Sabina sells Hackett, looks to gold for future growth

Nunavut-focused explorer Sabina Gold & Silver (SBB-T) has signed a definitive agreement to sell its 100%-owned Hackett River silver-zinc project, located near the Bathurst Inlet in southern Nunavut, to the Canadian arm of Swiss mining powerhouse Xstrata (XTA-L).

Xstrata will pay $50 million cash for the volcanogenic massive sulphide (VMS) deposit and grant Sabina a silver royalty equal to 22.5% of the first 190 million oz. of silver produced (and 12.5% thereafter); no other metals will be covered by the royalty. Additionally, Xstrata has agreed to spend at least $50 million bringing Hackett to feasibility over the next four years.

A preliminary economic assessment (PEA) for the project in 2009 calculated an indicated resource of 43.6 million tonnes grading 128.75 grams silver per tonne, 4.15% zinc, 0.35% copper, 0.58% lead and 0.27 grams gold, as well as inferred resources of 15.9 million tonnes at slightly lower grades. Total recoverable metals are estimated at 183 million silver oz., 4.81 billion lbs. zinc, 311 million lbs. copper, 614 million lbs. lead and 300,000 oz. gold.

The PEA further outlined a daily throughput rate of 12,000 tonnes over a 16-year mine life, using base-case metals prices of US$13.20 per oz. silver and 88¢ per lb. zinc, compared with today’s prices of roughly US$36 per oz. silver and US$1.06 per lb. zinc. Annual production from the proposed open-pit mine over the first 10 years is expected to be roughly 13.6 million silver oz. and 367 million lbs. zinc, in addition to appreciable amounts of copper, lead and gold.

High costs associated with bringing the relatively remote Hackett River into production, however, likely contributed the most to the sale of the project. With initial capital costs totalling $686 million and another $343 million required for sustaining capital, bringing in a major to finance mine development and the building of key infrastructure makes the most sense.

Sabina says it will use the proceeds from the sale to advance its nearby Back River gold project, located just 60 km east of Hackett River, also toward feasibility. It is currently spending $30 million on exploration there this year completing 70,000 metres of drilling with seven drill rigs, though with Sabina’s $160 million in working capital as of March 31, this might increase given the company’s renewed focus on Back River.

Sabina started looking for a strategic buyer for Hackett in the fall of 2010, setting up a data room and approaching 53 companies with the help of BMO Capital Markets. Ten companies signed confidentiality agreements but Xstrata expressed the most interest in the project early on in the process, according to Sabina.

The company’s president and CEO, Tony Walsh, noted in a prepared statement that the transaction provides a higher level of confidence Hackett will be developed in an earlier time, while simultaneously giving Sabina continued exposure to further exploration at the project through the royalty scheme. The potential development of Back River would be further enhanced by the use of infrastructure built for Hackett by Xstrata, as the agreement contains a clause allowing Sabina to use the infrastructure on commercially competitive terms.

An updated resource estimate for Back River in March 2011 pegged the indicated resource of the banded iron formation deposit at 9.87 million tonnes grading 8.33 grams gold per tonne, or 2.65 million oz. Inferred resources totalled 5.6 million tonnes grading 8.65 grams gold for another 1.56 million oz.

Both projects are found in the 120-km long Hackett River greenstone belt within the Slave Sturctural Province, a predominantly Archaean granite-greenstone-sedimentary terrain near Great Slave Lake. Their nearest and largest neighbours -though still in the hundreds of kilometres away – include Rio Tinto‘s (rio-t, rio-l) famous Diavik diamond mine, BHP Billiton‘s (bhp-n, blt-l) Ekati diamond mine, Agnico Eagle‘s (aem-t, aem-n) Meadowbank gold mine and Newmont Mining‘s (nem-n, nmc-t) Hope Bay gold project.

Shares of Sabina closed up 19¢ to $6.93 following the June 2 Hackett River announcement on 671,000 shares traded.