China’s Zhaojin becomes cornerstone investor in Sabina

One of China’s largest gold companies has invested $66 million for a 9.9% stake in Canada’s Sabina Gold & Silver (TSX: SBB), a junior that is advancing its wholly owned Back River gold project in Nunavut.

Negotiations with Zhaojin International, a subsidiary of Zhaojin Mining, China’s fourth-biggest gold producer, began two years ago, Sabina president and CEO Bruce McLeod told The Northern Miner, adding that it marks the Chinese company’s first significant investment outside of China.

“They have a reputation for being very conservative in their approach,” McLeod said in a telephone interview. “They are an accomplished producer, miller, refiner, and did significant due diligence on their own and through a third-party, North America-based engineering firm. They had their people to site twice.”

Zhaojin Mining, which listed on the Hong Kong Stock Exchange in 2006, has reserves of 13.6 million oz. gold and produces 655,000 oz. gold a year, according to Sabina, and has ambitious plans to double its production base within the next five to 10 years through investments in international operations.

Back River could produce 200,000 oz. gold a year for 11 years, based on the findings of a 2015 feasibility study. The study outlined $415 million in initial capital expenses and a 24% after-tax internal rate of return at a US$1,150 per oz. gold price, using an US80¢ exchange rate.

McLeod says the company plans to finance the project with 60% debt and 40% equity, and the investment will give it a leg up. “We’ve broken the back on the equity contribution of the project, and this will certainly make it much easier for us to raise the balance of the funds in the future.”

As part of the private placement (24.9 million shares at $2.65 per share), Zhaojin will nominate one director to Sabina’s board. It says Zhaojin has an option to boost its shares up to 19.9%, at which point it could nominate a second director.

“They have also given us a four-year standstill and a four-year voting trust to our board to ensure we can develop this project as an independent company,” McLeod says. “That’s very unusual … they weren’t fussed about it because I just don’t believe they have aspirations to be more than a financial and strategic partner for Sabina … which gives us the runway to put Back River into production.”

Sabina Gold & Silver’s Back River gold project before the Nunavut Impact Review Board rejected the first application for more development. NIRB’s subsequent approval came after five years of review and public hearings. Credit: Sabina Gold & Silver.

In addition, Sabina will benefit from Zhaojin’s “technical input” as an experienced gold miner. “We don’t go underground until later in our mine life, but again, they have significant experience in underground mining and mineral processing, which would be somewhat applicable to our project, and it’s just another set of experienced eyes.”

Back River is made up of gold deposits that are open at depth and along plunge a banded-iron formation in southwestern Nunavut. The project is 520 km northeast of Yellowknife in the Northwest Territories, 75 km southwest of the Bathurst Inlet and 50 km southeast of Glencore’s (LON: GLEN) Hackett River silver-zinc project.

In December Sabina received the project certificate from the Nunavut Impact Review Board. The certificate contains terms and conditions, most of which were agreed upon during the environmental assessment process.

The certificate helps the company advance through the regulatory and licensing phase, and Sabina recently submitted water licence applications.

This year Sabina expects to finish preconstruction earthworks, early procurement commitments, logistical improvements and build the project execution team.

In other remarks, McLeod noted that Zhaojin is “as interested in learning about how to operate in North America as we are having them as a strategic financial partner … Canada is a world leader in recognizing and promoting indigenous rights, and they believe they can learn from us how to operate and protect those rights.”

In October, Sabina and the Kitikmeot Inuit Association executed a binding term sheet setting the principle terms for inclusion in a definitive framework agreement for Back River. Once completed, the framework agreement would set out rights and obligations for surface access on Inuit-owned land and include an Inuit Impact and Benefit Agreement, among other obligations required by the Nunavut Agreement.

As of Jan. 22 the company has cash and equivalents of $93 million.

In addition to Back River, Sabina has a silver royalty on Glencore’s Hackett River (22.5% of the first 190 million oz. produced and 12.5% of all silver produced thereafter).

Sabina’s shares are trading at $1.96 within a 52-week trading range of $1.23 (March 2017) to $2.70 per share (September 2017).

BMO’s Andrew Kaip has an “outperform” rating on the stock and a $3-per-share price target.

BMO resumed coverage of Sabina on Jan. 22 after a period of restriction related to the Zhaojin investment.