It is a very different read from most annual reports.
Of course there are the usual numbers with revenues and profits, resources and reserves.
But what is different about this annual report is that there is a lot to learn from it even for people with no interest in buying shares in this particular mining company.
Seabridge Gold is who we’re talking about. This week they released their annual report which shows a gold mining company that seems to be doing the right things. But we won’t bother to cover their numbers. The point of this is not to convince you to buy shares in Seabridge Gold. Rather it is to see what we can learn from this quite different gold mining company.
Here’s a link to the full annual report. If you’ve never read an annual report before this one would be a good place to start. If you’ve been bored to tears over an annual report before then this one might just be a bit different.
But here are what we believe to be the key points covered in this decidedly abnormal annual report…
Actually first up a point of difference is that to call them a mining company is not really even correct. Seabridge does not (well at least not yet) actually mine any gold. They aim instead to constantly increase their reserves in the ground at a faster pace than they increase their outstanding shares.
Their CEO Rubi Fronk explains:
“If you look at what the gold mining industry is doing, they are turning what we believe to be a superior form of money — gold — into an inferior one — the dollar.
At Seabridge, we like to think of ourselves as modern alchemists turning cash into gold. Over the last 17 years, we have used cash from our shareholders to fund acquisitions and exploration of gold projects in Canada with the aim of increasing gold ownership per share as measured by our ounces of gold resources and reserves in the ground relative to our shares outstanding. We think there is a place for this strategy among those shareholders who value gold ownership over cashflow.”
Whereas “gold producers have to sell their gold to pay for its extraction. Then, they have to go out and spend enormous dollars to acquire, engineer and permit new projects to stay in business.” They have to fund this via dilution of ownership which simply means they issue more shares to fund these activities. Along with taking on more debt.
“Studies show that over the past ten years, common shares outstanding of the 10 largest gold mining companies have more than doubled, while their net debt has increased by about 40 fold.”
So that’s why Seabridge chose to maximise gold ownership rather than being a gold miner.
Many people in the gold mining industry grew up in the base metals industry “which is much larger and generally more technically advanced than gold mining. Base metals are commodities and that’s the way most gold mining executives think of gold. They don’t think of gold as money.”
Sea bridge’s strategy to grow gold ownership per share was based upon 2 main reasons:
1. That the “valuation of financial assets such as stocks and bonds relative to gold was unreasonably high due to inflationary monetary policies”. It wasn’t because gold was a specific price but rather because gold was undervalued compared to other assets.
When they launched, in late 1999, it took 44 ounces of gold to buy the Dow Jones Industrial Average (the main US stock market index). This was the highest ever. Since then the ratio has gone as low as 6 and it’s now about 15. They expect like we do that this will get to a ratio of 1 to 1 yet again. “As it has done twice in the last hundred years, the last time in 1980 when the Dow and gold crossed with gold at $850. We believe we now are in a time when gold is increasingly needed to protect wealth.”
2. It is extremely difficult to find gold that is economic to develop. Reserves are on the decline and gold discovery rates are also falling. “Gold is a store of wealth, the best there is, because of that scarcity. Cash you can get anywhere, you can even print it, but not gold.” So Seabridge decided to make this scarcity their competitive advantage by focusing on gold ownership.
Seabridge are nonetheless still preparing for some of their mines to begin production. As they realise that to get full value for the gold they have in the ground it will need to be extracted. So they cost of building and running a mine will reduce their level of gold ownership. How will they overcome this problem?
“We expect to enter into joint ventures with large, experienced producers who will take on most of the costs of nancing to production in return for a share of the project. This approach is designed to limit equity and debt dilution but it will cost us a significant portion of our reserves.
We think the loss of leverage to the gold price from taking on a partner will be more than offset by the substantially higher value given to ounces that have become reserves of a producing mine and this higher per ounce value should be re ected in our share price. Production should also generate a return in gold, which can be distributed to shareholders as a dividend in physical form.”
So a physical gold dividend to be paid to shareholders is a somewhat different idea to most gold miners. They instead sell gold to pay a dollar dividend!
So what take aways are there for the average gold investor from what Seabridge is doing and from it’s management teams outlook on the global economy?
Rudi Fronk says that with valuations at historically low levels they will look to acquire more projects where they can find economic ounces at a low cost.
“We have demonstrated the discipline to buy assets at the right time, when most of our industry is being forced to reduce debt by selling the projects they have acquired near the top of the market. We bought our existing projects near the bottom of the last gold cycle and we expect to do the same in the current depressed market.”
The difference between exchange of value and wealth preservation…
“As a political tool of government, I think the dollar cannot be trusted to preserve wealth. That is the role of gold. You can keep the dollar for its usefulness as a medium of exchange and meanwhile you can go on your own gold standard to protect your wealth. Seabridge represents a leveraged way of pursuing that strategy.”
On why their share price is still well below 2011 highs even though their reserves and resources in ground have grown…
“It’s all about investor sentiment. Gold is not yet in favor. Financial assets still are. The gold price is a teeter-totter with the stock market on the other end from gold. As long as perceived risks are low, stocks will go up at the expense of gold. When it goes the other way, I believe gold in the ground will rapidly increase in value. As a gold investor, you have to be patient and wait for the shift in sentiment. When it comes, I think you will be rewarded. We are very patient here at Seabridge.”
On weights and measures and values…
“We all know what a meter or a yard is. A kilo (or a punt) is also standardised and known. A minute is the same anywhere on earth. Why do we not have a standard measure for value?…
“If you had bought U.S.$300,000 of gold in 1970, you would have acquired 8,571 ounces which are worth today more than U.S.$10 million. Has gold gone up or has the dollar gone down? We think the latter.
At Seabridge, we measure our corporate worth in ounces of gold, not dollars. We measure our progress on behalf of shareholders in ounces of gold resources and reserves per share. We suggest gold may also be the right way to measure your own wealth. In our view, we require a constant for measuring wealth just as we need constant weights and measures for the things we buy. It keeps us honest.”
Their report makes a good argument for buying Seabridge shares, but as already noted that wasn’t the aim of this article. Although feel free to go ahead and buy some!
But there is an alternative. As the report says:
“The U.S. dollar [and every other government issued currency on earth] is what we call a faith-based currency. Oddly enough, you can still trade dollars for gold, so why would you not take the opportunity to do some of that?”
Why not indeed?
But you can do better than just buying and holding gold in a vault forever by following in Seabridge’s footsteps with your own “reserves”.
Seabridge’s strategy is to acquire in ground reserves and resources at cheap prices. Then to partner with larger producers to extract these reserves as the value of them rises. On top of this they aim to pay a physical gold dividend to share holders.
So here’s how to approximate this your self.
This way you’ll not only protect your wealth and purchasing power in the coming years but eventually could transfer it into assets that also produce an income. Because remember gold is money not really an investment. But currently it is money with an upside!