that this is what we might achieve, but this is such a difficult sector. I have had my hopes crushed so many times before in a junior exploration company. I just kept [worrying] what's going to be the fatal flaw we are not accounting for? So, big sigh of relief to get it to this point. With the caveat that this is a PEA, it is still preliminary. We have a lot of work to do as we move this to a Feasibility Study.

Tommy: The big question we talked about in the Spring was Metallurgy. Could you recover the gold economically? This PEA suggests that you can. How did you get metallurgy sorted out?

Walter: I would start with acknowledging that this is effectively a refractory gold deposit. We did try to see if we could use cyanide to leave the gold and produce dore. Unfortunately recoveries are not very good. That is probably the same thing the historical operators went through the same process where they ended up direct shipping the ore or producing a concentrate. Given the test work I just mentioned on cyanide, we were going to have to do something different. We did investigate using pressure oxidation. The downside of pressure oxidation is the Capex and technical aspects. It is a more challenging type of plant to build.

The advantage of the concentrate is we substantially reduce the Capex for this project. When you see what our capex is, $300 million Canadian or approximately $230 million US. For a project that will produce 300,000 ounces per year. That's a phenomenal capital intensity ratio. It makes the project economics really attractive -te IRR and payback on capital. In effect what we are doing is pushing that capital off to smelters. We create a concentrate and then we ship it abroad. And we certainly get the pound of flesh taken from the smelters in the pay abilities. When you look at our all in sustainable cost, that is more industry average, we're in the second quartile. That was the give and take, the balance.

Tommy: The PEA mentions a Term Sheet from a Chinese off-take partner. How reliable are they?

Walter: It's actually from a concentrate trading group in Switzerland who advised us that the best terms for this concentrate would be out of Asia. We did speak with other smelters in Quebec and Namibia and through other people into China. We had a number of quotes that came in but the one life of mine term sheet we went with as the basis of the PEA came out of Switzerland.

Tommy: Is the PEA conventional from a mining sense?  

Walter: I think so. I think it's a pretty straightforward PEA with the caveat we're in an area that will receive lots of snow in the Winter. Its renowned for the amount of snow we get up as Eskay Creek. Also the blending aspects are another unique aspect to it.

Tommy: Who were the engineers who helped you with the study and are they involved with other projects like it.

Walter: We had three different groups. Ausenco on the overall lead. SRK helping on the resource side and metallurgy and AGP on the mine design. Most recently AGP was working on Victoria Gold. Most recently Ausenco built the mine for Atlantic Gold, it was a turnkey project build out that Ausenco did and SRK is a world-renowned engineering consulting firm.

Tommy: Why would you say that Eskay is unique and are there other projects like it today?

Walter: A long time ago, I think it was 2005, I met with an engineer by the name of Ron Hochstein who is currently the CEO of Lundin Gold. Back in 2005 he made a comment to me that I've never forgotten, that was, "Good grades make for good miners." Obviously if you're in school and you get straight As you will be a good engineer, but what he was getting at was if you have good grade, meaning good concentration of gold and silver, you're likely to end up with a robust mining project, and that is what we have at Eskay Creek. For an open pit project that has over 4 grams of gold equivalent and the deepest point of the pit is just over 200 meters. It's the grade that gives this project its incredible economics and margin of safety.

Tommy: Who has a project like this out there?

Walter: In terms of junior companies, I don't know of any other that have an open pit project with this kind of grade. Sabina has an excellent project. Integra has an great project down in Idaho. Those are the companies that I aspire to match in terms of their management and performance. My feeling on this project is it's a unicorn. It's got size, infrastructure that has been built out by previous producers. We are in Tahltan Territory. They are our partners there. I could not ask for a better local community to have this project in their ancestral territory. There are so many wonderful things about this project that in my mind all add up to the fact that this will be an operating mine again in short order.

Tommy: Is it possible to grow the resource and make Eskay even more robust?

Walter: I think so. There's two areas of mineralization at Eskay Creek. There is the Eskay Contact Mudstone. The area that was targeted for mining in the 1990s and 2000s. There is a horizon right underneath it called rhyolite. It is clean ore but it is lower grade. The easier exploration upside is to expand the number of ounces in the rhyolite. It was largely ignored by previous operators. There are other opportunities to grow the higher grade as well. I do think we can grow this in a substantial way in the next 18 months to 2 years.

Tommy: Next steps are Feasibility Study and Permitting. What are you targeting that to take in timeline and budget to do that.

Walter: I want to be very careful. I don't know for sure what those timetables are going to be. We have Ausenco doing a study for us right now laying out the budget for the next two years and the various milestones we need to achieve to advance this project as quickly as possible. We have the advantage of this is a brownfield site. We have 20 years of climate and wildlife data. We have a history of the Tahltan, them understanding this project. Those are all things that should accelerate the timeline of getting this project back into production. But I can't give you a budget or a timeframe or budget specifically at this point in time. The next steps for us are to continue doing the infill filling and move that inferred resource into the M&I category so as we do FS or PFS, all those resources will convert into Proven and Probable Reserves. That's our ongoing focus while we study and lay out our game plan for the next two years.

Tommy: Can you comment on Skeena's goals corporately and your top responsibilities now that these results are out there?

Walter: My responsibilities are the same they have been over the last two years. That is to be a team leader. Find the right technical people to join our team as we move from exploration to development. When I first joined Skeena four years ago there's not a single person at Skeena today from four years ago. We've built an entirely new team and I expect we will do that as we move into development. That's on the people side. On the asset side we are switching from being an acquirer of assets to now everything is for sale with the exception of Eskay Creek, so any of your listeners want to put in a bid for any of our assets, we'd like all cash on those bids, but everything else is for sale and we are going to be entirely focused on Eskay Creek.

Tommy: Long term, is your vision to build a mine or sell to a mid-tier.

Walter: I like the Australian model. The Canadian industry is often criticized for being overly promotional. I think the Australian model is focusing on building real businesses and building cash flow. That's the mindset I want everyone on our team to have. How quickly and solidly can we turn this concept into a real business that generates real cash flow. Having said that, if some entity wants to come make us an offer for Eskay Creek, if it is an offer that reflects the intrinsic value of in my mind this Unicorn property, then of course we are always willing to have those discussions and try to achieve the best results for our shareholders whenever those opportunities come on.

Tommy: We've got to talk about Barrick Gold. They have a back in right to acquire 51% of the project, right?

Walter: We haven't purchased the project yet. We have an option to acquire 100% by making a payment to Barrick of $10 million Canadian. There is a swing on the purchase price because when we negotiated the deal the estimate on the environmental bond was $7.7 million. If it turns out that environmental bond goes up, the purchase price will decline by the corresponding amount. We are not going to know that until we sit down with the government and with Barrick and negotiate the environmental bond and execute the transfer of title on the property. That is something we anticipate to do in the next 12 months. A big milestone for the Company will just be acquiring Eskay 100%, once we do that, there is a hurdle on a back in right of 1.5 million ounces indicated or better, we crossed that line. Once we acquire Eskay 100% Barrick will have 12 months to come back into the project for 51% by paying us 3x our cumulative expense on the project. My view on this is we win either way. If Barrick decides not to Back in we'll own 100% of the project and have to proceed in advancing it ourselves. If Barrick does choose to back in we'll have one of the best partners in the world as an operator and all our shareholders will get paid back 3x what we've spent up til the point when Barrick backs in.

Tommy: Two of the most valuable Northern Canadian emerging gold stories, Pretium and Sabina, have both attracted investment from China's gold sector. Do you see Chinese playing an important role in financing Skeena and have you been brushing up on your Chinese?

Walter: We would treat every potential partner the same way, Chinese, Canadian, US. We'll talk to any and everybody about potential opportunities, but we are not targeting any specific group as a partner on this project.

Tommy: How you anticipate getting the word out on this PEA. Are you about to embark on an aggressive marketing schedule?

Walter: I am in fact. I am headed to Toronto, New York, London, Zurich and Geneva over the next week and a half to meet with some of our larger shareholders and other investors who don't own any of Skeena to tell them about our progress and hopefully get them to join our shareholder register in due course.

Tommy: To encapsulate what the PEA means to your final team as a final word?

Walter: I think everybody is really proud of the outcome here with Eskay. This is an incredibly difficult business. You gotta work hard and sometimes you have a little luck, and the combination of luck and hard work gave us the outcome we have with Eskay. I feel we could take a brief moment to pat ourselves on the back and then its back at it because there is a lot more work to be done here.

Tommy: Thanks for taking the time to share the story with us. Just a cautionary note to listeners. The PEA is preliminary in nature. There is no certainty the PEA will be realized. Please see Skeena's SEDAR profile for additional risk disclosures. Walter thank you very much my friend, good to see you. Please read important risk disclosures on https://www.skeenaresources.com/disclaimer 

Bonus question:

Tommy: Some people on CEO.CA think the current gold price is kept artificially low by certain market forces and believe gold is headed north of $5000 and I'm wondering have you run the economics on Eskay Creek at a $5000 gold price.

Walter: Wouldn't that be nice.

Tommy: I don't know what the world would look like.

Walter: Good point. I haven't run the numbers but I can do them right here. I'll put them into the spreadsheet. $5000 gold, what silver price do you want.

Tommy: lets go $200

Walter: Oh my gosh. Lol. Holy smokes. Its a $9 billion post tax NPV and IRR after tax would be 274%. Lets hope the world doesn't come to that.

Tommy: Thanks for indulging us.

The Eskay Creek PEA is derived from the Company's pit-constrained resource estimate (February 28, 2019), and does not include results from the recently initiated and ongoing 2019 Phase I infill drilling program. The effective date of the PEA is November 7, 2019 and a technical report will be filed on the Company's website and SEDAR within 45 days. Mineral resources are not mineral reserves and do not have demonstrated economic viability. The PEA is preliminary in nature and includes inferred mineral resources that are too speculative to have economic considerations applied to them that would enable them to be categorized as mineral reserves. There is no certainty that PEA results will be realized.

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