Claude deal offers Silver Standard a Canadian foothold

Claude Resources' Seabee gold mine in Saskatchewan. Credit: Claude ResourcesClaude Resources' Seabee gold mine in Saskatchewan. Credit: Claude Resources

VANCOUVER — Claude Resources (TSX: CRJ; US-OTC: CLGRF) has authored a strong turnaround story over the past three years at its Santoy and Seabee gold mines in Saskatchewan’s La Ronge mining district.

The company’s operational success and rising cash position drew attention from larger companies in mid-2015, and on March 7, Silver Standard Resources (TSX: SSO; NASDAQ: SSRI) stepped up to the plate with a $337-million cash-and-share bid to secure its place as an emerging, Americas-focused precious metals producer.

Under the arrangement, Claude investors would receive 0.18 of a Silver Standard share and 0.1¢ in cash. The offer represents a 25% premium based on the companies’ 20-day, volume-weighted average trading prices.

On a pro forma basis, Silver Standard would end up with 119 million shares outstanding, a $1-billion market capitalization, cash and equivalents of US$330 million, and US$283 million in debt. Claude shareholders would have a 32% equity position in the combined entity.

Claude has been producing gold at Seabee since 1991. Production has grown to include feedstock from the Seabee deposit and the Santoy area (Santoy 8 and Santoy Gap).

The Seabee mine is a narrow-vein, underground operation, with recent efforts focused on the 2b and L62 zones. A large part of the company’s success has come from the higher-grade Santoy Gap zone, which contributed to a record 75,748 oz. gold produced in 2015 at a mill grade of 8.82 grams gold per tonne.

“Moving through the second half of last year, our strong performances drew attention from a number of strategic interests,” Claude president and CEO Brian Skanderbeg said during a conference call. “The healthy premium crystallizes significant value from progress we’ve made over the past three years. This repositions our assets within a company, which … can more fully realize value through the benefits of multiple operations and access to capital. We have a track record of increasing production and decreasing costs.”

Silver Standard has looked out for acquisitions since picking up the Marigold mine in Nevada for $275 million from joint-venture partners Goldcorp (TSX: G; NYSE: GG) and Barrick Gold (TSX: ABX; NYSE: ABX) in early 2014. The catch was that acquisitions needed to be a cash-flow positive mine.

Silver Standard also owns the Pirquitas open-pit silver-zinc operation in Argentina.

The Seabee acquisition would boost Silver Standard’s annual gold production 35%, with the expanded company expected to crank out 390,000 oz. gold equivalent per year at cash costs of US$735 per oz. in 2016.

Acquiring Seabee and Santoy would also align with the experience of Silver Standard president and CEO Paul Benson, who has a background in underground gold mining.

“We’ve communicated to the market that our strategy includes acquisitions, but since picking up the Marigold mine we’ve been disciplined in evaluating opportunities,” Benson said. “Our production portfolio is now securely located in the Americas and consists of a diverse selection of underground and open-pit mines. We will control large land positions in attractive mineral belts that present opportunity to deploy capital for resource conversion and discoveries. With the Santoy and Seabee mines we’re establishing a long-term presence in Canada that provides operational opportunities and financial synergies.”

Silver Standard may use some of its capital to explore the Santoy Gap area. Claude has earmarked $3.5 million for an 85,000-metre drill program across the Seabee complex this year, and the company has had recent success at Santoy.

Hole 15-48 graded 30.54 grams gold per tonne over 1.2 metres and, at 675 metres, is the deepest hole ever drilled at the complex.

Claude also owns the 404 sq. km Amisk gold project, which represents one of the largest land positions in Manitoba’s Flin Flon mineral district.

“We first looked at Claude midway through 2015,” Benson said. “The great thing about this transaction is that it solidifies the production base, and definitely enables us to look at a wider scope of options. Up until now we really needed to look at another cash-flow producing mine, but now we’d be comfortable looking at development-stage or advanced exploration projects.”

Scotiabank analyst Craig Johnston noted that the deal “makes sense” for Silver Standard, and said the combined balance sheet would allow for exploration across Claude’s large land package in Saskatchewan, saying that “although the transaction may look slightly expensive at this time, we believe value accretion is a real possibility.”

Silver Standard shares have traded in a 52-week range of $5.22 to $10.56, and last closed at $7.89 per share.

The company has 80 million shares outstanding for a $655-million market capitalization.


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