Sabina Gold & Silver Corp. (SGSVF.PK) is an underrated exploration company with all of its properties at this time located in Canada. Being an exploration company, Sabina's success will be determined by its flagship property, which in its case is the Back River Gold Project, which includes 45 federal mineral leases and 13 federal mining claims in Nunavut in the Canadian Arctic.

The amount of gold in the Back River project, its strong cash position, and potential for flexibility with a royalty agreement makes Sabina a good long-term holding for the patient investor. Add to that the fact it has been punished because of the drop in gold and silver prices, and the $1.04 its trading at now presents a good entry point.

(click to enlarge) source:StockCharts.com

An investor needs to understand the way an exploration company operates to intelligently make a decision of whether or not to invest in it. With Sabina Gold & Silver, like the majority of exploration companies, it's working on its flagship project to bring it online first, and then from the revenue generated from that project, build out the rest of the projects to provide a continuous revenue stream into the future.

My knowledge of the industry shows that usually a project comes online in about 3-year to 4-year intervals. That means the original project should generate enough revenue to support the company, continue exploration, and develop the next project to come online.

So while it's important to know the overall potential projects an exploration company has, its success will largely be determined by its flagship project, and the primary focus of an investor should be on that project. The future success of an exploration company will be based upon the quality of its initial commercial production. With that in mind, we'll look at the Back River Gold Project in this article to see how Sabina's future looks.

source:blackriverproject.com

There are as many as 8 mineral deposits with commercial potential at the Back River Gold Project, which includes the Goose and George Properties. There are three deposits at the Goose Property (Goose, Umwelt, and Llama) and five deposits at the George Property (Locale 1, Locale 2, Lone Cow, GH, and Slave), which combined, will have an operating mine life of 10 - 15 years.

At this time the company "assumes" underground commercial production will launch at its Goose Property by the latter part of 2016; specifically the Umwelt and Goose deposits. That will coincide with open pit operations at Llama over the approximate first seven years of production (although all deposits will have underground and open pits of some sort). The goal is to produce from 300,000 to 400,000 ounces of gold annually.

In the early stages of production the company will attempt to mine higher grade ore when it can, while balancing strip ratios with the grade. In the latter part of the life of the mine production will migrate to the George Property, which has lower grade ore and higher costs. Even so, the company will attempt to deliver a consistent ore grade over the life of the mine. That will probably become less important as other projects begin commercial production over time.

Part of the higher costs will be the need to transport ore to its central processing plant at the Goose Property from the George Property. All ore from the Back River Gold Project will be processed at that one location.

The life span of the deposits at Goose and Llama are projected to be from 2 years to 8 years, based on the deposits being fairly shallow - in a range of 200 meters to 400 meters deep. At Umwelt the maximum deposit depth goes to as deep as 680 meters, with a production rate of about 3,000 tpd. Goose and Llama will have a production rate of 200 to 1,000 tpd.

Here are the dates of development for Back River:

* Predevelopment - anticipated in mid-2014 through mid-2015;

* Construction - expected to start in mid-2015 and last between one and two years;

* Operation - anticipated to launch in late-2016 and last 10-15 years or maybe longer. It has to be assumed it could easily be early 2017 before operations start.

The end product at the mine will be doré gold bars which will be shipped to a gold refinery in Canada for further purification.

The good news for the deposit is there is still considerable upside exploration potential, which could improve the production numbers mentioned above.

(click to enlarge) source:blackriverproject.com

While production costs for a mine engaging in commercial production is vital, for an exploration company still at least 3 years away from production, it's not as important; although it provides a snapshot of the company which can be scaled up or down depending on the conditions the company faces when commercial production launches.

With that in mind, the average cash cost at the company is $542. The generally accepted all-in average cost of $1,200 an ounce across all gold miners will have to be assumed when production begins. It could even be higher because of wage and fuel inflation by 2016 or 2017.

Most miners that assert a cash cost in the range of $500 - $600 an ounce, tend to have an all-in cost somewhere between $1,100 an ounce and $1,200 an ounce. If that's the case with Sabina, that is a good place to work from, and would make a nice profit even at today's low price of just over $1,300 an ounce. Of course the gold price in 3 to 4 years could be much higher or lower than that. The assumed all-in cash price makes Sabina positioned stronger than a lot of its competitors, and a better option for investors than most other exploration companies.

The good ore grades and low costs make it unlikely Sabina Gold & Silver will shut down operations, and the fact it is targeting its lower-producing properties about 7 to 8 years out reduces risk.

With pre-production capital estimated to be $450 million - when measured against estimated future cash flows and length of payback - the company looks pretty compelling to me. The over $100 million in cash it has will also help it to navigate through any short-term difficulties.

There is also a continuous stream of upgrades concerning resources at Back River, pointing to an even stronger performance from the deposit over time.

The one thing I'm getting away from concerning Back River in this article is in relationship to the royalty deal Sabina has with Xstrata Zinc with its Hackett River Project.

Sabina will get a whopping 22.5 percent of the first 190 million ounces of silver produced at the project, and 12. 5 percent afterwards. At about $20 an ounce for silver, that would be over $60 million annually in cash flow. For the duration of the deal it would be over $500 million at $20 an ounce. Silver will probably rebound, and if it does, the revenue would be much higher.

Not only that, but it gives Sabina a tremendous chip to play, which provides some flexibility for it financially. If it needs capital it could sell it at a nice price to a streaming and/or royalty company. It could be used for a variety of ways to get capital or simply held to generate the extra revenue while it builds out its projects over the years.

That will help it with the Back River deposit.

Sabina Gold & Silver, when measured by the viability of its flagship project, looks very strong. Its Back River deposit looks stronger and stronger as more reports come in from drilling results.

Even at the low-end estimate of 300,000 ounces of gold produced annually, it's not an insignificant company, and that is only one of its properties. It's the type of deposit a company needs to transition from an exploration company to a company engaging profitably in commercial production.

It is in one of the most desirable jurisdictions in the world; one that is favorable to mining and has a fast permitting process. It also makes elements like wage inflation more predictable when looking out into the future.

Add to that a strong balance sheet, relatively low costs, and a royalty deal in place that will generate significant revenue throughout its growing process, and you can see why Sabina has so much potential.

The major risk is the price of gold, any major shift in the policy of the Federal Reserve, and it still being 3 years away from commercial production, where a lot of unexpected things could happen. If the price of gold falls again, Sabina, over the short term, will participate in that drop, resulting in it falling below the $1.00 per share mark.

For an exploration company, Sabina has done about everything it can to mitigate these risks, and is about as solid a company as I have seen at the stage it's at. With the solid Back River deposit to provide it a strong beginning, it will have the ability to generate enough revenue to fund its future projects.

Keep in mind that this is looking at Sabina over the next several years, and only in light of its Back River deposit. It has a lot of other deposits, but those are years away from coming on line, and won't play a factor in the share price of company until Back River is commercially producing.