Seabridge Gold Inc 6-K, filed Aug 16, 2022
Seabridge Gold Inc (SA)
About this 6-K
Seabridge Gold Inc filed this 6-K on August 16, 2022.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of
August 2022
Commission File Number 1-32135
SEABRIDGE GOLD INC.
(Name of Registrant)
106 Front Street East, Suite 400, Toronto, Ontario, Canada M5A 1E1
(Address of Principal Executive Office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☐ Form 40-F ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ☐ No ☒
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- _____________
SEABRIDGE GOLD INC.
(the “Company”)
See the Exhibit Index hereto for a list of the documents filed herewith and forming a part of this Form 6-K.
Exhibits 99.1 and 99.2 hereto are incorporated by reference (as exhibits) to the Company’s registration statements on Form S-8 (File No. 333-211331) and Form F-10 (File No. 333-251081), as may be amended and supplemented.
1
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Seabridge Gold Inc. | ||
| (Registrant) | ||
| By: | /s/ Chris Reynolds | |
| Name: | Chris Reynolds | |
| Title: | VP Finance and CFO | |
Date: August 15, 2022
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EXHIBIT INDEX
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Exhibit 99.1
SEABRIDGE GOLD INC.
UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
AS AT JUNE 30, 2022
SEABRIDGE GOLD INC.
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
(Unaudited)
| June 30, | December 31, | |||||||||||
| Note | 2022 | 2021 | ||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | $ | 153,035 | $ | 11,523 | ||||||||
| Short-term deposits | 118,621 | 29,243 | ||||||||||
| Amounts receivable and prepaid expenses | 5 | 8,407 | 10,026 | |||||||||
| Investment in marketable securities | 6 | 3,320 | 3,367 | |||||||||
| 283,383 | 54,159 | |||||||||||
| Non-current assets | ||||||||||||
| Investment in associate | 6 | 1,486 | 2,429 | |||||||||
| Convertible notes receivable | 7 | 598 | 606 | |||||||||
| Long-term receivables and other assets | 8 | 51,539 | 13,038 | |||||||||
| Mineral interests, property and equipment | 9 | 716,579 | 662,279 | |||||||||
| Reclamation deposits | 11 | 19,929 | 15,231 | |||||||||
| 790,131 | 693,583 | |||||||||||
| Total assets | $ | 1,073,514 | $ | 747,742 | ||||||||
| Liabilities and shareholders’ equity | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable and accrued liabilities | 10 | $ | 31,507 | $ | 12,165 | |||||||
| Flow-through share premium | 13 | 1,186 | 1,366 | |||||||||
| Lease obligations | 2,249 | 90 | ||||||||||
| Provision for reclamation liabilities | 11 | 3,680 | 3,680 | |||||||||
| 38,622 | 17,301 | |||||||||||
| Non-current liabilities | ||||||||||||
| Secured Note | 12 | 234,315 | - | |||||||||
| Deferred income tax liabilities | 18 | 35,581 | 23,164 | |||||||||
| Lease obligations | 1,149 | 182 | ||||||||||
| Provision for reclamation liabilities | 11 | 4,086 | 4,762 | |||||||||
| 275,131 | 28,108 | |||||||||||
| Total liabilities | 313,753 | 45,409 | ||||||||||
| Shareholders’ equity | 13 | 759,761 | 702,333 | |||||||||
| Total liabilities and shareholders’ equity | $ | 1,073,514 | $ | 747,742 | ||||||||
Subsequent events (Notes 6, and 11), commitments and contingencies (Note 19)
The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements.
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SEABRIDGE GOLD INC.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Expressed in thousands of Canadian dollars except common share and per common share amounts)
(Unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||
| Note | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Remeasurement of secured note | 12 | $ | 31,566 | $ | - | $ | 31,566 | $ | - | |||||||||||
| Gain on disposition of mineral interests | 13 | - | 21,943 | - | 21,943 | |||||||||||||||
| Corporate and administrative expenses | 16 | (2,868 | ) | (2,031 | ) | (7,469 | ) | (6,788 | ) | |||||||||||
| Impairment of investment in associate | 6 | (873 | ) | - | (873 | ) | - | |||||||||||||
| Equity loss of associate | 6 | (46 | ) | (54 | ) | (90 | ) | (131 | ) | |||||||||||
| Other income - flow-through shares | 13 | 81 | 188 | 180 | 334 | |||||||||||||||
| Environmental rehabilitation (expense) gain | 12 | (26 | ) | 60 | 41 | 43 | ||||||||||||||
| Unrealized (loss) gain on convertible notes receivable | 7 | (13 | ) | (7 | ) | (19 | ) | 122 | ||||||||||||
| Interest income | 30 | 76 | 76 | 100 | ||||||||||||||||
| Finance expense and other income | (1,137 | ) | (446 | ) | (4,378 | ) | (544 | ) | ||||||||||||
| Earnings before income taxes | 26,714 | 19,729 | 19,034 | 15,079 | ||||||||||||||||
| Income tax expense | 18 | (7,626 | ) | (5,181 | ) | (6,227 | ) | (4,815 | ) | |||||||||||
| Net earnings for the period | $ | 19,088 | $ | 14,548 | $ | 12,807 | $ | 10,264 | ||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||
| Items that will not be reclassified to net income or loss | ||||||||||||||||||||
| Unrealized change in fair value of secured note | $ | 23,544 | $ | - | $ | 23,544 | $ | - | ||||||||||||
| Change in fair value of marketable securities | (221 | ) | 2 | (47 | ) | (636 | ) | |||||||||||||
| Tax impact | (6,327 | ) | - | (6,351 | ) | 84 | ||||||||||||||
| Total other comprehensive income (loss) | 16,996 | 2 | 17,146 | (552 | ) | |||||||||||||||
| Comprehensive income (loss) for the period | $ | 36,084 | $ | 14,550 | $ | 29,953 | $ | 9,712 | ||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||||||
| Basic | 13 | 80,144,953 | 75,742,184 | 79,701,761 | 75,071,255 | |||||||||||||||
| Diluted | 13 | 81,064,635 | 77,753,055 | 80,741,621 | 77,810,736 | |||||||||||||||
| Earnings per common share | ||||||||||||||||||||
| Basic | 13 | $ | 0.24 | $ | 0.19 | $ | 0.16 | $ | 0.14 | |||||||||||
| Diluted | 13 | $ | 0.24 | $ | 0.19 | $ | 0.16 | $ | 0.13 | |||||||||||
The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements.
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SEABRIDGE GOLD INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in thousands of Canadian dollars except number of shares)
(Unaudited)
| Number of Shares | Share Capital | Warrants | Stock-based Compensation | Contributed Surplus | Deficit | Accumulated Other Comprehensive Income (Loss) | Total Equity | |||||||||||||||||||||||||
| As at December 31, 2021 | 78,975,349 | $ | 809,269 | $ | - | $ | 8,697 | $ | 36,126 | $ | (149,983 | ) | $ | (1,776 | ) | $ | 702,333 | |||||||||||||||
| Share issuance - At-The-Market offering | 995,989 | 22,746 | - | - | - | - | - | 22,746 | ||||||||||||||||||||||||
| Share issuance - options exercised | 186,007 | 4,106 | - | (1,447 | ) | - | - | - | 2,659 | |||||||||||||||||||||||
| Share issuance - RSUs vested | 128,800 | 2,733 | - | (2,733 | ) | - | - | - | - | |||||||||||||||||||||||
| Share issuance costs | - | (607 | ) | - | - | - | - | - | (607 | ) | ||||||||||||||||||||||
| Deferred tax on share issuance costs | - | 162 | - | - | - | - | - | 162 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | - | 2,515 | - | - | - | 2,515 | ||||||||||||||||||||||||
| Other comprehensive income (loss) | - | - | - | - | - | - | 17,146 | 17,146 | ||||||||||||||||||||||||
| Net income for the period | - | - | - | - | - | 12,807 | - | 12,807 | ||||||||||||||||||||||||
| As at June 30, 2022 | 80,286,145 | $ | 838,409 | $ | - | $ | 7,032 | $ | 36,126 | $ | (137,176 | ) | $ | 15,370 | $ | 759,761 | ||||||||||||||||
| As at December 31, 2020 | 74,162,286 | $ | 704,599 | $ | 3,275 | $ | 23,011 | $ | 36,089 | $ | (150,878 | ) | $ | (1,378 | ) | $ | 614,718 | |||||||||||||||
| Share issuance - Private placement | 350,000 | 8,358 | - | - | - | - | - | 8,358 | ||||||||||||||||||||||||
| Share issuance - At-The-Market offering | 976,062 | 22,396 | - | - | - | - | - | 22,396 | ||||||||||||||||||||||||
| Share issuance - options exercised | 679,668 | 14,934 | - | (7,630 | ) | - | - | - | 7,304 | |||||||||||||||||||||||
| Share issuance - Warrants exercised | 500,000 | 11,100 | (3,275 | ) | - | - | - | - | 7,825 | |||||||||||||||||||||||
| Share issuance - RSUs vested | 135,450 | 3,413 | - | (3,413 | ) | - | - | - | - | |||||||||||||||||||||||
| Share issuance costs | - | (990 | ) | - | - | - | - | - | (990 | ) | ||||||||||||||||||||||
| Deferred tax on share issuance costs | - | 264 | - | - | - | - | - | 264 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | - | 2,934 | - | - | - | 2,934 | ||||||||||||||||||||||||
| Expired options | - | - | - | (37 | ) | 37 | - | - | - | |||||||||||||||||||||||
| Other comprehensive income (loss) | - | - | - | - | - | - | (552 | ) | (552 | ) | ||||||||||||||||||||||
| Net income for the period | - | - | - | - | - | 10,263 | - | 10,263 | ||||||||||||||||||||||||
| As at June 30, 2021 | 76,803,466 | $ | 764,074 | $ | - | $ | 14,865 | $ | 36,126 | $ | (140,615 | ) | $ | (1,930 | ) | $ | 672,520 | |||||||||||||||
The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements.
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SEABRIDGE GOLD INC.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
(Unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating Activities | ||||||||||||||||
| Net earnings | $ | 19,088 | $ | 14,548 | $ | 12,807 | $ | 10,264 | ||||||||
| Adjustment for non-cash items: | ||||||||||||||||
| Remeasurement gain on secured note | (31,566 | ) | - | (31,566 | ) | - | ||||||||||
| Gain on disposition of mineral interests | - | (21,943 | ) | - | (21,943 | ) | ||||||||||
| Stock-based compensation | 222 | 8 | 2,515 | 2,934 | ||||||||||||
| Other income - flow-through shares | (81 | ) | (188 | ) | (180 | ) | (334 | ) | ||||||||
| Income tax recovery (expense) | 7,626 | 5,181 | 6,227 | 4,815 | ||||||||||||
| Unrealized foreign exchange loss | 8,266 | - | 7,163 | - | ||||||||||||
| Other non-cash items | (399 | ) | 312 | (333 | ) | 414 | ||||||||||
| Adjustment for cash items: | ||||||||||||||||
| Environmental rehabilitation disbursements | (356 | ) | (410 | ) | (669 | ) | (481 | ) | ||||||||
| Changes in working capital items: | ||||||||||||||||
| Amounts receivable and prepaid expenses | 609 | 2,234 | 1,619 | 648 | ||||||||||||
| Accounts payable and accrued liabilities | 2,212 | 1,775 | (2,690 | ) | 1,124 | |||||||||||
| Net cash from (used in) operating activities | 5,621 | 1,517 | (5,107 | ) | (2,559 | ) | ||||||||||
| Investing Activities | ||||||||||||||||
| Investment in short-term deposits | (118,621 | ) | (11 | ) | (118,638 | ) | (22 | ) | ||||||||
| Mineral interests, property and equipment | (27,204 | ) | (12,238 | ) | (37,295 | ) | (19,785 | ) | ||||||||
| Long-term receivables | (13,983 | ) | - | (30,381 | ) | (2,439 | ) | |||||||||
| Redemption of short-term deposits | - | - | 29,260 | - | ||||||||||||
| Investment in reclamation deposits | (398 | ) | (7,446 | ) | (4,698 | ) | (7,450 | ) | ||||||||
| Cash proceeds from disposition of mineral interests | - | 21,943 | - | 21,943 | ||||||||||||
| Net cash from (used in) investing activities | (160,206 | ) | 2,248 | (161,752 | ) | (7,753 | ) | |||||||||
| Financing Activities | ||||||||||||||||
| Secured note | - | - | 282,263 | - | ||||||||||||
| Share issuance net of costs | 9,370 | 24,812 | 22,139 | 31,227 | ||||||||||||
| Exercise of options | 1,039 | 3,362 | 2,659 | 7,304 | ||||||||||||
| Exercise of warrants | - | 7,825 | - | 7,825 | ||||||||||||
| Payment of lease liabilities | (43 | ) | (19 | ) | (64 | ) | (37 | ) | ||||||||
| Net cash from financing activities | 10,366 | 35,980 | 306,997 | 46,319 | ||||||||||||
| Effects of exchange rate fluctuation on cash and cash equivalents | 1,430 | (250 | ) | 1,374 | (316 | ) | ||||||||||
| Net increase (decrease) in cash and cash equivalents during the period | (142,789 | ) | 39,495 | 141,512 | 35,691 | |||||||||||
| Cash and cash equivalents, beginning of the period | 295,824 | 13,724 | 11,523 | 17,528 | ||||||||||||
| Cash and cash equivalents, end of the period | $ | 153,035 | $ | 53,219 | $ | 153,035 | $ | 53,219 | ||||||||
The accompanying notes form an integral part of these unaudited condensed consolidated interim financial statements.
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SEABRIDGE GOLD INC.
Notes to the condensed consolidated interim financial statements
For the three and six months ended June 30, 2022 and 2021
(Amounts in notes and in tables are in millions of Canadian dollars, except where otherwise indicated) (Unaudited)
| 1. | Reporting entity |
Seabridge Gold Inc. is comprised of Seabridge Gold Inc. (“Seabridge” or the “Company”) and its subsidiaries, KSM Mining ULC, Seabridge Gold (NWT) Inc., Seabridge Gold (Yukon) Inc., Seabridge Gold Corp., SnipGold Corp. and Snowstorm Exploration (LLC), and is a company engaged in the acquisition and exploration of gold properties located in North America. The Company was incorporated under the laws of British Columbia, Canada on September 4, 1979 and continued under the laws of Canada on October 31, 2002. Its common shares are listed on the Toronto Stock Exchange trading under the symbol “SEA” and on the New York Stock Exchange under the symbol “SA”. The Company is domiciled in Canada, the address of its registered office is 10th Floor, 595 Howe Street, Vancouver, British Columbia, Canada V6C 2T5 and the address of its corporate office is 106 Front Street East, 4th Floor, Toronto, Ontario, Canada M5A 1E1.
| 2. | Basis of accounting |
These unaudited condensed consolidated interim financial statements (“consolidated interim financial statements”) were prepared in accordance with IAS 34, Interim Financial Reporting, using accounting policies consistent with those used by the Company in preparing the annual consolidated financial statements as at and for the year ended December 31, 2021 and should be read in conjunction with the Company’s annual consolidated financial statements as at and for the year ended December 31, 2021. They do not include all of the information required for a complete set of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Company’s financial position and performance since the last annual financial statements. These interim financial statements were authorized for issue by the Company’s board of directors on August 12, 2022.
| 3. | Significant accounting judgments, estimates and assumptions |
The preparation of consolidated interim financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities as at the date of the consolidated interim financial statements and reported amounts of expenses during the three and six months ended June 30, 2022 and 2021. Estimates and assumptions used in the preparation of these consolidated interim financial statements are consistent with those used by the Company in preparing the annual consolidated financial statements as at and for the year ended December 31, 2021 (except for those related to valuation of secured note described below in Note 4). Estimates and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events which are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
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| 4. | Significant accounting policies |
Except as described below, the accounting policies applied in these interim financial statements are the same as the those applied in the Company’s consolidated financial statements as at and for the year ended December 31, 2021. Changes in accounting policies will also be reflected in the Company’s consolidated financial statements as at and for the year ending December 31, 2022.
Financial instruments
All financial liabilities (including liabilities designated at fair value through profit and loss “FVTPL”) are recognized initially at fair value on the date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.
Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at FVTPL) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately in profit or loss.
The Company has elected to account for its secured note liability and all embedded derivatives as a single financial liability. The change in fair value of the secured note liability is recognized in profit or loss. The change in the fair value related to the Company’s own credit risk is recorded through other comprehensive income (loss).
Significant estimates
The Company measures the fair value of its secured note liability using a Monte Carlo simulation model. Significant inputs and assumptions into this model include future silver prices, discount rates, forecasted silver production, and probabilities of Environmental Assessment Certificate (“EAC”) expiry, achieving commercial production and securing project financing. Changes to these inputs and assumptions could have a significant impact on the measurement of the secured note liability. Refer to Note 12 for further information.
Capitalization of borrowing costs
Borrowing costs are capitalized and allocated specifically to qualifying assets when funds have been borrowed, either to specifically finance a project or for general borrowings during the period of construction. Qualifying assets are defined as assets that require more than six months to be brought to the location and condition intended by management. Capitalization of borrowing costs ceases when such assets are ready for their intended use.
| 5. | Amounts receivable and prepaid expenses |
| ($000s) | June 30, 2022 | December 31, 2021 | ||||||
| HST | 2,238 | 1,698 | ||||||
| Trade and other receivables due from related parties | 19 | 281 | ||||||
| Prepaid expenses and other receivables | 6,150 | 8,047 | ||||||
| 8,407 | 10,026 |
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| 6. | Investments |
| ($000s) | January 1, 2022 | Fair value through other comprehensive income (loss) | Loss of associates | Impairment | Additions | June 30, 2022 | ||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||
| Investments in marketable securities | 3,367 | (47 | ) | - | - | - | 3,320 | |||||||||||||||||
| Non-current assets: | ||||||||||||||||||||||||
| Investment in associate | 2,429 | - | (89 | ) | (873 | )(a) | 19 | (b) | 1,486 |
| ($000s) | January 1, 2021 | Fair value through other comprehensive income (loss) | Loss of associates | Impairment | Additions | December 31, 2021 | ||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||
| Investments in marketable securities | 3,826 | (459 | ) | - | - | - | 3,367 | |||||||||||||||||
| Non-current assets: | ||||||||||||||||||||||||
| Investment in associate | 2,611 | - | (221 | ) | 39 | (c) | 2,429 |
| (a) | The Company accounts for its investment in Paramount, a publicly listed company, using the equity method. During the current quarter, the Company concluded that the fair value of its investment in Paramount, determined based on the closing share price on June 30, 2022, had declined significantly, and recorded an impairment of $.9 million (December 31, 2021- nil) in the consolidated statements of operations and comprehensive income (loss). |
| (b) | In 2022, the Company received 22,610 common shares of Paramount for payment of interest on the secured convertible notes accrued between July 1, 2021 and December 31, 2021. Subsequent to the quarter end, the Company received 32,712 common shares of Paramount for payment of interest on the secured convertible notes accrued between January 1, 2022 and June 30, 2022. |
| (c) | During the year ended December 31, 2021, the Company received 30,086 common shares of Paramount for payment of interest on the secured convertible notes accrued between July 1, 2020 and June 30, 2021. Refer to note 7 for details on convertible notes receivable. |
The Company holds common shares of several mining companies that were received as consideration for optioned mineral properties and other short-term investments, including one gold exchange traded receipt. These financial assets are recorded at fair value of $3.3 million (December 31, 2021 - $3.4 million) in the consolidated statements of financial position. At June 30, 2022, the Company revalued its holdings in its investments and recorded a fair value decrease of $0.05 million in the statement of operations and comprehensive income (loss).
Investment in associate relates to Paramount Gold Nevada Corp (“Paramount”). As at June 30, 2022, the Company holds a 5.62% (December 31, 2021 – 6.4%) interest in Paramount for which it accounts using the equity method on the basis that the Company has the ability to exert significant influence through its representation on Paramount’s board of directors. During the six months ended June 30, 2022, the Company recorded its proportionate share of Paramount’s net loss of $0.1 million (six months ended June 30, 2021 – $0.1 million) within equity loss of associate on the consolidated statements of operations and comprehensive income (loss). As at June 30, 2022, the carrying value of the Company’s investment in Paramount was $1.5 million (December 31, 2021 - $2.4 million).
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| 7. | Convertible notes receivable |
In September 2019, the Company participated in a private placement to purchase US$410,000, at face value, of secured convertible notes issued by Paramount. Each convertible note had an issue price of US$975 per US$1,000 face value with a four-year maturity. The Company purchased 410 convertible notes for a total of $0.5 million (US$399,750). The convertible notes bear interest at a rate of 7.5% per annum, payable semi-annually. Paramount has the option to settle the interest in whole or in part in either cash or common shares. At any time after the issuance of the convertible notes, the Company can convert all or any portion of the outstanding amount into common shares of Paramount at a price of US$1.00 per common share. The convertible notes receivable is recorded at fair value through profit or loss.
As at June 30, 2022 the fair value of the convertible notes receivable was $0.6 million (December 31, 2021 - $0.6 million). The fair value was determined using the binomial option pricing model using the following assumptions: risk-free rate of 3.42%, 1.25 years expected remaining life of the convertible note, volatility of 49% based on Paramount stock price volatility, forfeiture rate of nil, and dividend yield of nil.
| 8. | Long-term receivables and other assets |
| ($000s) | June 30, 2022 | December 31, 2021 | ||||||
| BC Hydro 1 | 38,500 | - | ||||||
| Canadian Exploration Expenses (Note 18) | 9,173 | 9,172 | ||||||
| British Columbia Mineral Exploration Tax Credit 2 | 3,866 | 3,866 | ||||||
| 51,539 | 13,038 |
| 1) | The Company has paid $38.5 million to British Columbia Hydro and Power Authority (“BC Hydro”) as advance payments made pursuant to the Company signing a facilities agreement with BC Hydro covering the design and construction of facilities to supply construction phase hydro-sourced electricity to the KSM project. |
| 2) | During 2016, upon the completion of an audit of the application by tax authorities of the British Columbia Mineral Exploration Tax Credit (“BCMETC”) program, the Company was reassessed $3.6 million, including accrued interest, for expenditures that the tax authority has categorized as not qualifying for the BCMETC program. The Company recorded a $3.6 million provision within non-trade payables and accrued expenses on the consolidated statements of financial position as at December 31, 2016 with a corresponding increase in mineral interests. In 2017 the Company filed an objection to the reassessment with the appeals division of the tax authorities and paid one-half of the accrued balance to the Receiver General and reduced the provision by $1.8 million. In 2019, the Company received a decision from the appeals division that the Company’s objection was denied, and the Company filed a Notice of Appeal with the British Columbia Supreme Court. The Attorney General of Canada replied to the facts and arguments in the Company’s Notice of Appeal and stated its position that the Company’s expenditures did not qualify for the BCMETC program. During the first quarter 2022, the Company completed discoveries with the Department of Justice and will continue to move the appeal process forward as expeditiously as possible. The Company intends to continue to fully defend its position. As at June 30, 2022, the Company has paid $1.6 million to the Receiver General, and the Canada Revenue Agency (CRA) has withheld $2.3 million of HST credits due to the Company that would fully cover the residual balance, including interest, should the Company be unsuccessful in its challenge. In 2021, based on further study of the facts and circumstances of the Company’s objection, the Company concluded that it was more likely than not that it will be successful in its objection and reclassified the $3.9 million as long-term receivables on the consolidated statements of financial position. |
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| 9. | Mineral interests, property and equipment |
| ($000s) | Mineral interests 3 | Construction in progress | Property & equipment | Right-of-use assets | Total | |||||||||||||||
| Cost | ||||||||||||||||||||
| As at January 1, 2021 | 591,446 | - | - | 307 | 591,753 | |||||||||||||||
| Additions | 40,559 | 27,061 | 3,080 | 100 | 70,800 | |||||||||||||||
| As at December 31, 2021 | 632,005 | 27,061 | 3,080 | 407 | 662,553 | |||||||||||||||
| Additions 2 | 4,971 | 40,565 | 4,459 | 4,517 | 54,512 | |||||||||||||||
| As at June 30, 2022 | 636,976 | 67,626 | 7,539 | 4,924 | 717,065 | |||||||||||||||
| Accumulated Depreciation | ||||||||||||||||||||
| As at January 1, 2021 | - | - | - | 72 | 72 | |||||||||||||||
| Depreciation expense | - | - | 117 | 85 | 202 | |||||||||||||||
| As at December 31, 2021 | - | - | 117 | 157 | 274 | |||||||||||||||
| Depreciation expense 1 | - | - | 117 | 95 | 212 | |||||||||||||||
| As at June 30, 2022 | - | - | 234 | 252 | 486 | |||||||||||||||
| Net Book Value | ||||||||||||||||||||
| As at December 31, 2021 | 632,005 | 27,061 | 2,963 | 250 | 662,279 | |||||||||||||||
| As at June 30, 2022 | 636,976 | 67,626 | 7,305 | 4,672 | 716,579 |
| 1) | Depreciation expense related to equipment is capitalized to construction in progress. |
Mineral interests, property and equipment additions by project are as follows.
| Six months ended June 30, 2022 | ||||||||||||||||||||||||||||
| ($000s) | January 1, 2022 | Mineral interests | Construction in progress | Property & equipment | Right-of-use assets | Total Additions | June 30, 2022 | |||||||||||||||||||||
| Additions | ||||||||||||||||||||||||||||
| KSM 1, 2 | 502,015 | 142 | 40,565 | 4,459 | 4,193 | 49,359 | 551,374 | |||||||||||||||||||||
| Courageous Lake | 77,176 | 246 | - | - | - | 246 | 77,422 | |||||||||||||||||||||
| Iskut | 41,779 | 2,110 | - | - | - | 2,110 | 43,889 | |||||||||||||||||||||
| Snowstorm | 31,471 | 1,941 | - | - | - | 1,941 | 33,412 | |||||||||||||||||||||
| 3 Aces | 9,034 | 532 | - | - | - | 532 | 9,566 | |||||||||||||||||||||
| Grassy Mountain | 771 | - | - | - | - | - | 771 | |||||||||||||||||||||
| Corporate | 307 | - | - | - | 324 | 324 | 631 | |||||||||||||||||||||
| 662,553 | 4,971 | 40,565 | 4,459 | 4,517 | 54,512 | 717,065 | ||||||||||||||||||||||
| Year ended December 31, 2021 | ||||||||||||||||||||||||||||
| ($000s) | January 1, 2021 | Mineral interests | Construction in progress | Property & equipment | Right-of-use assets | Total Additions | December 31, 2021 | |||||||||||||||||||||
| Additions | ||||||||||||||||||||||||||||
| KSM 3 | 444,167 | 27,607 | 27,061 | 3,080 | 100 | 57,848 | 502,015 | |||||||||||||||||||||
| Courageous Lake | 76,522 | 654 | - | - | - | 654 | 77,176 | |||||||||||||||||||||
| Iskut | 37,949 | 3,830 | - | - | - | 3,830 | 41,779 | |||||||||||||||||||||
| Snowstorm | 24,924 | 6,547 | - | - | - | 6,547 | 31,471 | |||||||||||||||||||||
| 3 Aces | 7,113 | 1,921 | - | - | - | 1,921 | 9,034 | |||||||||||||||||||||
| Grassy Mountain | 771 | - | - | - | - | - | 771 | |||||||||||||||||||||
| Corporate | 307 | - | - | - | - | - | 307 | |||||||||||||||||||||
| 591,753 | 40,559 | 27,061 | 3,080 | 100 | 70,800 | 662,553 | ||||||||||||||||||||||
| 1) | Construction in progress additions at KSM includes $5.0 million of capitalized borrowing costs. |
| 2) | $6.8 million of costs related to the BC Hydro project (refer to Note 8) were reclassified from mineral interests to long-term receivables and other assets. |
| 3) | $3.9 million of costs related to the BCMETC audit (refer to Note 8) were reclassified from mineral interests to amounts receivable. |
Continued exploration of the Company’s mineral properties is subject to certain lease payments, project holding costs, rental fees and filing fees.
Page 10
| a) | KSM |
In 2001, the Company purchased a 100% interest in contiguous claim blocks in the Skeena Mining Division, British Columbia. The vendor maintains a 1% net smelter royalty interest on the project, subject to maximum aggregate royalty payments of $4.5 million. The Company is obligated to purchase the net smelter royalty interest for the price of $4.5 million in the event that a positive feasibility study demonstrates a 10% or higher internal rate of return after tax and financing costs.
In 2011 and 2012, the Company completed agreements granting a third party an option to acquire a 2% net smelter royalty on all gold and silver production sales from KSM for a payment equal to the lesser of $160 million or US$200 million. The option is exercisable for a period of 60 days following the announcement of receipt of all material approvals and permits, full project financing and certain other conditions for the KSM Project.
In December 2020, the Company purchased the Snowfield (renamed East Mitchell) property from Pretium Resources Inc. The East Mitchell property, located in the same valley that hosts KSM’s Mitchell deposit, was purchased for US$100 million ($127.5 million) in cash, a 1.5% net smelter royalty on East Mitchell property production, and a conditional payment of US$20 million, payable following the earlier of (i) commencement of commercial production from East Mitchell property, and (ii) announcement by the Company of a bankable feasibility study which includes production of reserves from the East Mitchell property. US$15 million of the conditional payment can be credited against future royalty payments.
| b) | Courageous Lake |
In 2002, the Company purchased a 100% interest in the Courageous Lake gold project from Newmont Canada Limited and Total Resources (Canada) Limited. The Courageous Lake gold project consists of mining leases located in Northwest Territories of Canada.
| c) | Iskut |
On June 21, 2016, the Company purchased 100% of the common shares of SnipGold Corp. which owns the Iskut Project, located in northwestern British Columbia.
| d) | Snowstorm |
In 2017, the Company purchased 100% of the common shares of Snowstorm Exploration LLC which owns the Snowstorm Project, located in northern Nevada. In connection with the acquisition, the Company has agreed to make a conditional cash payment of US$2.5 million if exploration activities at the Snowstorm Project result in defining a minimum of five million ounces of gold resources compliant with National Instrument 43-101 and a further cash payment of US$5.0 million on the delineation of an additional five million ounces of gold resources.
Page 11
| e) | 3 Aces |
In 2020, the Company acquired a 100% interest in the 3 Aces gold project in the Yukon, Canada from Golden Predator Mining Corp. through the issuance of 300,000 common shares valued at $6.6 million. Should the project attain certain milestones, including the confirmation of a National Instrument 43-101 compliant mineral resource of 2.5 million ounces of gold, the Company will pay an additional $1 million, and upon confirmation of an aggregate mineral resource of 5 million ounces of gold, the Company will potentially pay an additional $1.25 million.
| f) | Grassy Mountain |
In 2013, the Company sold 100% of its interest in the Grassy Mountain Project with a net book value of $0.8 million retained within mineral properties, related to the option to either receive, at the discretion of the Company, a 10% net profits interest royalty or a $10 million cash payment. Settlement is due four months after the later of: the day that the Company receives a feasibility study on the project; and the day that the Company is notified that permitting and bonding for the mine is in place. The current owner of the Grassy Mountain Project is Paramount who completed a feasibility study in 2020 but they have not notified the Company that permitting and bonding for the mine is in place.
| 10. | Accounts payable and accrued liabilities |
| ($000s) | June 30, 2022 | December 31, 2021 | ||||||
| Trade payables | 7,434 | 10,190 | ||||||
| Trade and other payables due to related parties | 47 | 136 | ||||||
| Non-trade payables and accrued expenses 1 | 24,026 | 1,839 | ||||||
| 31,507 | 12,165 |
| 1) | Non-trade payables and accrued expenses include $19.4 million of accrued expenses related to construction at KSM. |
| 11. | Provision for reclamation liabilities |
| ($000s) | June 30, 2022 | December 31, 2021 | ||||||
| Beginning of the period | 8,442 | 6,164 | ||||||
| Disbursements | (669 | ) | (3,320 | ) | ||||
| Environmental rehabilitation (recovery) expense | (41 | ) | 5,515 | |||||
| Accretion | 34 | 83 | ||||||
| End of the period | 7,766 | 8,442 | ||||||
| Provision for reclamation liabilities - current | 3,680 | 3,680 | ||||||
| Provision for reclamation liabilities - long-term | 4,086 | 4,762 | ||||||
| 7,766 | 8,442 |
The estimate of the provision for reclamation obligations, as at June 30, 2022, was calculated using the estimated discounted cash flows of future reclamation costs of $7.8 million (December 31, 2021 - $8.4 million) and the expected timing of cash flow payments required to settle the obligations between 2022 and 2026. As at June 30, 2022, the undiscounted future cash outflows are estimated at $8.2 million (December 31, 2021 - $8.6 million) primarily over the next three years. The nominal discount rate used to calculate the present value of the reclamation obligations was 3.09% at June 30, 2022 (0.9% - December 31, 2021). During the six months ended June 30, 2022, reclamation disbursements amounted to $0.7 million (six months ended June 30, 2021 - $0.5 million).
In 2021, the Company updated the closure plan for the Johnny Mountain mine site and charged an additional $5.4 million of rehabilitation expenses to the consolidated statements of operations and comprehensive income (loss). Expenditures include the estimated costs for the closure of all adits and vent raises, removal of the mill and buildings, treatment of landfills and surface water management as well as ongoing logistics, freight and fuel costs.
In 2022, the Company placed $4.7 million on deposit as security for the reclamation obligations at KSM. As at June 30, 2022, the Company has placed a total of $19.9 million (December 31, 2021 - $15.2 million) on deposit with financial institutions or with government regulators that are pledged as security against reclamation liabilities. The deposits are recorded on the consolidated statements of financial position as reclamation deposit. As at June 30, 2022, the Company had $5.1 million (December 31, 2021, $3.0 million) of uncollateralized surety bond, issued pursuant to arrangements with an insurance company, in support of environmental closure costs obligations related to the KSM project. Subsequent to the quarter end, the Company purchased $2.7 million of uncollateralized surety bond, issued pursuant to arrangements with an insurance company, in support of environmental closure costs obligations related to the KSM project.
Page 12
| 12. | Secured note liability |
On February 25, 2022, the Company, through its wholly-owned subsidiary, KSM Mining ULC (“KSMCo”) signed a definitive agreement to sell a secured note (“secured note”) that is to be exchanged at maturity for a silver royalty on its 100% owned KSM Project (“KSM”) to institutional investors (“Investors”) for US$225 million. The transaction closed on March 24, 2022. The key terms of the secured note include:
| ● | When the secured note matures, the Investors will use all of the principal amount repaid on maturity to purchase a 60% gross silver royalty (the “Silver Royalty”) maturity occurs upon the first to occur of: |
| a) | Commercial production being achieved at KSM; and |
| b) | Either the 10-year anniversary, or if the Environmental Assessment Certificate (“EAC”) expires and the Investors do not exercise their right to put the secured note to the Company, the 13-year anniversary of the issue date of the secured note. |
| ● | Prior to its maturity, the secured note bears interest at 6.5% per annum, payable quarterly in arrears. The Company can elect to satisfy interest payments in cash or by delivering common shares. |
| ● | The Company has the option to buyback 50% of the Silver Royalty, once exchanged on or before 3 years after commercial production has been achieved, for an amount that provides the Investors a minimum guaranteed annualized return. |
| ● | If project financing to develop, construct and place KSM into commercial production is not in place by the fifth anniversary from closing, the Investors can put the secured note back to the Company for US$232.5 million, with the Company able to satisfy such amount in cash or by delivering common shares at its option. This right expires once such project financing is in place. If the Investors exercise this put right, the Investors’ right to purchase the Silver Royalty terminates. |
| ● | If KSM’s EAC expires at anytime while the secured note is outstanding, the Investors can put the secured note back to the Company for US$247.5 million at any time over the following nine months, with the Company able to satisfy such amount in cash or by delivering common shares at its option. If the Investors exercise this put right, the Investors’ right to purchase the Silver Royalty terminates. |
| ● | If commercial production is not achieved at KSM prior to the tenth anniversary from closing, the Silver Royalty payable to the Investors will increase to a 75% gross silver royalty (if the EAC expires during the term of the secured note and the corresponding put right is not exercised by the Investors, this uplift will occur at the thirteenth anniversary from closing). |
| ● | No amount payable shall be paid in common shares if, after the payment, any of the Investors would own more than 9.9% of the Company’s outstanding shares. |
| ● | The Company’s obligations under the secured note are secured by a charge over all of the assets of KSMCo and a limited recourse guarantee from the Company secured by a pledge of the shares of KSMCo. |
A number of the above noted options within the agreement represent embedded derivatives. Management has elected to not separate these embedded derivatives from the underlying host secured note, and instead account for the entire secured note as a financial liability at fair value through profit or loss.
The Company entered into a loan commitment within the scope of IFRS 9 ‘Financial Instruments’ on February 25, 2022 related to the secured note, as at that date, the Company and the Investors were committed under pre-specified terms and conditions to complete the transaction. The loan commitment was initially recognized at a fair value of US $225 million. Upon funding of the secured note on March 24, 2022, the loan commitment was settled with no gain or loss recognized.
Page 13
The secured note was recognized at its estimated fair value at initial recognition of $282.3 million (US $225 million) using a Monte Carlo simulation model. This incorporated several scenarios and probabilities of the EAC expiring, achieving commercial production and securing project financing, forecasted silver prices and the discount rates. At June 30, 2022, the fair value of the secured note decreased by $55.1 million. The decrease in fair value was primarily due to the increase in discount rates and updated forecast production schedule. The fair value of the secured note was estimated using Level 3 inputs and is most sensitive to changes in discount rates, future silver prices, and forecasted silver production.
The carrying amount for the secured note is as follows:
| ($000s) | Secured Note | |||
| Fair value at inception | 282,262 | |||
| Add (deduct): | ||||
| Unrealized change in fair value | (55,110 | ) | ||
| Foreign currency translation | 7,163 | |||
| Carrying value and fair value on June 30, 2022 | 234,315 |
Sensitivity Analysis:
For the fair value of the secured note, reasonably possible changes at the reporting date to one of the significant inputs, holding other inputs constant, would have the following effects:
Key Inputs | Inter-relationship
between inputs and fair value measurement | Increase | ||||
| Key observable inputs | The estimated fair value would increase (decrease) if: | |||||
| ● Silver price forward curve | ● Future silver prices were 10% higher | $ | 8.1 | |||
| ● Future silver prices were 10% lower | $ | (17.1 | ) | |||
| ● Discount rates (7.9% - 9.2%) | ● Discount rates were 1% higher | $ | (15.7 | ) | ||
| ● Discount rates were 1% lower | $ | 17.8 | ||||
| Key unobservable inputs | ||||||
| ● Forecasted silver production | ● Silver production indicated silver ounces were 10% higher | $ | 15.0 | |||
| ● Silver production indicated silver ounces were 10% lower | $ | (12.3 | ) | |||
The fair value of the secured note has been calculated using a Monte Carlo simulation model.
| 13. | Shareholders’ equity |
The Company is authorized to issue an unlimited number of preferred shares and common shares with no par value. No preferred shares have been issued or were outstanding at June 30, 2022 or December 31, 2021.
The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support the acquisition, exploration and development of mineral properties. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business.
Page 14
The properties in which the Company currently has an interest are in the exploration stage, as such the Company is dependent on external financing to fund its activities. In order to carry out the planned exploration and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There were no changes in the Company’s approach to capital management during 2022. The Company considers its capital to be share capital, stock-based compensation, warrants, contributed surplus and deficit. The Company is not subject to externally imposed capital requirements.
| a) | Equity financings |
In 2019, the Company entered into an agreement with two securities dealers, for an At-The-Market offering program, entitling the Company, at its discretion, and from time to time, to sell up to US$40 million in value of common shares of the Company. In 2020, the Company issued 1,327,046 shares, at an average selling price of $21.94 per share, for net proceeds of $28.5 million under the Company’s At-The-Market offering.
During the first quarter of 2021, the Company entered into a new agreement with two securities dealers, for an At-The-Market offering program, entitling the Company, at its discretion, and from time to time, to sell up to US$75 million in value of common shares of the Company. This program can be in effect until the Company’s current US$775 million Shelf Registration Statement expires in January 2023. In 2021, the Company issued 2,242,112 shares, at an average selling price of $22.71 per share, for net proceeds of $49.9 million under the Company’s At-The-Market offering. During the six months ended June 30, 2022, the Company issued 995,989 shares, at an average selling price of $22.84 per share, for net proceeds of $22.3 million under the Company’s At-The-Market offering.
In June 2021, the Company issued 350,000 flow-through common shares at $28.06 per common share for aggregate gross proceeds of $9.8 million. The Company committed to renounce its ability to deduct qualifying exploration expenditures for the equivalent value of the gross proceeds of the flow-through financing and transfer the deductibility to the purchasers of the flow-through shares. The effective date of the renouncement was December 31, 2021. At the time of issuance of the flow-through shares, $1.5 million premium was recognized as a liability on the consolidated statements of financial position. During 2021, the Company incurred $1.1 million of qualifying exploration expenditures and $0.2 million of the premium was recognized through other income on the consolidated statements of operations and comprehensive income (loss). During the six months ended June 30, 2022, the Company incurred $0.8 million of qualifying exploration expenditures and $0.1 million of the premium was recognized through other income on the consolidated statements of operations and comprehensive income (loss).
In June 2020, the Company issued 345,000 flow-through common shares at $32.94 per common share for aggregate gross proceeds of $11.4 million. The Company committed to renounce its ability to deduct qualifying exploration expenditures for the equivalent value of the gross proceeds of the flow-through financing and transfer the deductibility to the purchasers of the flow-through shares. The effective date of the renouncement was December 31, 2020. In accordance with draft legislation released on December 16, 2020 in relation to the COVID-19 pandemic, a 12-month extension was provided to the normal timelines in which the qualifying exploration expenditures should be incurred. At the time of issuance of the flow-through shares, $3.9 million premium was recognized as a liability on the consolidated statements of financial position. During 2020, the Company incurred $4.7 million of qualifying exploration expenditures and $1.6 million of the premium was recognized through other income on the consolidated statements of operations and comprehensive income (loss). During 2021, the Company incurred $6.5 million of qualifying exploration expenditures and $2.2 million of the premium was recognized through other income on the consolidated statements of operations and comprehensive income (loss). During the first quarter in 2022, the Company incurred $0.2 million of qualifying exploration expenditures and the remaining $0.1 million of the premium was recognized through other income on the consolidated statements of operations and comprehensive income (loss).
Page 15
| b) | Stock options and Restricted share units |
The Company provides compensation to directors and employees in the form of stock options and Restricted Share Units (“RSU”s).
Pursuant to the Share Option Plan, the Board of Directors has the authority to grant options, and to establish the exercise price and life of the option at the time each option is granted, at a price not less than the closing price of the common shares on the Toronto Stock Exchange on the date of the grant of such option and for a period not exceeding five years. All exercised options are settled in equity. Pursuant to the Company’s RSU Plan, the Board of Directors has the authority to grant RSUs, and to establish terms of the RSUs including the vesting criteria and the life of the RSU. The life of the RSU is not to exceed two years.
Stock options and RSU transactions were as follows:
| Options | RSUs | Total | ||||||||||||||||||||||
| Number of Options | Weighted Average Exercise Price ($) | Amortized Value of options ($000s) | Number of RSUs | Amortized Value of RSUs ($000s) | Stock-based Compensation ($000s) | |||||||||||||||||||
| Outstanding January 1, 2022 | 1,023,334 | 14.61 | 8,125 | 173,800 | 572 | 8,697 | ||||||||||||||||||
| Granted | - | - | - | - | - | - | ||||||||||||||||||
| Exercised option or vested RSU | (186,007 | ) | 14.29 | (1,447 | ) | (128,800 | ) | (2,733 | ) | (4,180 | ) | |||||||||||||
| Expired | - | - | - | - | - | - | ||||||||||||||||||
| Amortized value of stock-based compensation | - | - | - | - | 2,515 | 2,515 | ||||||||||||||||||
| Outstanding at June 30, 2022 | 837,327 | 14.69 | 6,678 | 45,000 | 354 | 7,032 | ||||||||||||||||||
| Exercisable at June 30, 2022 | 837,327 | |||||||||||||||||||||||
| Options | RSUs | Total | ||||||||||||||||||||||
| Number of Options | Weighted Average Exercise Price ($) | Amortized Value of options ($000s) | Number of RSUs | Amortized Value of RSUs ($000s) | Stock-based Compensation ($000s) | |||||||||||||||||||
| Outstanding at January 1, 2021 | 2,611,691 | 12.51 | 22,524 | 135,450 | 487 | 23,011 | ||||||||||||||||||
| Granted | - | - | - | 173,800 | 573 | 573 | ||||||||||||||||||
| Exercised option or vested RSU | (1,585,501 | ) | 11.17 | (14,370 | ) | (135,450 | ) | (3,413 | ) | (17,783 | ) | |||||||||||||
| Expired | (2,856 | ) | 6.30 | (37 | ) | - | - | (37 | ) | |||||||||||||||
| Amortized value of stock-based compensation | - | - | 8 | - | 2,925 | 2,933 | ||||||||||||||||||
| Outstanding at December 31, 2021 | 1,023,334 | 14.61 | 8,125 | 173,800 | 572 | 8,697 | ||||||||||||||||||
| Exercisable at December 31, 2021 | 1,023,334 | |||||||||||||||||||||||
Page 16
The outstanding share options at June 30, 2022 expire at various dates between December 2022 and June 2024. A summary of options outstanding, their remaining life and exercise prices as at June 30, 2022 is as follows:
| Options Outstanding | Options Exercisable | |||||||||||
| Number | Remaining | Number | ||||||||||
| Exercise price | outstanding | contractual life | Exercisable | |||||||||
| $ 13.14 | 359,827 | 6 months | 359,827 | |||||||||
| $ 16.94 | 50,000 | 1 year 4 months | 50,000 | |||||||||
| $ 15.46 | 377,500 | 1 year 6 months | 377,500 | |||||||||
| $ 17.72 | 50,000 | 2 years | 50,000 | |||||||||
| 837,327 | 837,327 | |||||||||||
During the six months ended June 30, 2022, 186,007 options were exercised for proceeds of $2.7 million and 186,007 common shares were issued. The weighted average share price at the date of exercise of options exercised during the period was $23.47.
In December 2021, 123,800 RSUs were granted. Of these, 28,000 RSUs were granted to Board members, 75,200 RSUs were granted to members of senior management, and the remaining 20,600 RSUs were granted to other employees of the Company. The fair value of the grants, of $2.6 million, was estimated as at the grant date to be amortized over the expected service period of the grants. The expected service period of approximately four months from the date of the grant was dependent on certain corporate objectives being met. Of the $2.6 million fair value of the grants, $0.4 million was amortized during the fourth quarter 2021, and the remaining $2.2 million was amortized during the first quarter in 2022. During the current quarter, 128,800 RSUs were vested and 119,800 RSUs were exchanged for common shares of the Company.
During the second quarter of 2021, 10,000 RSUs were granted to a Board member. Half of the RSUs vested up on the first anniversary of the appointment and the remaining half on the second anniversary. The fair value of the grants, of $0.2 million, was estimated as at the grant date to be amortized over the expected service period of the grants. During the current quarter, 5,000 RSUs were vested, and as at June 30, 2022, $0.1 million of the fair value of the grants was amortized.
During the third and fourth quarter of 2021, 40,000 RSUs were granted to three new members of senior management. Half of the RSUs will vest on the first anniversary of employment and the remaining half on the second anniversary. The fair value of the grants, of $0.9 million, was estimated as at the grant date to be amortized over the expected service period of the grants. As at June 30, 2022, $0.4 million of the fair value of the grants was amortized.
| c) | Basic and diluted net loss per common share |
Basic and diluted net income attributable to common shareholders of the Company for the six months period ended June 30, 2022 was $12.8 million (six months ended June 30, 2021 - $10.3 million net income).
Earnings per share has been calculated using the weighted average number of common shares and common share equivalents issued and outstanding during the period. Stock options are reflected in diluted earnings per share by application of the treasury method. The following table details the weighted average number of outstanding common shares for the purpose of computing basic and diluted earnings per common share for the following periods:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Weighted average number of common shares outstanding | 80,144,953 | 75,742,184 | 79,701,761 | 75,071,255 | ||||||||||||
| Dilutive effect of options 1 | 843,034 | 2,010,870 | 914,979 | 2,256,352 | ||||||||||||
| Dilutive effect of RSUs 1 | 76,648 | 19,295 | 124,881 | 77,052 | ||||||||||||
| Dilutive effect of warrants 1 | - | 313,187 | - | 406,077 | ||||||||||||
| 81,064,635 | 77,753,055 | 80,741,621 | 77,810,736 | |||||||||||||
| 1) | As at June 30, 2022, there was a total of 837,327 stock options and 45,000 RSUs outstanding (June 30, 2021 – 1,929,167 stock options and nil RSUs). |
Page 17
| 14. | Cash flow items |
Adjustment for other non-cash items within operating activities:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||
| ($000s) | Notes | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Impairment of investment in associate | 6 | 873 | - | 873 | - | |||||||||||||
| Equity loss of associate | 6 | 46 | 54 | 90 | 131 | |||||||||||||
| Environmental rehabilitation expense | 11 | 26 | (60 | ) | (41 | ) | (43 | ) | ||||||||||
| Unrealized gain on convertible notes receivable | 7 | (6 | ) | 14 | 9 | (82 | ) | |||||||||||
| Accrued interest income on convertible notes receivable | 7 | - | - | (19 | ) | (20 | ) | |||||||||||
| Depreciation | 9 | 74 | 22 | 95 | 43 | |||||||||||||
| Finance costs, net | 18 | 32 | 34 | 69 | ||||||||||||||
| Effects of exchange rate fluctuation on cash and cash equivalents | (1,430 | ) | 250 | (1,374 | ) | 316 | ||||||||||||
| (399 | ) | 312 | (333 | ) | 414 | |||||||||||||
| 15. | Fair value of financial assets and liabilities |
The Company’s fair values of financial assets and liabilities were as follows:
| June 30, 2022 | ||||||||||||||||||||
| ($000s) | Carrying Amount |
Level 1 |
Level 2 |
Level 3 | Total Fair Value | |||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | 153,035 | 153,035 | - | - | 153,035 | |||||||||||||||
| Amounts receivable and prepaid expenses | 5,568 | 5,568 | - | - | 5,568 | |||||||||||||||
| Investment in marketable securities | 3,320 | 3,320 | - | - | 3,320 | |||||||||||||||
| Convertible notes receivable | 598 | - | - | 598 | 598 | |||||||||||||||
| Long-term receivables | 51,539 | 51,539 | - | - | 51,539 | |||||||||||||||
| 214,060 | 213,462 | - | 598 | 214,060 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Accounts payable and accrued liabilities | 31,507 | 31,507 | - | - | 31,507 | |||||||||||||||
| Secured note | 234,315 | - | - | 234,315 | 234,315 | |||||||||||||||
| 265,822 | 31,507 | - | 234,315 | 265,822 | ||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| ($000s) | Carrying Amount | Level 1 | Level 2 | Level 3 | Total Fair Value | |||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | 11,523 | 11,523 | - | - | 11,523 | |||||||||||||||
| Short-term deposits | 29,243 | 29,243 | - | - | 29,243 | |||||||||||||||
| Amounts receivable and prepaid expenses | 5,229 | 5,229 | - | - | 5,229 | |||||||||||||||
| Investment in marketable securities | 3,367 | 3,367 | - | - | 3,367 | |||||||||||||||
| Convertible notes receivable | 606 | - | - | 606 | 606 | |||||||||||||||
| Long-term receivables | 13,038 | 13,038 | - | - | 13,038 | |||||||||||||||
| 63,006 | 62,400 | - | 606 | 63,006 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Accounts payable and accrued liabilities | 12,165 | 12,165 | - | - | 12,165 | |||||||||||||||
| 12,165 | 12,165 | - | - | 12,165 | ||||||||||||||||
Page 18
The Company’s financial risk exposures and the impact on the Company’s financial instruments are summarized below:
Credit Risk
The Company’s credit risk is primarily attributable to short-term deposits, convertible notes receivable, and receivables included in amounts receivable and prepaid expenses. The Company has no significant concentration of credit risk arising from operations. The short-term deposits consist of Canadian Schedule I bank guaranteed notes, with terms up to one year but are cashable in whole or in part with interest at any time to maturity, for which management believes the risk of loss to be remote. Management believes that the risk of loss with respect to financial instruments included in amounts receivable and prepaid expenses to be remote.
Liquidity Risk
The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As at June 30, 2022, the Company had cash and cash equivalents of $153.0 million and short-term deposits of $118.6 million (December 31, 2021 - $11.5 million and $29.2 million, respectively) for settlement of current financial liabilities of $31.5 million (December 31, 2021 - $12.2 million). The Company’s financial liabilities primarily have contractual maturities of 30 days and are subject to normal trade terms. The Company’s ability to fund its operations and capital expenditures and other obligations as they become due is dependent upon market conditions.
As the Company does not generate cash inflows from operations, the Company is dependent upon external sources of financing to fund its exploration projects and on-going activities. If required, the Company will seek additional sources of cash to cover its proposed exploration and development programs at its key projects, in the form of equity financings and from the sale of non-core assets. Refer to note 13 for details on equity financings.
Market Risk
| (a) | Interest Rate Risk |
Interest rate risk is the risk that the future cash flows of a financial instrument or its fair value will fluctuate because of changes in market interest rates. The secured note liability (Note 12) bears interest at a fixed rate of 6.5% per annum. The Company’s current policy is to invest excess cash in Canadian bank guaranteed notes (short-term deposits). The short-term deposits can be cashed in at any time and can be reinvested if interest rates rise.
| (b) | Foreign Currency Risk |
The Company’s functional currency is the Canadian dollar and major purchases are transacted in Canadian and US dollars. The Company funds certain operations, exploration and administrative expenses in the United States on a cash call basis using US dollar cash on hand or converted from its Canadian dollar cash. Management believes the foreign exchange risk derived from currency conversions is not significant to its operations and has not entered into any foreign exchange hedges. As at June 30, 2022, the Company had cash and cash equivalents, short-term deposits, investment in associate, convertible notes receivable, reclamation deposits, accounts payable, accrued liabilities and secured note that are in US dollars.
| (c) | Investment Risk |
The Company has investments in other publicly listed exploration companies which are included in investments. These shares were received as option payments on certain exploration properties the Company owns or has sold. In addition, the Company holds $3.3 million in a gold exchange traded receipt that is recorded on the consolidated statements of financial position in investments. The risk on these investments is significant due to the nature of the investment but the amounts are not significant to the Company.
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| 16. | Corporate and administrative expenses |
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| ($000s) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Employee compensation | 1,302 | 1,066 | 2,540 | 2,034 | ||||||||||||
| Stock-based compensation | 222 | 8 | 2,515 | 2,934 | ||||||||||||
| Professional fees | 596 | 394 | 855 | 559 | ||||||||||||
| Other general and administrative | 748 | 563 | 1,559 | 1,261 | ||||||||||||
| 2,868 | 2,031 | 7,469 | 6,788 | |||||||||||||
| 17. | Related party disclosures |
During the six months ended June 30, 2022, the Company received 22,610 common shares of Paramount for payment of interest on the secured convertible notes (six months ended June 30, 2021 – 14,236 common shares). Subsequent to the quarter end, the Company received 32,712 common shares of Paramount for payment of interest on the secured convertible notes. There were no other transactions with related parties other than compensation paid to key management personnel.
| 18. | Income taxes |
As reported in the Company’s prior year financial statements, in 2019 the Company received a notice from the CRA that it proposed to reduce the amount of expenditures reported, as Canadian Exploration Expenses (CEE) for the three-year period ended December 31, 2016. The Company has funded certain of its exploration expenditures, from time-to-time, with the proceeds from the issuance of flow-through shares and renounced, to subscribers, the expenditures which it determined to be CEE. The notice disputes the eligibility of certain types of expenditures previously audited and approved as CEE by the CRA. The Company strongly disagrees with the notice and responded to the CRA auditors with additional information for their consideration. In 2020, the CRA auditors responded to the Company’s submission and, although accepting additional expenditures as CEE, reiterated that their position remains largely unchanged and subsequently issued reassessments to the Company reflecting the additional CEE expenditures accepted and $2.3 million of Part Xll.6 tax owing. The Company has been made aware that the CRA has reassessed certain investors who subscribed for flow-through shares in 2013 and will reassess other investors with reduced CEE deductions. The Company’s and investors’ reassessments will be appealed to the courts. The Company has indemnified the investors that subscribed for the flow-through shares. The potential tax indemnification to the investors is estimated to be $11.0 million, plus $2.2 million potential interest. No provision has been recorded related to the tax, potential interest, nor the potential indemnity as the Company and its advisors do not consider it probable that there will ultimately be an amount payable.
During the year ended December 31, 2021, the Company deposited $9.2 million into the accounts of certain investors with the Receiver General, in return for their agreement to object to their respective assessments and agreement to repay the Company the full amount deposited on their behalf upon resolution of the Company’s appeal. The deposits made were recorded as long-term receivables on the statement of financial position. No additional payments were made during the current quarter.
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| 19. | Commitments and contingencies |
| Payments due by years | ||||||||||||||||||||
| ($000s) | Total | 2022 | 2023-24 | 2025-26 | 2027-28 | |||||||||||||||
| Capital expenditure obligations | 96,297 | 42,077 | 54,220 | - | - | |||||||||||||||
| Mineral interests | 7,863 | 561 | 2,506 | 2,620 | 2,176 | |||||||||||||||
| Flow-through share expenditures | 7,964 | 7,964 | - | - | - | |||||||||||||||
| Lease obligation | 3,415 | 2,128 | 903 | 285 | 99 | |||||||||||||||
| Interest payment on the secured note | 65,961 | 9,423 | 18,846 | 18,846 | 18,846 | |||||||||||||||
| 181,500 | 62,153 | 76,475 | 21,751 | 21,121 | ||||||||||||||||
During the first quarter of 2022, the Company entered into a Facilities Agreement with British Columbia Hydro and Power Authority (“BC Hydro”) covering the design and construction of facilities by BC Hydro to supply construction phase hydro-sourced electricity to the KSM project.
The cost to complete the construction is estimated to be $28.9 million of which the Company paid $7.7 million to BC Hydro in 2022, and $21.2 million is due in 2023. In addition, the Facilities Agreement requires $54.2 million in security or cash from the Company for BC Hydro system reinforcement, which is required to make the power available of which the Company paid $21.2 million to BC Hydro in 2022, and $33.0 million is due in 2023. The $54.2 million system reinforcement security will be forgiven annually, typically over a period of less than 8 years, based on project power consumption.
Prior to its maturity, the secured note bears interest at 6.5%, or US$14.6 million per annum, payable quarterly in arrears. The Company can elect to satisfy interest payments in cash or by delivering common shares.
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Exhibit 99.2
SEABRIDGE GOLD INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECOND QUARTER ENDED
JUNE 30, 2022
SEABRIDGE GOLD INC.
Management’s Discussion and Analysis
This management’s discussion and analysis (“MD&A”) of Seabridge Gold Inc. (“Seabridge” or the “Company”) and its subsidiary companies, dated August 12, 2022, is intended to supplement and complement the unaudited condensed consolidated interim financial statements and related notes (“consolidated interim financial statements”) as at and for the three and six months ended June 30, 2022. It should be read in conjunction with the Company’s audited annual consolidated financial statements and annual management’s discussion and analysis for the year ended December 31, 2021, and the 2021 Annual Information Form filed on SEDAR at www.sedar.com. Other corporate documents are also available on SEDAR and EDGAR as well as the Company’s website www.seabridgegold.com. As the Company has no operating projects at this time, its ability to carry out its business plan rests with its ability to sell projects or to secure equity and other financings. All amounts contained in this document are stated in Canadian dollars unless otherwise stated.
The consolidated interim financial statements for the three and six months ended June 30, 2022 and the comparative period 2021 have been prepared by the Company in accordance with IAS 34, Interim Financial Reporting.
Company Overview
Seabridge Gold Inc. is a company engaged in the acquisition and exploration of mineral properties, with an emphasis on gold resources, located in North America. The Company’s objective is to provide its shareholders with exceptional leverage to a rising gold price and the returns from significant copper resources it has acquired. The Company’s business plan is to increase its mineral resources in the ground, through exploration, but not to go into production on its own. The Company intends to sell projects or participate in joint ventures towards production with major mining companies. Since inception in 1999, Seabridge has acquired interests in numerous advanced-stage gold projects situated in North America and its principal projects include the KSM property located in British Columbia and the Courageous Lake property located in the Northwest Territories. The Company also holds a 100% interest in the Iskut Project in British Columbia and the Snowstorm Project in Nevada. In 2020, the Company purchased its 100% interest in the 3 Aces gold project in Yukon and acquired the East Mitchell property, adjacent to the KSM project, in British Columbia. Although focused on gold exploration, the Company has made significant copper discoveries, in particular, at KSM. Seabridge’s common shares trade in Canada on the Toronto Stock Exchange under the symbol “SEA” and in the United States on the New York Stock Exchange under the symbol “SA”.
Subsequent to the quarter end, the Company announced Jay Layman retired as President and COO. Mr. Layman, however, will continue to serve as a Director of the Company and will assist in the transitioning and mentoring two new officer appointments: Ryan Hoel, P.E., as Senior VP, Chief Operating Officer and Melanie Miller as VP, Chief Sustainability Officer. Mr. Hoel joined the Company in September 2021 as VP, Projects and since that time has led the Substantially Started activities at KSM. Ms. Miller joined the Company, as a Director, in June 2020, and has served as the Chairperson of the Company’s Sustainability Committee since its inception. With her new management role, Ms. Miller will step down as Chairperson of the Sustainability Committee, with Mr. Layman taking on the responsibility. Ms. Miller will remain a director of the Company.
Page 2
Results of Operations
During the current quarter, the Company recorded net earnings of $19.1 million, or $0.24 per share, on both a basic and diluted basis. During the comparative period in 2021 the Company recorded net earnings of $14.5 million, or $0.19 per share, on both a basic and diluted basis.
During the six months ended June 30, 2022, the Company recorded net earnings of $12.8 million, or $0.16 per share, on both a basic and diluted basis. During the comparative period in 2021, the Company recorded net earnings of $10.3 million, or $0.14 and $0.13 per share on a basic and diluted basis, respectively.
Unrealized change in fair value of the Company’s secured note was the most significant item contributing to net earnings but corporate and administrative expenses, finance expense and other expense, stock-based compensation, and income taxes also contributed to net earnings for the three and six months ended June 30, 2022. These items are discussed further below.
During the current quarter, the fair value of the secured note liability, issued on March 24, 2022, decreased by $55.1 million, and the Company recorded a $31.6 million gain, related to the increase in risk-free interest rates, changes in future silver prices, and changes in silver forecast production schedule contained in the recently announced results an updated Preliminary Feasibility Study (PFS) and Preliminary Economic Assessment (PEA) for the KSM project, discussed below. Also, the Company recorded $23.5 million of the gain within other comprehensive income (loss) related to changes in credit spreads. In the second quarter, risk free interest rates and credit spreads, increased by 1.6% and significantly reduced the net present value of the interest commitment and the silver royalty embedded in the secured note. The fair value of the secured note was estimated using Level 3 inputs and is most sensitive to changes in, silver prices and forecasted silver production.
During the second quarter of 2021, the Company disposed of its residual interests in its previously owned Red Mountain project located in northwestern British Columbia, for cash proceeds of US$18 million and recorded a gain of $21.9 million through the statement of operations and comprehensive earnings (loss) in that period. The capitalized costs incurred and accumulated while the Company held the project had previously been recovered through option and acquisition payments and the residual interest in the project had no carrying value.
During the current quarter, corporate and administrative expenses increased by $0.9 million, from $2.0 million in the second quarter in 2021 to $2.9 million in the current quarter. The increase was mainly due to higher cash and stock-based compensation, and professional fees incurred during the current quarter (discussed below).
Cash compensation increased by $0.2 million, from $1.1 million in the second quarter of 2021 to $1.3 million in the current quarter. Higher cash compensation mainly related to a recent and continuing increase in non-project personnel. Professional fees and other general and administrative expenses increased by $0.3 million, from $1.0 million in the second quarter in 2021 to $1.3 million in the current quarter. The increase was mainly related to increase in external consulting costs and travel costs as restrictions have eased over the course of the year.
During the six months ended June 30, 2022, corporate and administrative expenses increased by $0.7 million, from $6.8 million in the first half in 2021 to $7.5 million in the first half of 2022. The increase was mainly due higher cash compensation, and higher professional fees and other general and administrative expenses, partially offset by lower stock-based compensation (discussed below).
Page 3
Cash compensation increased by $0.5 million, from $2.0 million in the first half in 2021 to $2.5 million in the first half in 2022. The increased cash compensation mainly related to an increase in non-project headcount. Professional fees increased by $0.3 million, from $0.6 million in the first half in 2021 to $0.9 million in the first half in 2022. The increase was mainly related to the costs associated with implementation of a new ERP system, the Company wide risk assessment review, and sustainability reporting. Other general and administrative expenses increased by $0.3 million, from $1.3 million in the first half in 2021 to $1.6 million in the first half in 2022. The increase was mainly related to increased external consulting costs and travel. The Company anticipates that personnel numbers and related remuneration will continue to increase in 2022 as there are several key positions that have yet to be filled.
The Company has, since 2019, refocused the compensation practices away from issuing a combination of stock options and RSUs to only issuing restricted share units (RSUs). During the six months ended June 30, 2022, stock-based compensation expense, related to RSUs, decreased by $0.4 million, from $2.9 million in the first haft in 2021 to $2.5 million in the first half in 2022. The decrease was mainly due to the fact that the RSUs granted in December 2020 and expensed in 2021, had a higher grant date fair value when compared to the RSUs granted during 2021 and expensed in 2022.
To the year ended December 31, 2021, the Company had expensed all accumulated fair value associated with stock options as the service period related to the remaining outstanding options ended in that year. The Company’s stock-based compensation expense related to stock options and restricted share units are illustrated on the following tables:
| ($000s) | ||||||||||||||||||||||||
| RSUs granted | Number of RSUs | Grant date fair value | Expensed in 2020 | Expensed in 2021 | Expensed in 2022 | Balance to be expensed | ||||||||||||||||||
| December 16, 2020 | 135,450 | 3,413 | 487 | 2,926 | - | - | ||||||||||||||||||
| June 24, 2021 | 10,000 | 222 | - | - | 113 | 109 | ||||||||||||||||||
| September 01, 2021 | 20,000 | 454 | - | 75 | 112 | 267 | ||||||||||||||||||
| September 07, 2021 | 10,000 | 229 | - | 36 | 57 | 136 | ||||||||||||||||||
| October 01, 2021 | 10,000 | 195 | - | 24 | 48 | 123 | ||||||||||||||||||
| December 13, 2021 | 123,800 | 2,622 | - | 437 | 2,185 | - | ||||||||||||||||||
| 487 | 3,498 | 2,515 | 634 | |||||||||||||||||||||
Page 4
| ($000s) | ||||||||||||||||||||||||||||||||
| Options granted | Exercise price ($) | Number of options | Grant date fair value | Cancelled prior to 2020 | Expensed prior to 2020 | Expensed in 2020 | Expensed in 2021 | Balance
to be expensed | ||||||||||||||||||||||||
| June 24, 2015 | 9.00 | 475,000 | 5,774 | 149 | 1,266 | 4,359 | - | - | ||||||||||||||||||||||||
| December 14, 2017 | 13.14 | 605,000 | 4,303 | - | 4,085 | 218 | - | - | ||||||||||||||||||||||||
| October 11, 2018 | 16.94 | 50,000 | 421 | - | 334 | 87 | - | - | ||||||||||||||||||||||||
| December 12, 2018 | 15.46 | 568,000 | 4,719 | - | 3,383 | 1,328 | 8 | - | ||||||||||||||||||||||||
| June 26, 2019 | 17.72 | 50,000 | 416 | - | 168 | 248 | - | - | ||||||||||||||||||||||||
| 149 | 9,236 | 6,240 | 8 | - | ||||||||||||||||||||||||||||
During the current quarter, all of the 123,800 RSUs, granted in mid-December 2021, vested upon the Company completing the 2021 exploration program at Snowstorm and have been exchanged for common shares of the Company. In December 2021, $0.4 million of the full fair value of $2.6 million, associated with those RSUs, was charged to the statement of operations and comprehensive loss and the remaining fair value of the grant of $2.2 million was charged to the statement of operations and comprehensive loss in the first and current quarter of 2022.
During the second quarter of 2021, 10,000 RSUs were granted to a Board member. Half of those RSUs vested in the current quarter, and the remaining half will vest on the second anniversary of their appointment.
In the first six months of 2021, 135,450 RSUs, granted in 2020, fully vested to the holders upon the Company attaining pre-established vesting conditions and $2.9 million of fair value was expensed through the statement of operations and comprehensive loss.
The Company holds common shares of several mining companies that were received as consideration for optioned mineral properties and other short-term investments, including one gold exchange traded receipt. During the current quarter, the Company recognized a decrease in fair value of investments, net of income taxes, of $0.2 million. During the six months ended June 30, 2022, the Company recognized a decrease in the fair value of investments, net of income taxes, of $nil. During the second quarter in 2021, the fair value of investments remained virtually unchanged. During the six months ended June 30, 2021, the Company recognized a decrease in the fair value of investments, net of income taxes, of $0.6 million.
The Company holds one investment in an associate that is accounted for on the equity basis. During the three and six months ended June 30, 2022, the Company recognized $0.05 million and $0.09 million loss in associate, respectively. During the comparative three and six months ended June 30, 2021, the Company recognized $0.05 million and $0.13 million loss in the associate, respectively. Also, during the current quarter, the Company reviewed the recoverability of the investment in the associate and recorded an impairment of $0.9 million (June 30, 2021 - nil) in the consolidated statements of operations and comprehensive loss.
Finance costs amounted to $0.3 million and $3.4 million in the three and six months ended June 30, 2022 respectively, compared to no significant finance costs in the three months ended June 30, 2021 and $0.2 million in the six months ended June 30, 2021. The finance costs incurred during 2022 were primarily related to the secured note financing.
The Company recognized a foreign exchange loss of $0.8 million and $1.0 million in the three and six months ended June 30, 2022 respectively, compared to loss of $0.4 million in both three and six month ended June 30, 2021. Based on closing exchange rates, the US dollar appreciated by 3.1% in the second quarter of 2022.
During the three and six months ended June 30, 2022, the Company recognized income tax expense of $7.6 million and $6.2 million, respectively, primarily due to the deferred tax liability arising from the gain recognized on remeasurement of the fair value of the secured note liability, and from the renouncement of expenditures related to the June 2021 flow-through shares issued which are capitalized for accounting purposes. The impact of the revaluation of the secured note that was recorded through other comprehensive income (loss), of $6.4 million, was also recorded through other comprehensive income (loss). The income tax expense was partially offset by income tax recovery arising from the losses in the period, and unrealized foreign exchange loss related to the secured note liability.
Page 5
During the comparative three and six months ended June 30, 2021, the Company recognized income tax expense of $5.2 million and $4.8 million, respectively, primarily due to the deferred tax liability arising from the gain recognized on disposition of the Company’s residual interests in its previously owned Red Mountain project, and from the renouncement of expenditures related to the June 2020 flow-through shares issued which are capitalized for accounting purposes. The income tax expense was partially offset by income tax recovery arising from the losses in the period.
Quarterly Information
Selected financial information for the last eight quarters ending June 30, 2022 is as follows:
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||
| (in thousands of Canadian dollars, except per share amounts) | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | ||||||||||||||||||||||||
| Revenue | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Earnings (loss) for the period | 19,088 | (6,281 | ) | (8,546 | ) | (822 | ) | 14,548 | (4,285 | ) | (12,653 | ) | 4,977 | |||||||||||||||||||
| Basic earnings (loss) per share | 0.24 | (0.08 | ) | (0.11 | ) | (0.01 | ) | 0.19 | (0.06 | ) | (0.18 | ) | 0.07 | |||||||||||||||||||
| Diluted earnings (loss) per share | 0.24 | (0.08 | ) | (0.11 | ) | (0.01 | ) | 0.19 | (0.06 | ) | (0.18 | ) | 0.07 | |||||||||||||||||||
During the current quarter, the Company recognized $31.6 million unrealized gain related to the change in the fair value of the secured note. In the first quarter 2022, the loss for the period included $2.3 million of stock-based compensation expense related to amortization of RSUs granted in December 2021 that were vested during the second quarter 2022. In the fourth quarter 2021, the loss included $5.4 million of rehabilitation expenses related to the Johnny Mountain Mine. In the second quarter 2021, net income included $21.9 million gain on disposition of interest in the Red Mountain project. In the first quarter 2021, the loss for the period included $2.9 million of stock-based compensation expense related to amortization of RSUs granted in December 2020 that were vested during the second quarter 2021.
In the third quarter 2020, net income included a $4.9 million reversal of stock-based compensation expense, related to non-market condition, performance vesting stock options granted in the years 2015 to 2019, that was previously recognized through the statement of operations and comprehensive income (loss). The reversal reflected a revised estimated vesting period of those options. In the fourth quarter 2020, that vesting period was re-estimated to reflect the purchase of the Snowfield property from Pretium Resources Inc. for $127.5 million. The purchase, discussed below, added 25.9 million ounces of gold and 3.0 billion pounds of copper in the measured and indicated categories of resources and alone increased the measured and indicated gold ounces at KSM by 51% and by 28% for copper. The estimated service period for these stock options, including those whose fair value was reversed in the previous quarter, was reset to the Snowfield property acquisition date, and $8.6 million stock-based compensation expense was recognized through the statement of operations and comprehensive income (loss) in the fourth quarter 2020.
Page 6
Mineral Interest Activities
During the six months ended June 30, 2022, the Company added an aggregate of $11.8 million of expenditures that were attributed to mineral interests, including $9.2 million of cash expenditures. The breakdown of cash expenditure by project is illustrated on the following table.
| Cash expenditure | ||||||||
| ($000s) | Amount | Percentage | ||||||
| KSM | 5,666 | 61 | % | |||||
| Snowstorm | 2,097 | 23 | % | |||||
| Iskut | 717 | 8 | % | |||||
| 3 Aces | 528 | 6 | % | |||||
| Courageous Lake | 202 | 2 | % | |||||
| Total cash expenditures | 9,210 | 100 | % | |||||
During the current quarter, the Company continued its 2022 site capture and early infrastructure development activities that are designed to ensure that KSM’s Environmental Assessment Certificate (EAC) remains in good standing and completed an updated pre-feasibility study (PFS), the results of which were announced in the current quarter, and the full study was filed in the third quarter of 2022. Also in the current quarter, the additional work and data collection was carried out for a preliminary economic assessment (PEA) for mineral resources at KSM, not included in the PFS resources. The results of the PEA were announced subsequent to the quarter end and are imbedded, as an appendix to the full technical study filing.
On site capture activities, under the B.C. Environmental Assessment Act, a project’s EAC is subject to expiry if the project has not been substantially started (“Substantial Start”) by the deadline specified in the EAC. The deadline for KSM’s EAC is July 29, 2026. However, if the B.C. Minister of Environment and Climate Change Strategy determines that a project has been Substantially Started before the deadline, the EAC remains in effect for the life of the project. The 2022 full year plan for site capture is approximately $150 million and is being funded by the proceeds of the US$225 million secured note issued in March 2022. Significant activities include road, bridge and camp construction, hydro installations, fish habitat offsetting programs and the acquisition and transport of construction equipment and vehicles.
The site capture expenditures during the six months ended June 30, 2022 are illustrated below:
| ($000s) | Balance | Expenditures | Credits | Net expenditures 2022 | Balance | | ||||||||||||||
| Capital expenditure | 30,024 | 40,107 | (213 | ) | 39,894 | 69,918 | ||||||||||||||
| Capitalized borrowing costs | - | 5,013 | - | 5,013 | 5,013 | |||||||||||||||
| 30,024 | 45,120 | (213 | ) | 44,907 | 74,931 |
| 1) | Cost recoveries related to the Coulter Creek Access Road joint venture. |
The results of the PFS shows a considerably more sustainable and profitable mining operation than its 2016 predecessor. It envisages an all open pit mine plan that includes the Mitchell, East Mitchell and Sulphurets deposits only that is scheduled to operate for 33 years. Mill production is increased from an initial 130,000 metric tonnes per day (tpd) to 195,000 tpd in the third year of production. The primary reasons for the improvements in the plan arise from the acquisition of the East Mitchell resource in December 2020 and an expansion to planned mill throughput. The many design improvements over earlier studies include a smaller environmental footprint, reduced waste rock production, reduced green house gas emissions by electrification of the mine haul fleet, a 50% increase in mill throughput, and the elimination of capital-intensive block cave mining.
Page 7
Projected economic results of the study compared to the 2016 study and against alternate scenarios are illustrated below.
| 2016 PFS Base Case | 2022 PFS Base Case | 2022 PFS Recent Spot Case | 2022 PFS Alternate Case | |||||||||||||
| Metal Prices: | ||||||||||||||||
| Gold ($/ounce) | 1,230 | 1,742 | 1,850 | 1,500 | ||||||||||||
| Copper ($/pound) | 2.75 | 3.53 | 4.25 | 3.00 | ||||||||||||
| Silver ($/ounce) | 17.75 | 21.90 | 22.00 | 20.00 | ||||||||||||
| Molybdenum ($/lb) | 8.49 | 18.00 | 18.00 | 18.00 | ||||||||||||
| US$/Cdn$ Exchange Rate: | 0.80 | 0.77 | 0.77 | 0.77 | ||||||||||||
| Cost Summary: | ||||||||||||||||
| Operating Costs Per Ounce of Gold Produced (years 1 to 7) | $ | 119 | $ | 35 | $ | -83 | $ | 118 | ||||||||
| Operating Costs Per Ounce of Gold Produced (life of mine) | $ | 277 | $ | 275 | $ | 164 | $ | 351 | ||||||||
| Total Cost Per Ounce of Gold Produced (inclusive of all capital and closure) | $ | 673 | $ | 601 | $ | 490 | $ | 677 | ||||||||
| Initial Capital (billions) | $ | 5.0 | $ | 6.4 | $ | 6.4 | $ | 6.4 | ||||||||
| Sustaining Capital (billions) | $ | 5.5 | $ | 3.2 | $ | 3.2 | $ | 3.2 | ||||||||
| Unit Operating Cost (US$/tonne) | $ | 12.36 | $ | 11.36 | $ | 11.36 | $ | 11.36 | ||||||||
| Pre-Tax Results: | ||||||||||||||||
| Net Cash Flow (billions) | $ | 15.9 | $ | 38.6 | $ | 46.1 | $ | 27.9 | ||||||||
| NPV @ 5% Discount Rate (billions) | $ | 3.3 | $ | 13.5 | $ | 16.4 | $ | 9.2 | ||||||||
| Internal Rate of Return | 10.4 | % | 20.1 | % | 22.4 | % | 16.5 | % | ||||||||
| Payback Period (years) | 6.0 | 3.4 | 3.1 | 4.1 | ||||||||||||
| Post-Tax Results: | ||||||||||||||||
| Net Cash Flow (billions) | $ | 10.0 | $ | 23.9 | $ | 28.6 | $ | 17.1 | ||||||||
| NPV @ 5% Discount Rate (billions) | $ | 1.5 | $ | 7.9 | $ | 9.8 | $ | 5.2 | ||||||||
| Internal Rate of Return | 8.0 | % | 16.1 | % | 18.0 | % | 13.1 | % | ||||||||
| Payback Period (years) | 6.8 | 3.7 | 3.4 | 4.3 | ||||||||||||
The results of the PEA announced subsequent to the quarter end is a stand-alone mine plan that was undertaken to evaluate a potential future expansion of the KSM mine to the copper rich Iron Cap and Kerr deposits after the PFS mine plan has been completed. The 2022 PEA is primarily an underground block cave mining operation supplemented with a small open pit and is planned to operate for 39 years with a peak mill feed production of 170,000 t/d. The results of the PEA point to an after tax net present value (discounted at 5%) of US$5.8 billion, an after tax IRR at 18.9%, and after-tax payback at 6.2 years and demonstrates that KSM is a potential multigenerational mining project with flexibility to vary metal output.
In the current quarter, work also continued on various, significant, components of the eventual design of KSM including connection to BC Hydro’s transmission line. Work was conducted on planed infrastructure projects, including the continuation of the construction of the first section of the Coulter Creek access road as well as new temporary and permanent camp installations.
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During the current quarter, the Company deposited $0.4 million in the form of security for reclamation activities related to the infrastructure programs mentioned above.
In the current quarter, the Company commenced the 2022 exploration and drilling program at Iskut based on the analysis of the 2021 drilling program and a geophysical survey conducted early that year. The program is designed to test the porphyry gold-copper potential at depth on the Bronson Slope deposit as well as below the below the Quartz Rise Lithocap. Work is also planned to consider forming a drill testing program at an additional site on the SnipGold claim block.
In addition to exploration work at Iskut, the Company continued its planned 2022 reclamation and closure activities at the Johnny Mountain mine site. Plans for 2022, among other items is the dismantling and removals of the historic mill and mill buildings.
At Snowstorm, during the current quarter, the Company concluded the drilling program commenced in 2021. The program entailed re-entering existing drill holes and using directional drilling tools to continue the drill from known gold-bearing intersections toward prospective higher-grade structures. Approximately 2,500 meters of drilling was completed. Results of the program will be evaluated in the coming quarters.
At the 3 Aces gold project in the Yukon, the Company continues to wait for the receipt of appropriate permits to conduct planned 2022 activities. The timing of receipt is unknown, and the Company may have to alter the 2022 program should significant delays ensue. The 2022 program was designed to test the exploration model developed for a central core area to confirm the potential for resource expansion and evaluate the applicability of the model on targets within the claims.
As reported in prior periods, the Company continues to evaluate the best path forward at its Courageous Lake project in NWT. Options include securing a joint venture partner, the sale of all or a portion of the project, updating the 2012 PFS with a smaller initial project, or conducting additional exploration outside the area of known reserves and resources.
In response to the Covid-19 pandemic, the Company has implemented measures to safeguard the health and well-being of its employees, contractors, consultants, and community members. Many of the Company’s employees worked remotely prior to the pandemic, and from March 2020 through to most of 2021 and into 2022, employees have been working remotely during ongoing periods of lockdowns in various jurisdictions. The Company will conduct its 2022 programs around social distancing protocols that include safety and preventative actions at its camps. The Company will execute its 2022 exploration and development work at KSM, Iskut, Snowstorm and 3 Aces projects under the same successful protocols it implemented in 2020 and continued through 2021. The Company’s engagement with potential joint venture partners, or potential acquirors of KSM or Courageous Lake diminished in both 2020 and 2021 as major mining companies focused on addressing the needs of their existing operations as a result of the pandemic.
The Company continues to have full access to its properties in Canada and the United States and has managed to adequately staff its camps for conducting its programs. The Company has not experienced problems obtaining the supplies and services needed for its work programs. The Company has instituted and will continue to implement operational and monitoring protocols to ensure the health and safety of its employees and stakeholders, which follow the advice of local governments and health authorities where it operates. The Company plans work programs on an annual basis and adjusts its plans to the conditions it faces. The Company fully expects to be able to continue operating its planned programs on this basis going forward, as required, and anticipates that the pandemic will continue to have minimal impact on its exploration activities. One factor that the Company must plan for is the recent resurgence of inflation above past multi-decade levels. Budgets prepared for 2022 have incorporated inflation factors, including labour costs, fuel and energy costs and camp operations and supplies. These increases have not materially impacted planned operations or the Company’s ability to fund and execute its plans.
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Liquidity and Capital Resources
The Company’s working capital position at June 30, 2022, was $244.8 million compared to $36.9 million on December 31, 2021. Increased cash resources was the net result of cash raised through financings (discussed below), and exercise of stock options, offset by cash used in early infrastructure development and corresponding equipment, environmental, reclamation and exploration projects, corporate and administrative costs, and reclamation bonding deposits for KSM. Included in current liabilities at June 30, 2022 is $1.2 million of flow-through premium liability which is a non-cash item (December 31, 2021 - $1.4 million) and will be reduced as flow-through expenditures are incurred.
On March 24, 2022, the Company entered into an agreement selling a secured note (“Note”) that is to be exchanged at maturity for a 60% gross silver royalty (the “Silver Royalty”) on the KSM project to Sprott Resource Streaming and Royalty Corp. and Ontario Teachers’ Pension Plan (jointly, the “Investors”) for US$225 million. The proceeds of the financing are to be used to continue ongoing physical works at KSM and advance the project towards a designation of Substantially Started. The Substantially Started designation ensures the continuity of the KSM project’s approved EAC for the life of the project.
The Note bears interest at 6.5% per annum, payable quarterly in arrears. The Company can elect to satisfy interest payments in cash or by delivering common shares. The Company’s obligations under the Note are secured by a charge over all of the assets of its wholly owned subsidiary, KSM Mining ULC, and a limited recourse guarantee from the Company secured by a pledge of the shares of KSM Mining ULC.
If project financing to develop, construct and place KSM into commercial production is not in place by the March 24, 2027, the Investors can put the Note back to the Company for US$232.5 million in cash or common shares at the Company’s option. This right expires once such project financing is in place. If the Investors exercise this put right, the Investors’ right to purchase the Silver Royalty terminates.
If the EAC expires at any time while the Note is outstanding, the Investors can put the Note back to the Company for US$247.5 million at any time over the following nine months, in cash or common shares at the Company’s option. If the Investors exercise this put right, the Investors’ right to purchase the Silver Royalty would terminate.
When the Note matures, the Investors will use all of the principal amount repaid on maturity to purchase the Silver Royalty. The Note matures upon the first of either commercial production being achieved at KSM and either the 10-year anniversary, or if the EAC expires and the Investors do not exercise their right to put the Note to the Company, the 13-year anniversary of the issue date of the Note.
If commercial production is not achieved at KSM prior to the tenth anniversary from closing, the Silver Royalty payable to the Investors will increase to a 75% gross silver royalty. If the EAC expires during the term of the Note and the corresponding put right is not exercised, the increase will occur at the thirteenth anniversary from closing. The Company has the option to buy back 50% of the Silver Royalty, once exchanged on or before 3 years after commercial production has been achieved, for an amount that provides the Investors a minimum guaranteed annualized return.
No amount payable may be paid in common shares of Seabridge if, after the payment, any of the Investors would own more than 9.9% of the Company’s outstanding shares.
The financing provides most of the capital necessary to attain Substantial Start and reduces the time from the construction schedule once a construction decision has been made.
During the first quarter of 2021, the Company entered into a revised agreement with two securities dealers, for an At-The-Market offering program, entitling the Company, at its discretion, and from time to time, to sell up to US$75 million in value of common shares of the Company. This program can be in effect until the Company’s current US$775 million Shelf Registration Statement expires in January 2023. During the six months ended June 30, 2022, the Company issued 995,989 shares, at an average selling price of $22.84 per share, for net proceeds of $22.3 million under Company’s At-The-Market offering.
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During the six months ended June 30, 2022, the Company received $2.7 million upon the exercise of 186,007 stock options.
In June 2021, the Company issued 350,000 flow-through common shares at $28.06 per common share for aggregate gross proceeds of $9.8 million. The Company committed to renounce its ability to deduct qualifying exploration expenditures for the equivalent value of the gross proceeds of the flow-through financing and transfer the deductibility to the purchasers of the flow-through shares. The effective date of the renouncement was December 31, 2021. At the time of issuance of the flow-through shares, $1.5 million premium was recognized as a liability on the consolidated statements of financial position. During 2021, the Company incurred $1.1 million of qualifying exploration expenditures and $0.2 million of the premium was recognized through other income on the consolidated statements of operations and comprehensive income (loss). During the six months ended June 30, 2022, the Company incurred $0.8 million of qualifying exploration expenditures and the $0.1 million of the premium was recognized through other income on the consolidated statements of operations and comprehensive income (loss).
During the second quarter of 2021, the Company disposed of its residual interests in its previously owned Red Mountain project located in northwestern British Columbia, for net cash proceeds of $21.9 million.
As part of the acquisition agreement of Snowstorm Exploration LLC in June 2017, the Company issued 500,000 common share purchase warrants exercisable for four years at $15.65 per share. During 2021, all the warrants were exercised for net proceeds of $7.8 million and 500,000 common shares were issued.
During the current quarter, operating activities, including working capital adjustments, generate $5.6 million cash compared to $1.5 million cash generated by operating activities in comparative quarter in 2021. The increase in cash generated from operating activities, was mainly related to the foreign exchange gain, and working capital movement that was partially offset by increase in cash compensation, general and administrative expenses and financing costs. Operating activities in the near-term are expected to remain stable or increase marginally given the growth in project and corporate activity in the Company.
As previously disclosed in the Company’s prior years financial statements, in 2019 the Company received a notice from the CRA that it proposed to reduce the amount of expenditures reported as Canadian Exploration Expenses (CEE) for the three-year period ended December 31, 2016. The Company has funded certain of its exploration expenditures, from time-to-time, with the proceeds from the issuance of flow-through shares and renounced, to subscribers, the expenditures which it determined to be CEE. The notice disputes the eligibility of certain types of expenditures previously audited and approved as CEE by the CRA. The Company strongly disagrees with the notice and responded to the CRA auditors with additional information for their consideration. In 2020, the CRA auditors responded to the Company’s submission and, although accepting additional expenditures as CEE, reiterated that their position remains largely unchanged and subsequently issued reassessments to the Company reflecting the additional CEE expenditures accepted and $2.3 million of Part Xll.6 tax owing. The Company has been made aware that the CRA has reassessed certain investors who subscribed for flow-through shares in 2013 and will reassess other investors with reduced CEE deductions. Notice of objections to the Company’s and investors’ reassessments have and will be filed as received and will be appealed to the courts, should the notice of objections be denied. The Company has indemnified the investors that subscribed for the flow-through shares. The potential tax indemnification to the investors is estimated to be $11.0 million, plus $2.2 million potential interest. No provision has been recorded related to the tax, potential interest, nor the potential indemnity as the Company and its advisors do not consider it probable that there will ultimately be an amount payable.
During 2016, upon the completion of an audit of the application by tax authorities of the British Columbia Mineral Exploration Tax Credit (“BCMETC”) program, the Company was reassessed $3.6 million, including accrued interest, for expenditures that the tax authority has categorized as not qualifying for the BCMETC program. The Company recorded a $3.6 million provision within non-trade payables and accrued expenses on the consolidated statements of financial position as at December 31, 2016 with a corresponding increase in mineral interests. In 2017 the Company filed an objection to the reassessment with the appeals division of the tax authorities and paid one-half of the accrued balance to the Receiver General and reduced the provision by $1.8 million. In 2019, the Company received a decision from the appeals division that the Company’s objection was denied, and the Company filed a Notice of Appeal with the British Columbia Supreme Court. The Attorney General of Canada replied to the facts and arguments in the Company’s Notice of Appeal and stated its position that the Company’s expenditures did not qualify for the BCMETC program. Subsequent to the year end, the Company completed discoveries with the Department of Justice and will continue to move the appeal process forward as expeditiously as possible. The Company intends to continue to fully defend its position. As at June 30, 2022, the Company has recognized $3.9 million of long-term receivable from the CRA, including $2.3 million of HST credit due to the Company.
The Company will continue its objective of advancing its major gold projects, KSM and Courageous Lake, and to further explore the Iskut, Snowstorm and 3 Aces projects to either sell or enter into joint venture arrangements with major mining companies. The market for metals streams and royalty interests seems to be growing and the Company will determine the merits of disposing of options it holds on non-core net profits interests and net smelter returns. On financing future exploration and development by selling or entering into new streaming and royalty arrangements.
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Contractual Obligations
The Company has the following commitments as at June 30, 2022:
| Payments due by years | ||||||||||||||||||||
| ($000s) | Total | 2022 | 2023-24 | 2025-26 | 2027-28 | |||||||||||||||
| Capital expenditure obligations | 96,297 | 42,077 | 54,220 | - | - | |||||||||||||||
| Mineral interests | 7,863 | 561 | 2,506 | 2,620 | 2,176 | |||||||||||||||
| Flow-through share expenditures | 7,964 | 7,964 | - | - | - | |||||||||||||||
| Lease obligation | 3,415 | 2,128 | 903 | 285 | 99 | |||||||||||||||
| Interest payment on the secured note | 65,961 | 9,423 | 18,846 | 18,846 | 18,846 | |||||||||||||||
| 181,500 | 62,153 | 76,475 | 21,751 | 21,121 | ||||||||||||||||
During the first quarter of 2022, the Company entered into a Facilities Agreement with British Columbia Hydro and Power Authority (“BC Hydro”) covering the design and construction of facilities by BC Hydro to supply construction phase hydro-sourced electricity to the KSM project.
The cost to complete the construction is estimated to be $28.9 million of which the Company paid $7.7 million to BC Hydro in 2022, and $21.2 million is due in 2023. In addition, the Facilities Agreement requires $54.2 million in security or cash from the Company for BC Hydro system reinforcement, which is required to make the power available of which the Company paid $21.2 million to BC Hydro in 2022, and $33.0 million is due in 2023. The $54.2 million system reinforcement security will be forgiven annually, typically over a period of less than 8 years, based on project power consumption.
Prior to its maturity, the secured note bears interest at 6.5%, or US$14.6 million per annum, payable quarterly in arrears. The Company can elect to satisfy interest payments in cash or by delivering common shares.
Outlook
As mentioned above, the Covid-19 pandemic has not materially impacted the Company’s operations, financial condition or financial performance, but in 2020 and 2021 it caused it to reduce the scale of certain programs and has hindered, and may continue to hinder, the pace of advancement at the affected projects. The Company has been able to commence its 2022 exploration and monitoring programs at its projects safely and within the constraints and measures implemented and the pandemic had no material impact to the results of operations. Although the capital markets are relatively volatile, the Company has not experienced limitations nor does it foresee limitations to accessing capital on acceptable terms. No disruptions to supply chains have been experienced nor have there been delays in project activity.
The pandemic has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to business globally that resulted in economic slowdowns. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. Working closely with the health authorities and with its business partners, the Company developed effective procedures for operating safely in the current global health crisis.
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With the increase in the price of gold since the start of the pandemic, the Company has enjoyed favourable capital markets and has continued to raise funds under its ATM offering of common shares and other financings mentioned above and its financial condition has not been adversely impacted by the pandemic. As a company without revenue from operations, its financial performance has not been impacted by the pandemic. The Company will continue to monitor developments of the pandemic and continuously assess the pandemic’s potential further impact on the Company’s operations and business.
In addition to the extensive Substantial Start work that the Company plans to carry out in 2022, it also intends to continue its pursuit of a joint venture agreement on the KSM project with a suitable partner on terms advantageous to the Company, since it does not intend to build or operate the project alone. The KSM project includes multiple deposits and provides a joint venture partner, or purchaser, flexibility in the design of the project. In accordance with its priorities and risk tolerance, the Company believes that it does not make sense for it to start preparing a feasibility study on the KSM project on its own. The 2022 KSM PFS will include recommendations on additional work that could be completed to advance the project, including budget estimates. The work that a joint venture partner might choose to complete might include some or all of this recommended work and might include significantly more work, and so the timing and cost for a joint venture partner to conclude the recommended work or a feasibility study is impossible to predict. The Company plans its work to advance the KSM project on an annual basis, when the results of one year’s work have been received and analyzed, planning for the next year begins. When planning its programs, the Company will consider the recommended work in the PFS, but the Company will decide work based on its priorities, the results of its advancement work and the items it believes are best left for a joint venture partner to decide. Plans for each year are typically announced in the second quarter of the year and budgets are established at the beginning of that year.
At Iskut, the Company will evaluate its 2021 exploration activities that focused on a potential porphyry deposit below the Quartz Rise lithocap and on the Bronson Slope deposit. Once completed, results will be evaluated and plans for follow-up, if warranted, will be designed. Environmental work will also continue on the reclamation and closure plan for the Johnny Mountain mine.
At Snowstorm, the Company will utilize the results of the 2021 drill program, completed in the current quarter to undertake a follow-up drill program based on those results.
At the Company’s 3 Aces project, the Company has used the results of historical data to establish the scope of an initial drill program it plans to conduct in 2022 once all appropriate permits are in place, the program is focused on high grade mineralized targets.
Environment, Social and Governance
Management and the Board of Directors have formalized several key policies that entrench the Company’s environmental, social and governance (ESG) goals, priorities and strategies to operate safely, sustainably and with the highest governance standards. The Board of Directors has established a Sustainability Committee and granted that committee the authority to investigate any activity of the Corporation and its affiliates relating to sustainability and ESG. As the Company operates in the natural resource extraction industry, the Company strives to achieve the highest operating standards, assessing and mitigating the impacts on the physical environment and the communities in which the Company operates. The Company is committed to sustainability and the integration of sustainability principles into all of our activities and has adopted its Sustainability Policy and produced and published its inaugural sustainability report that was prepared with select disclosures and guidance from the Sustainability Standards Accounting Board Metals and Mining Industry Standards and the Global Reporting Initiative Standards, as well as metrics designed for specifically for the Company. The Company has also published its ESG Performance Tables for its first reporting year, 2020. The sustainability report highlights the Company’s accomplishments and approach to three critical pillars: the economy, society, and the environment. These pillars are seen as interdependent, each necessary and supportive to the other. The Company recognizes that sustainability involves protecting environmental values in the area of our projects, contributing to the health and the economic and social well-being of our employees and the local communities, and taking action on national and global priorities. A sustainable human environment requires the Company to consider issues such as cultural respect, inclusiveness, diversity, and broad participation in the opportunities and benefits which derive from our efforts.
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In addition to the Sustainability Policy, the Company has also implemented its Environmental Policy; Health and Safety Policy including a separate policy on discrimination, bullying, harassment, and violence; a Workplace Employment Policy; and its Policy Statement on Diversity. The Inaugural Sustainability Report and all of the Company’s policies related to ESG can be found on the Company’s website www.seabridgegold.com.
Internal Controls Over Financial Reporting
The Company’s management under the supervision of the Chief Executive Officer and Chief Financial Officer are responsible for designing adequate internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Management is responsible for establishing and maintaining adequate internal controls over financial reporting. The control framework used is Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Changes to Internal Controls Over Financial Reporting
There was no change in the Company’s internal controls over financial reporting that occurred during the period beginning on April 1, 2022 and ended on June 30, 2022, that has materially affected or is reasonably likely to materially affect, the Company’s internal controls over financial reporting with the exception of the implementation of a new enterprise resource planning (ERP) system. The Company implemented the ERP system to support the development work at KSM, and believes that the implementation of the ERP system and related changes to internal controls will enhance its internal controls over financial reporting while providing the ability and flexibility to scale its business in the future. Management employed appropriate procedures to ensure internal controls were in place during and after the conversion.
Disclosure Controls and Procedures
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in the rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company is accumulated and communicated to management as appropriate, to allow timely decisions regarding required disclosure. The Company’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation of the design of the disclosure controls and procedures as of June 30, 2022, that they are appropriately designed and effective and that since the December 31, 2021 evaluation, there have been no material changes to the Company’s disclosure controls and procedures.
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Limitations of Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, believe that any internal controls over financial reporting and disclosure controls and procedures, no matter how well designed, can have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance that the objectives of the control system are met.
Cybersecurity
The Company’s management is responsible for cybersecurity risks that face the Company, and the Board of Directors has granted the Audit Committee the authority to oversee management’s assessment of those risks and their prevention and mitigation approaches and to investigate any material breaches. To date, there have been no material breaches of security measures.
An independent review of access to information and other security protocols around the Company’s IT systems was undertaken in 2020 and another review is planned for 2022. The review, among other items, verifies all employees’ ability to recognize potentially malicious emails or other communications that could enable an intruder to download malware onto the Company’s systems leading to the potential circumventing of the Company’s security protocols and to potentially steal or hold ransom Company data.
Shares Issued and Outstanding
At August 12, 2022, the issued and outstanding common shares of the Company totaled 80,277,145. In addition, there were 837,327 stock options, and 54,000 RSUs. Assuming the conversion of all of these instruments outstanding, there would be 81,168,472 common shares issued and outstanding.
Related Party Transactions
During the current quarter and the comparative quarter in 2021, there were no payments to related parties other than compensation paid to key management personnel. These transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
Critical Accounting Estimates
The Company’s management makes judgments in its process of applying the Company’s accounting policies in the preparation of its consolidated financial statements. In addition, the preparation of financial data requires that the Company’s management make assumptions and estimates of effects of uncertain future events on the carrying amounts of the Company’s assets and liabilities at the end of the reporting period and the reported amounts of income and expenses during the reporting period. Actual results may differ from those estimates as the estimation process is inherently uncertain. Estimates are reviewed on an ongoing basis based on historical experience and other factors that are considered to be relevant under the circumstances. Revisions to estimates and the resulting effects on the carrying amounts of the Company’s assets and liabilities are accounted for prospectively.
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The critical judgments, estimates and assumptions applied in the preparation of the Company’s consolidated financial statements are reflected in note 3 (N) of the Company’s audited annual consolidated financial statements for the year ended December 31, 2021.
Risks and Uncertainties
The risks and uncertainties are discussed within the Company’s most recent Annual Information Form filed on SEDAR at www.sedar.com, and the Annual Report on Form 40-F filed on EDGAR at www.sec.gov/edgar.shtml.
Forward Looking Statements
The consolidated financial statements and management’s discussion and analysis and any other materials included with them, contain certain forward-looking statements relating but not limited to the Company’s expectations, intentions, plans and beliefs. Forward-looking information can often be identified by forward-looking words such as “anticipate”, “believe”, “expect”, “goal”, “plan”, “intend”, “estimate”, “may” and “will” or similar words suggesting future outcomes, or other expectations, beliefs, estimates, plans, objectives, assumptions, intentions or statements about future events or performance. Forward-looking information may include reserve and resource estimates and expected changes to them, estimates of future production and related financial analysis, unit costs, costs of capital projects and timing of commencement of operations, and is based on current expectations that involve a number of business risks and uncertainties. Factors that could cause actual results to differ materially from any forward-looking statement include, but are not limited to, failure to establish estimated resources and reserves, the grade and recovery of ore which is mined varying from estimates, capital and operating costs varying significantly from estimates, delays in obtaining or failures to obtain required governmental, environmental or other project approvals, inflation, changes in exchange rates, fluctuations in commodity prices, delays in the development of projects and other factors. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from expected results.
Potential shareholders and prospective investors should be aware that these statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. Shareholders are cautioned not to place undue reliance on forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and various future events will not occur. The Company undertakes no obligation to update publicly or otherwise revise any forward-looking information whether as a result of new information, future events or other such factors which affect this information, except as required by law.
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Exhibit 99.3
Report to Shareholders
Quarter Ended June 30, 2022
Recent Highlights
| ● | NI-43-101 Technical Report filed for KSM Project |
| ● | 2022 PFS Lifts KSM profitability and sustainability to much higher levels |
| ● | 2022 PEA shows potential to expand mine life for an additional 39 years focusing on copper |
| ● | Substantially Started activities continue at KSM |
| ● | Exploration activities are underway at Iskut, focusing on gold-copper porphyry opportunities |
| ● | Two new internal senior officer appointments |
New KSM Technical Report contains a PFS with 33-year open pit mine plan and a 39-Year PEA capturing higher grade copper deposits not included in the PFS
Seabridge has filed a National Instrument 43-101 Technical Report at www.sedar.com for its 100%-owned KSM project located in northern British Columbia, Canada. The Technical Report includes a Preliminary Feasibility Study (the “2022 PFS”) and a Preliminary Economic Assessment (the “2022 PEA”)
The new Technical Report provides a complete picture of KSM’s potential for multi-generational gold, silver, copper and molybdenum production. This Technical Report enables potential partners to evaluate all the major opportunities and challenges of the project as defined by industry-leading consultants in their respective fields of expertise. The 2022 PFS lays out a development option which is simplified and limited to open pit production with a rapid payback thanks in part to a very low strip ratio for such a large mine. Average annual gold production is estimated at more than 1 million ounces per year. The 2022 PEA defines a robust copper-rich opportunity from block caving. Both have excellent economics at current metal prices and share innovative environmental enhancements including substantial electrification.
We’re very proud of what we have accomplished in this Technical Report. Our evolving string of technical reports on KSM since 2012 are a textbook of how a project can be improved by a resourceful and imaginative technical team. We believe we have now optimized the project’s value for joint venture negotiations.
2022 PFS highlights
The 2022 PFS shows a considerably more sustainable and profitable mining operation than its 2016 predecessor, now consisting of an all open pit mine plan that includes the Mitchell, East Mitchell and Sulphurets deposits only. The primary reasons for the improvements in the plan compared to the 2016 study arise from the acquisition of the East Mitchell open pit resource and an expansion to planned mill throughput. The many design improvements over the 2016 PFS include a smaller environmental footprint, reduced waste rock production, reduced greenhouse gas emissions by partial electrification of the mine haul fleet, a 50% increase in mill throughput, and the elimination of capital-intensive block cave mining.
The 2022 PFS has redesigned KSM for an inflationary environment and achieves significant capital and energy efficiencies. Although initial capital was negatively impacted by inflation, the mine plan was simplified to bring total project capital down below the 2016 estimates despite inflation negatively impacting initial capital, by eliminating sustaining capital associated with block cave development. Important steps were also taken to make the project less dependent on oil, especially diesel fuel, which is an inflationary hot spot and likely to remain so. We have done this by maximizing the use of low cost, green hydroelectric energy.
106 Front Street East, Suite 400, Toronto, OntarioM5A 1E1, Canada
(416) 367-9292 www.seabridgegold.com
Highlights of the 2022 PFS include:
| ● | Proven and Probable Mineral Reserves of 47.3 million ounces of Gold, 7.3 billion pounds of copper, 160 million ounces of silver and 385 million pounds of molybdenum |
| ● | Average annual metal production over the 33-year mine life of 1.03 million ounces of gold, 178 million pounds of copper, 3.0 million ounces of silver and 4.2 million pounds of molybdenum |
| ● | Base case operating costs estimated at US$275 per ounce of gold produced after copper, silver and molybdenum credits |
| ● | Base case total cost (Including initial and sustaining capital, reclamation and closure costs) estimated at US$601 per ounce of gold produced after copper, silver and molybdenum credits |
| ● | After-Tax NPV(5%) estimated at US$7.9B, after tax IRR at 16.1% and after-tax payback of 3.7 years |
The 2022 PFS envisages an open pit mine operation that is scheduled to operate for 33 years. Ore delivery to the mill is increased from an initial 130,000 tonnes per day (“tpd”) to 195,000 tpd in Year 3. Over the entire 33-year mine life, ore will be fed to a flotation and gold extraction mill. The flotation plant will produce a gold/copper/silver concentrate for transport by truck to a nearby seaport at Stewart, B.C. for shipment to Pacific Rim smelters. Metallurgical projections supported by extensive metallurgical testing project a copper concentrate with an average copper grade of 24% and a high gold (64 g/t) and silver (177g/t) content, making it readily saleable. A separate molybdenum concentrate and gold-silver doré will be produced at the KSM processing facility. Base case metal prices used in the 2022 PFS were US$1,742 per ounce of gold, US$3.53 per pound of copper, US$21.90 per ounce of silver and US$18.00 per pound of molybdenum.
For further details on the 2022 PFS please see here.
2022 PEA highlights
The 2022 Preliminary Economic Assessment (“2022 PEA”) is a stand-alone mine plan undertaken to evaluate a potential future expansion of the KSM mine to the copper rich Iron Cap and Kerr deposits after the 33-year 2022 PFS mine plan has been completed. The 2022 PEA is primarily an underground block cave mining operation supplemented with a small open pit designed to operate for 39 years with a peak mill feed production of 170,000 tpd. The PEA demonstrates KSM is a multigenerational mining project with flexibility to vary metal output.
Highlights of the 2022 PEA using the same base case metal prices as the 2022 PFS include:
| ● | Based entirely on KSM’s Kerr and Iron Cap deposits that are not included in the 2022 PFS |
| ● | 39-year mill feed of 1.7 billion tonnes containing 16 billion pounds of copper, 23.2 million ounces of gold and 122 million ounces of silver |
| ● | Average annual production over the 39-year mine life of 368,000 ounces of gold, 366 million pounds of copper, 1.8 million ounces of silver and 0.4 million pounds of molybdenum |
| ● | Base case operating costs estimated at US$0.38 per pound of copper produced after gold, silver and molybdenum credits |
| ● | Base case total cost (including all capital) estimated at US$1.44 per pound of copper produced after gold, silver and molybdenum credits |
| ● | After tax NPV5% estimated at US$5.8 billion, after tax IRR at 18.9%, and after-tax payback at 6.2 Years |
The 2022 PEA envisages an underground focused mine plan starting with the development of an Iron Cap block cave supplemented with a small open pit at Kerr. Development of a Kerr block cave would commence after the production ramp-up period of Iron Cap is completed. Kerr block cave mill feed starts 6 years after the start of Iron Cap mill feed. Mill feed delivery to the process plant is ramped up to 170,000 tpd by Year 12. Over the entire 39-year mine life, mill feed will be delivered to a conventional flotation concentrator. The flotation plant will produce a gold/copper/silver concentrate and separate molybdenum concentrate for transport by truck to a nearby seaport at Stewart, B.C.
For further details on the 2022 PEA please see here.
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2022 exploration at Iskut to focus on gold-copper targets
Exploration activities are now underway at Seabridge’s 100%-owned Iskut project in British Columbia 2022. This year’s program consists of drill testing gold-copper targets at Bronson Slope and Quartz Rise, and geophysical surveys to evaluate the North Snip target.
In 2020 and 2021, Seabridge undertook drilling and MT geophysical surveys across a large part of the Iskut property. Regional geophysical surveys of the property show a distinct structural feature that connects Quartz Rise, Bronson Slope and North Snip. All the prospective intrusions fall along this regional trend and each surveyed intrusion on this trend has a coherent resistivity anomaly at depth like those recognized at KSM. The Bronson Slope target already contains a measured and indicated resource of 187 million tonnes of 0.36 g/t Au, 0.12% Cu, and drilling at Quartz Rise has encountered gold-copper grades below a clear lithocap.
Drill testing is now underway on the Bronson Slope target. The existing quartz-chalcopyrite-magnetite resource at Bronson Slope was deposited as a skarn on the border of the complex and into the adjacent wall rock. MT geophysical surveys have identified a clearly defined zone of resistive rocks within the intrusive complex that could be the source of the chalcopyrite-magnetite mineralization. Drilling below the chalcopyrite-magnetite mineralized zones and into the intrusions has been very limited, but the best grades in the resource project towards this MT anomaly.
KSM early site capture activities continue to advance with bridges, access roads, camps, and power
Seabridge continues its site development activities at KSM. Construction of the Bell-Irving River Bridge is approaching completion which will provide permanent access to KSM’s process plant and tailings facility areas. Construction has advanced on the Treaty Creek Access Road, with access now capturing eight kilometers. Camp 11 earthworks are complete to allow camp construction, with temporary housing available. Permanent housing is expected to be installed during the current quarter. Following a year of above average seasonal snow loads, work programs have now commenced at Camp 9 in the Mitchell Valley and on the Coulter Creek Access Road. Site development by BC Hydro is moving forward with plans to complete site clearing by mid Q4.
Contracts for a significant portion of the 2022 and 2023 site capture activities have been awarded to our Indigenous partners and/or companies that have formed joint ventures with Indigenous groups. The ongoing site capture activities are intended to move KSM towards accomplishing four main objectives:
| 1. | Achieve a ‘substantially started’ designation which ensures the continuity of the KSM project’s approved Environmental Assessment Certificate (“EAC”) for the life of the project; |
| 2. | Complete key tasks which support construction readiness and will shorten the construction period once a construction decision has been made; |
| 3. | Enhance the KSM proposition in our joint venture negotiations by securing the EAC, further de-risking the project, and accelerating the construction timetable; and |
| 4. | Continue to build on the relationships with our Indigenous stakeholders. |
The Gold Market
As we thought in our Q1 report, the Fed's second
big prediction...a strong economy capable of sustaining growth as the Fed fights inflation...is rapidly going the way of its transitory
inflation
prediction. The speed of decline in the housing market and retailing is breathtaking. We have had two consecutive quarters of negative
growth in the US. The Fed and Treasury say this is not a recession but attempting to change the definition does nothing to improve the
facts. The leading indicators tells us a negative Q3 is a virtual certainty. The UK and EU are also in recession.
Some major third world economies such as Turkey and Argentina are being eviscerated by the strong dollar and the mounting stress is very likely to break something soon. Other historically sound but now suddenly Twin Deficit countries such as Japan and Germany may not be far behind as energy costs have now more than offset traditional strength in exports. We think major casualties are coming in the corporate world and financial systems, even sovereign debt and currencies if the Fed does not relent. The cost of capital is rising everywhere, lenders are pulling back, liquidity is drying up and much more than the stock and bond markets are at risk.
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The Fed has proved to be more dedicated to fighting inflation than we had thought. The ultimate result must nonetheless soon be the same...a pivot in an effort to save not the stock market so much as the economy and the wellbeing of key allies such as Japan and the UK. The highly questionable July jobs report which ran counter to all the other data should not be allowed to overshadow the downward trend in the US economy, to say nothing of evident global weakness as indicated by the third markdown in global growth prospects by the IMF and BIS since the start of the year.
Gold has, in our view, performed surprisingly well. A decline of 1.0% this year to date is less than both the S&P and the bond market. The deadly impact of rising rates and a booming dollar in a world built on ZIRP and a soft dollar is increasing default risk, another factor that historically supports gold. A Fed pivot away from tightening, which we continue to expect this year, will unleash gold to new highs as it confirms a period of stagflation, the most favorable environment for gold.
Senior Management Changes
Earlier this month, Jay Layman retired as President and COO for personal reasons. Mr. Layman will continue to serve as a Director of the Company, assisting in transitioning and mentoring two new officer appointments: Ryan Hoel, P.E., as Senior VP, Chief Operating Officer and Melanie Miller as VP, Chief Sustainability Officer.
Mr. Hoel joined Seabridge in September 2021 as VP, Projects and since that time has led the Substantially Started activities at KSM Project. Mr. Hoel has more than 20 years of experience in large-scale project management, development, and operations with companies including Rio Tino, Lundin Mining, New Gold, Arizona Mining, and South32.
Ms. Miller joined Seabridge as a Director in June 2020 and has served as the Chairperson of the Company’s Sustainability Committee since its inception. With her new management role, Ms. Miller has stepped down as Chairperson of the Sustainability Committee, with Mr. Layman taking on the responsibility. Ms. Miller will remain a director of the Company. Ms. Miller has over 20 years of executive success leading business and supply chain innovation for Fortune 500 organizations.
Seabridge’s ability to internally replace retiring executives is a testament to the succession planning that has been developed within the Company. All stakeholders owe Jay Layman a huge debt of gratitude for the significant contributions he has made over the 12 years he served as COO.
Financial Results
During the three-month period ended June 30, 2022 Seabridge posted a net profit of $19.1 million ($0.24 per share) compared to a net profit of $14.5 million ($0.19 per share) for the same period in 2021. During the 2nd quarter, Seabridge invested $27.2 million in mineral interests project spending compared to $12.2 million in the second quarter of 2021. At June 30, 2022, net working capital was $244.8 million compared to $36.9 million at December 31, 2021.
Included in the net profit reported for the current quarter was a non-cash gain associated with the Secured Note issued to Sprott Resource Streaming and Royalty Corp. and Ontario Teachers’ Pension Plan in February 2022. The Company is treating the Secured Note as a financial liability and under IFRS Accounting Standards, Seabridge will be revaluing the liability on a quarterly basis. The change in value reported as of June 30, 2022 was primarily due to increases in interest rates during the quarter and the new silver production plans contained in the KSM Technical Report. For details on the accounting treatment of the Secured Note, please refer to Note 12 to Seabridge’s June 30, 2022 financial statements.
On Behalf of the Board of Directors,
/s/ Rudi P. Fronk
Rudi P. Fronk
Chairman and Chief Executive Officer
August 12, 2022
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