Claude Resources’ (TSX: CRJ; US-OTC: CLGRF) flagship Seabee gold mine in northeastern Saskatchewan has produced more than 1 million oz. gold since it started commercial production in December 1991. Its Santoy mine complex, 14 km east of Seabee, has produced gold since January 2011.
But the company ran into headwinds in 2013, as weaker grades and higher costs pushed its balance sheet into negative territory, analysts Joseph Fazzini and Kent Neale of Dundee Capital Markets write in a report marking the start of their coverage of the miner.
The proportion of lower-grade ore mined at the Santoy mine’s 8 Zone slowed overall production and raised costs, while “volatile grades” from Seabee’s narrow-veined orebody “hampered production,” the analysts note.
At the same time, the company was spending significant sums to extend its shaft at Seabee from 550 metres to 1,000 metres, and investing $6–10 million on exploration at its Madsen project in Red Lake, Ont. “As these operational challenges occurred in tandem with a declining gold price,” Fazzini and Neale explain. “Claude Resources’ balance sheet came under pressure in 2013.”
By year-end, the company had violated a debt covenant with Crown Capital and entered into an agreement to waive the violation by issuing Crown Capital $1 million in stock to Crown. Management also sold the company’s Madsen project for a cash and equity payment worth $11.2 million.
Last year, however, things took a turn for the better. The company introduced Alimak long-hole mining at Seabee, which improved productivity with lower development costs, and commissioned its higher-grade Santoy Gap zone, which helped drive 2014 production up 44% year-on-year to 62,984 oz. gold. Annual mill head grade last year also increased 43% year-on-year to 7.32 grams gold per tonne.
Claude also decided early in the year to sell a 3% life-of-mine net smelter return royalty for Seabee to private equity firm Orion Mine Finance for US$12 million. By the end of 2014, the company’s debt had fallen by US$10.6 million to $22.6 million, and its cash balance had moved from zero to US$11.2 million. The company says it hopes to achieve a net debt balance of zero before 2016.
“Overall expenditures are down 6%, and with Claude Resources’ lean and mean structure, the company can continue generating positive free cash flow and pay down debt,” the Dundee analysts outline in their research report, entitled Claude Making a Comeback.
In an interview, president and CEO Brian Skanderbeg describes 2014 as a pivotal year for the company and that despite a challenging gold-price environment, management delivered the best operating performance in its history. “Our grade profile has changed, our endowment in the camp has changed and that’s impacting our free cash flow margins,” he says. “The two orebodies that now form 95% of our production weren’t even discovered in 2010 and weren’t part of our resource base until the end of 2011 — they were discovered in the second quarter of 2011, and were reflected in the year-end resource statement.”
Skanderbeg is referring to the 120,000 oz. gold L62 deposit found 200 metres from its Seabee mine, and the 600,000 oz. gold Santoy Gap deposit, 800 metres from the lower-grade Santoy 8 zone. “We started investing in Seabee in 2009 and committed to an expanded exploration effort in 2009 and 2010, and were rewarded in 2011 with the discovery of L62 and Santoy Gap, within months of each other,” he says. “It’s those discoveries and our execution that has really put us in a much healthier position. We also took the opportunity to sell [the Madsen] asset and reduce debt to become a much simpler story leveraged to operational success.”
Moreover, as Claude mined the Santoy Gap, grades came in much higher than management had initially expected. Santoy Gap entered production in 2014 and was mined at 7.96 grams gold per tonne for the year, he notes, while reserves were 6.4 grams gold per tonne.
“Veins are thicker at the Santoy Gap and grade is higher, so it has simply improved margins by having greater endowment,” he explains. “The positive reconciliation of grade translated into positive reconciliation of ounces and higher margins … and we may find at depth that parts of Santoy 8 may link up with Santoy Gap.”
The improvements combined to send the company’s stock up 125% last year — a performance better than most of its peers.
This year, Claude plans to produce between 60,000 and 65,000 oz. gold — mostly from the Santoy Gap zone, as it ramps up to 500 tonnes per day — and from the L62 deposit at Seabee. Operating costs are forecast to come in slightly below those of 2014, with unit cash costs ranging from C$785 to C$850 per oz., compared with last year’s average of C$836 per oz. It expects all-in sustaining costs this year of between C$1,175 and C$1,275 per oz., down from the 2014 average of C$1,310 per oz.
“All-in sustaining costs are at the low end of what most of our peer group is at,” Skanderbeg adds, “and our fully loaded cost is C$1,300 per oz., inclusive of debt-servicing costs, which would put us in at the lower end of the cost curve of producers on a fully loaded basis and gives us healthy margins of 15% on a free cash-flow basis.”
The company also does all of its own drilling, with five rigs that it owns, and can drill underground at a cost of C$20 per metre, which Skanderbeg says is far below the industry average of $50 to $60 per metre.
“Most producers don’t choose to operate their own equipment, but we’ve found it to be the most cost-effective way of drilling,” he says. “We can drill three times as many metres for the same dollars as most of our competitors. I don’t know why more people don’t do it.”
This year management expects to spend C$2 million on a 70,000-metre drill program. Between 4,000 and 5,000 metres will be exploration drilling from surface. The remaining 65,000 metres will be underground drilling, of which 20,000 metres will be exploration-focused.
The Dundee analysts believe there’s plenty of exploration upside left on Claude Resources’ land package. “Despite the already long history of production from the Seabee mine complex,” they note, “we believe that significant exploration potential remains in the camp.”
The company’s Seabee property hosts proven and probable reserves of 1.32 million tonnes grading 7.03 grams gold per tonne for 299,000 contained oz. gold. Measured and indicated resources stand at 0.65 million tonnes grading 5.98 grams gold per tonne for 125,200 contained oz. gold, and inferred resources add 3.3 million tonnes grading 7.96 grams gold per tonne for 847,300 oz. gold.
In addition to Seabee, 125 km northeast of the town of La Ronge in Saskatchewan, and 150 km northwest of Flin Flon, Man., Claude Resources owns the Amisk gold project in northeastern Saskatchewan. Claude rekindled the project in 2010 by outlining its potential to host a large, bulk-tonnage gold-silver deposit.
Skanderbeg says the company is transformed.
“We’ve fundamentally changed the story from one where shareholders had balance sheet concerns and Claude was viewed as a relatively high-risk company, to one where we’ve delivered a healthy balance sheet and excellent operating execution,” he says. “The next step is to look at growth opportunities. Our focus is free cash flow, and the ability for the com
pany to generate free cash flow gives us those opportunities.”
At press time, Claude Resources was trading at 60¢ per share within a 52-week range of 14¢ to 64¢ per share. The company has 188 million shares outstanding.
Dundee initiated coverage of the company with an 80¢-per-share target price on the stock. Others that have launched coverage of the name this year are National Bank (with 90¢ target); Cormark Securities ($1.05) and Scotiabank ($1).
Dundee’s analysts note that Claude trades at 4.7 times the estimated 2015 cash flow per share compared with the junior peer average of 7.2 times, and at 4.4 times estimated 2015 enterprise value/earnings before interest, taxes, depreciation and amortization, or below the peer average of 7.1 times.
“While we attribute the discount to Claude Resources’ small producer status and limited institutional shareholder base, recent improvements are capturing the market’s attention, and we consider Claude Resources’ valuation to be compelling.”