Sabina focuses on optionality at Back River

A feasibility study for Sabina Gold & Silver’s (TSX: SBB; US-OTC: SGSVF) Back River gold project in Nunavut shows the project could be a large, low-cost producer that could be scaled down in order to lower capital requirements.

The study, led by JDS Energy & Mining Inc., envisions a combined open-pit and underground mine at Back River producing 346,000 oz. gold annually at total cash costs of US$535 per oz. over a 10-year mine life. Projected all-in sustaining costs are US$671 per oz.

In comparison, the 2013 prefeasibility study estimated Back River producing 287,000 oz. annually at total cash costs of US$685 per oz. over an 8.4-year mine life. The longer mine life resulted from an expansion in the project’s measured and indicated resources, while the higher annual gold production came from the firm’s move to increase throughput to 6,000 tonnes per day, up from 5,000 daily tonnes.

The higher throughput has added $90 million to the start-up costs of $695 million, which BMO analyst Andrew Kaip notes is “offset by higher processing rates, recoveries and a longer mine life.” (Gold recoveries have gone from 88% to 93%.)

Economics have become more promising. Using a lower gold price of US$1,200 per oz. and a 5% discount rate, Back River has a $529-million post-tax net present value (NPV) and a 21.7% post-tax internal rate of return (IRR). This compares to a $290-million after-tax NPV and a 16.5% IRR, at US$1,350 per oz. gold in the prefeasibility study. Payback is at 2.2 years, down from 3.3 years previously.

Despite the robust economics, the large and relatively remote project will still be tricky to finance, given the current markets and the huge capital requirement, totalling $1.2 billion ($695 million in initial costs and $539 million in sustaining capital, including closure costs).

“In terms of optionality, we recognize in these difficult markets that it would be a challenge for us to finance a project — even as robust as ours — without significant dilution, or burdening our upside with expensive royalties or streams,” Sabina’s CEO and president Bruce McLeod said on a conference call.

But he notes that the deposit’s reserves and resources sit in several high-grade open-pit and underground deposits, which “offers the opportunity for large-scale production — but it’s also scalable.”

The open-pit and underground reserves are on two sites: Goose and George. Each site has four mineable deposits, with most of the reserves and resources located at the Goose site, near surface.

Total reserves stand at 19.8 million tonnes grading 5.70 grams gold per tonne for 3.6 million oz. gold. There’s another 28.2 million tonnes of 5.87 grams gold for 5.3 million oz. in measured and indicated.

McLeod reiterates that while Sabina is pleased with the feasibility results, financing the project would be hard. The junior might bring Back River online as a smaller throughput, higher-grade and lower capital cost project.

The technical report for the feasibility study — expected in less than two months — did some preliminary work, indicating that Back River could generate 150,000 to 200,000 oz. gold annually for 10 years, at start-up costs of $300 million.

“We plan to evaluate this opportunity that could be more financeable in this market, and hope to have the results of a feasibility study on a smaller capex option complete by September 2015,” McLeod says.

Meanwhile, with $28 million in its treasury (as of March 31, 2015), the junior will continue feasibility and permitting at the Back River project. “We can keep de-risking Back River through feasibility and permitting, and still retain a healthy surplus — without having to issue equity at these prices,” McLeod said.

If all goes to plan, Sabina intends to submit its environmental impact statement in late 2015, with approval anticipated by mid-2016. It could end 2015 with $16 million in cash and equivalents.

On the feasibility news, Sabina closed May 21 up 12% at 43¢. It has an $83.4-million market capitalization.