Exclusive Interviews, Gold & Silver
Rudi Fronk: All That Glitters With Seabridge Is Gold
By Anthony Wile - October 25, 2015

Introduction: Rudi P. Fronk, Chairman and CEO of Seabridge Gold, has over 30 years experience in the gold business, primarily as a senior officer and director of publicly traded companies. In 1999 Mr. Fronk co-founded Seabridge and has served as the company's CEO since that time. Prior to Seabridge, Mr. Fronk held senior management positions with Greenstone Resources, Columbia Resources, Behre Dolbear & Company, Riverside Associates, Phibro-Salomon, Amax, and DRX. Mr. Fronk is a graduate of Columbia University from which he holds a Bachelor of Science in Mining Engineering and a Master of Science in Mineral Economics.

Anthony Wile: Nice to sit down with you, Rudi. I wrote an editorial recently entitled "Why Most Gold Stocks Are Bad Investments." In it I indicated that very few gold miners actually understood the economics of what they were investing in. I pointed out something I believe deeply, which is that "any company that is in the business of digging real value out of the ground only to exchange it for paper currency is doing a disservice to its shareholders." I'd like you to comment on this.

Rudi Fronk: Your basic premise is correct. Gold miners are always seeking to turn a superior currency, gold, into an inferior one, the dollar. At Seabridge, we like to think of ourselves as modern alchemists, turning cash into gold. Over the last 16 years, we have used cash to fund acquisitions and exploration of gold projects in Canada.

Anthony Wile: And you now have more than 90 million ounces of gold in all categories, or nearly two ounces of gold per share.

Rudi Fronk: That's right. And 45 million of those ounces are reserves, with much more to come. Now, why does the rest of the gold industry do everything in reverse, turning gold into cash? Well, first of all, because they can. There is an instant market for gold at the quoted world price and they can always sell it. Not all minerals and metals have that marketability.

Second, miners are almost always engineers. They understand the hard facts of quantifying production and managing mining costs – it comes down to things like estimating ore grades, recovery rates, reagent consumption and fuel prices – and all that stuff is ultimately expressed in dollars. I was trained as an engineer and that's how I was taught. Engineers are very good at taking big issues and reducing them to tiny details that can be measured and controlled. Big "soft" economic issues that are harder to quantify and control usually go right by them.

As soon as I completed my degree in mining engineering, I started studying economics and finance because that's the arena where things are valued. To run a mine, you need the engineering mindset but to understand its value, you need to understand money. Because in the gold business, our product is money.

Anthony Wile: Right. It bears repeating that Seabridge identifies reserves without removing them from the ground and immediately selling them for fiat. Can you go into further detail about how you arrived at this concept?

Rudi Fronk: Our strategy at Seabridge came from two fundamental insights. First, it is extremely difficult to find gold that is economic to develop. Why would you want to mine it at a price that does not reflect that scarcity? Gold is a store of wealth, the best there is, because of that scarcity. Cash you can get anywhere, you can even print it, but not gold.

Once you mine gold, you have to sell it to pay for the extraction. It makes no sense to mine and sell this gold for your shareholders in return for cash when the whole point to being a shareholder is to protect your wealth by owning gold. So we decided to maximize gold ownership per share.

Now, gold in the ground is not worth as much as gold in the hand. To realize the full value of our reserves, they will have to be mined. But mining only makes sense if we can keep a high percentage of the gold output in physical form for our shareholders. That means three things: waiting for higher gold prices, avoiding share dilution by getting a partner to finance the production because share dilution means less gold ownership per share, and to the extent possible, funding the mining costs from the sale of other metals that come along with the gold like copper, silver and molybdenum, which we believe have less monetary value and less scarcity than gold. That way we can keep more of the physical gold for our owners.

In the meantime, we are maximizing gold ownership per share via low-cost exploration and engineering studies that are anti-dilutive.

Anthony Wile: So you are designed as an investment in gold, not as an investment in IRRs or other cash measures of return. This makes Seabridge a currency play more than a mining play.

Rudi Fronk: Yes, exactly.

Anthony Wile: You mentioned two insights. What's the second one?

Rudi Fronk: The second insight was that the valuation of financial assets such as stocks and bonds relative to gold was unreasonably high due to inflationary monetary policies. These things go in cycles. In the 1970s, hard assets were overvalued against financial assets. Then we got the reverse. We formed Seabridge at the height of enthusiasm for financial assets. The day we launched, in late 1999, it took 44 ounces of gold to buy the Dow… the highest ever. Since then the ratio has gone as low as 6. It's now about 15 but we think it will get to a ratio of 1 to 1 yet again, as it has done twice in the last hundred years, the last time in 1980 when the Dow and gold crossed at $850.

Anthony Wile: What is your sense of the current monetary system and where it is headed? Is monopoly fiat a good store of value these days? Was it ever?

Rudi Fronk: As you know, money has three functions – a medium of exchange, a unit of account and a store of value. The dollar does a great job of acting as a medium of exchange worldwide, although its volatility is certainly a source of anxiety for commercial trade and investment. The problem is the other two, because over time the dollar continually loses value against real things. Since the forming of the Federal Reserve, the central bank of fiat, the dollar's purchasing power has dropped about 97%. Furthermore, the US authorities have politicized the dollar – it is being used to prop up borrowers at the expense of savers, to aid the banks and Wall Street. It is being printed to fund a bloated Federal Government, which therefore does not need to live within its means. Below-market rates of interest elevate financial assets by encouraging speculation, but at the expense of real investment and real economic growth.

As a political tool of government, the dollar cannot be trusted to preserve wealth. That is the role of gold. You can keep the dollar for its usefulness as a medium of exchange and meanwhile you can go on your own gold standard to protect your wealth.

Now, I know that nobody thinks history means anything anymore. We are told that we are in a new era where the old rules no longer apply. But we should all note that at the end of World War Two, nearly half of the world's currencies went to zero. Gold did not.

I'm not predicting a new world war. But I note that the global debt market now has about $225 trillion outstanding while equities total about $75 trillion. So, we have about $300 trillion in financial claims against a global GDP of about $75 trillion. How is that going to work out? Lots of people are going to lose value. Meanwhile, there is about $7 trillion in above-ground gold to back these claims, which are really liabilities, not assets. As the only asset that backs itself, gold is going much higher.

Anthony Wile: Why do you think your perspectives are not more widely shared in the industry?

Rudi Fronk: Because most of us have our eyes on the ground, absorbed in the minutiae. You need to look up and see how the world works. You need to look behind the government data and the easy answers. There is a ton of propaganda that you have to fight your way through and most people are just too busy doing their day-to-day stuff.

Anthony Wile: Why don't these issues receive more coverage in the media?

Rudi Fronk: Because they are scary. People don't want to face unpleasant truths. Most investors have been making money, measured in dollars, and if you have been holding financial liabilities as if they are assets, you have been rewarded in dollars. Who wants to know that this wealth may prove to be less than real?

Anthony Wile: I also discussed ETFs in the editorial. How do you see ETFs? Do you believe ETFs and miners have a similar risk profile at this point? Is it better to invest in a mining stock?

Rudi Fronk: If you don't want to take the time to analyze and follow an individual stock, ETFs can make sense to spread the risk. But you need to understand that on high volatility days, ETFs can be very mispriced in the market. Don't try to trade them on those days because they may not reflect the value of the underlying securities. Overall, it's better to pick individual companies where you have confidence in management and the strategy they have adopted for adding value.

Anthony Wile: We can see the general public is attracted to ETFs because of their liquidity and trading action. It seems to me that mining stocks are suffering as a result. Liquidity has been drained from the sector. Your response?

Rudi Fronk: The liquidity drain has not affected Seabridge but I think you have a point. However, the gold industry is tiny. Apple alone is probably ten times larger than the entire gold industry. When interest in gold awakens again – and it looks like it may be starting – there will not be enough vehicles to absorb the investment demand.

Anthony Wile: Good miners can always dig for more precious metals, thus expanding reserves and the value of shares. I put it this way: "The only real advantage a gold mining company has in this day and age is its ability to produce at a discount and hold and store the precious metal it mines." Can you comment?

Rudi Fronk: It won't work for most producers. Reserves are on the decline. Discovery rates are falling. New projects are smaller and lower grade than the ones that are being depleted. Many producers are high-grading their deposits to stay in business and meet their debt obligations, a strategy that destroys reserves. To the extent possible, the gold should be left in the ground until it can be mined at a profit that reflects its long-term scarcity and enables the producers to retain physical gold for their shareholders, in effect becoming a gold bank, which is our aim at Seabridge.

Anthony Wile: I also pointed out that a well-managed and efficient company that retained most of its gold and silver would see significant share appreciation – especially against mining companies that continually swap their assets for paper currency.

Rudi Fronk: I agree. That's our objective at Seabridge.

Anthony Wile: I do have to point out that even when you retain significant reserves it sometimes doesn't seem to be reflected in the share price. Why is that, do you think?

Rudi Fronk: It's all about investor sentiment. Gold is not in favor. Financial assets are. The gold price is a teeter-totter with the stock market on the other end from gold. As long as perceived risks are low, stocks will go up at the expense of gold. When it goes the other way, gold in the ground will skyrocket in value. As a gold investor, you have to be patient and wait for the shift in sentiment. When it comes, you will be rewarded. We are very patient here at Seabridge.

Anthony Wile: Can you fill our readers in on how Seabridge has done of late from a price perspective?

Rudi Fronk: We are a leveraged play on gold so we tend to exceed the industry averages both to the upside and to the downside, just as you would expect.

We have outperformed other gold stocks since gold hit its lows in early August. In fact, our share price bottomed just a few days before gold, suggesting that we sniffed out the move in gold that was about to happen. We are currently trading around $8 US, down from more than $37 in 2011. And we are a much stronger company now than we were when we made that high because we now own about twice as much gold per share as we did then.

As you know, gold went up nearly 650% from the low in 1999 to the high in 2011. Gold outperformed every other asset class. Gold stocks went up 1575% from bottom to top, which is pretty nice leverage to the gold price. Seabridge beat that by another 3500%.

Anthony Wile: My final point in the editorial was that "the bigger the inventory of gold or silver, the more value the company acquires and retains. This should be the future of precious metals mining." What do you think? Is it?

Rudi Fronk: You are preaching to the choir. And you will be proved right, in my opinion. Valuations right now are based on the cash flow from producing reserves. The option value imputed to gold in the ground is next to nothing. That's what happens at the bottom of the cycle.

Eventually, I would like to see gold companies provide a second set of financial statements in which the unit of account is ounces of gold, not dollars. I see us being a leader in this development. That would address the weakness of the dollar as a unit of account and position our business in its correct light.

Anthony Wile: Let's talk to you for a moment about some Seabridge Gold projects. Late in August you announced results from the drilling program at the KSM project and used the phrase "nothing short of spectacular." Can you elaborate?

Rudi Fronk: We already have over 2 billion tonnes of reserves at KSM that contain 38 million ounces of gold and 10 billion pounds of copper. In 2013 we set out to find new deposits that could improve the already robust economics of KSM. Over the past 2 years we have added new resources containing over 11 million ounces of gold and 10 billion pounds of copper at grades that are about twice our average reserve grade. And this does not include this year's drill results, which are also much higher grade. I call this spectacular.

Anthony Wile: You've described KSM as a "district." Can you explain that for the laymen among us? Give us a sense of the breadth and depth of the discovery. I believe KSM has a projected 55-year mine life. That's a significant number, isn't it?

Rudi Fronk: In my 35 years in the business, I have never seen a major project start with 55 years of reserve life. If you include the additional resources at KSM, it is not crazy to think we can get to 100 years of mine life! By saying it is a district, I mean that there are more deposits to be found besides the six we already have. It's an immensely powerful mineral system that goes on for miles. You almost never get a district owned by only one company.

Anthony Wile: Give us a sense of the range of Seabridge's projects. KSM is not the only one by any means. Are you most optimistic about KSM?

Rudi Fronk: Over the past several years we have concentrated on KSM. However, we have a second project called Courageous Lake, located in Canada's Northwest Territories. At Courageous Lake we have already quantified 6.5 million ounces of gold reserves on two kilometers of a 52-kilometer-long gold-bearing greenstone belt. We believe that the exploration opportunities at Courageous Lake are phenomenal. We own the entire belt.

Anthony Wile: Seabridge is partially dependent on metals market prices for its share valuation. Can you give us a sense of where you see the general gold market headed pricewise?

Rudi Fronk: I think gold has bottomed and the bear market has finally come to an end. I see gold going to new highs over the next two years as it becomes clear that the world's financial obligations are heading towards default, probably by way of inflation. The debt load cannot be carried. My sense is that it will be inflated away. Analysts point out that inflation is low despite QE but that's because the monetary easing to date has been centered on banks and financial assets so that's where the inflation has gone. If central banks want consumer price inflation, and they do, they can create it through channels other than buying debt and increasing bank reserves, which haven't worked so far.

Anthony Wile: How about the dollar?

Rudi Fronk: In my view, the dollar will continue to lose value – perhaps not against other fiat currencies but certainly against the world of real things. That's what the authorities want and I believe they will stop at nothing to get it.

Anthony Wile: Do you really think the US is headed for recovery?

Rudi Fronk: No. The data is not good. The trumpeted job creation in the Establishment Report is contradicted by the data in the Household Report, wage data, output data, retail sales and so on. Inventories are high and rising while sales are stagnant or falling at the manufacturing, wholesale and retail levels. I think the US economy is definitely slowing down and likely headed into recession in the short term.

Anthony Wile: Yes, it is not a real recovery from what we can tell, and sooner or later that should have an impact on gold prices, shouldn't it?

Rudi Fronk: That's right. The bear argument on gold depends on a strong US economic recovery, a credible Fed and rising short-term interest rates. The market is losing confidence in all three. Where is the recovery the Fed has promised? And what has happened to the normalization in interest rates that the Fed keeps telling us is just around the corner? Jim Grant makes the point that the gold price is the inverse of confidence in central bankers. From that perspective, the Fed is gold's best friend because they are doing a fine job of demonstrating that they have no idea what they are doing.

Anthony Wile: That's an optimistic note on which to end – for gold bulls anyway. Thanks for your time.

After Thoughts

I think most readers will agree that Rudi Fronk comes across as a thoughtful man in this interview. His approach dovetails nicely with the approach I recommended in an editorial I wrote last week – and referred to throughout this interview.

In that editorial, as I mentioned in the interview, I wrote about how gold companies need to keep control of their production. I feel very strongly about this point. It is one of the reasons the junior miners have lost ground to ETFs.

This was one of the reasons to interview Rudi. He is one of the only CEOs I know in this business that fully realizes the mining industry's main advantage over ETFs is that miners actually dig up metals.

Thus, they produce something of substance, and as long as they keep control of their inventory, they are continually creating something that ETFs cannot: increasing stores of value.

Of course, you don't have to store metals aboveground. You can keep them underground so long as you know where to find them. But as the world trends toward increasing fiat money debasement, gold and silver will become increasingly impressive stores of value.

Many mining CEOs have little to say about world events – even economic ones – and even less about the historical necessity of the products they labor so mightily to free from the ground.

But gold's time is coming once again. Unlike many in the industry, I won't give you a time or a price. I'll simply observe, as Rudi does, that the current economic numbers worldwide don't work out – and they are big and terrible numbers, indeed. As he pointed out:

The global debt market now has about $225 trillion outstanding while equities total about $75 trillion. So, we have about $300 trillion in financial claims against a global GDP of about $75 trillion. How is that going to work out?

This is the kind of cogent commentary that the mining industry needs more of. Rudi is confronting reality in a farsighted and even courageous way. Something is going to give in this central bank economy sooner or later, and when it does, those who hold gold and silver will prove to be the most prudent among us.

When it comes to mining stocks, those executives who have adopted Rudi's approach of keeping valuable assets in the ground for purposes of appreciation will see their foresight rewarded. And so will their shareholders.

Posted in Exclusive Interviews, Gold & Silver