Research
Report
Claude Resources Inc.
200, 224 - 4th Avenue South
Saskatoon, Saskatchewan S7K
5M5
Phone (306) 668-7505 Fax
(306) 668-7500
Toronto Stock Exchange
Alberta Stock Exchange
Trading Symbol - CRJ
February 9, 1998
CLAUDE RESOURCES INC.
("CRJ-T")
CIBC Wood Gundy Investment Research
Junior Gold Producers - Who Will Survive? Metals and Minerals
Highlights
Our analysis in this report looks at the viability of junior gold
companies operating in an environment of prolonged
softness in the gold price (meaning that it remains around
US$300 per ounce). While most of the companies covered
are expected to withstand such an event, we have
performed a relative ranking on each to demonstrate what
could happen to share prices in a flat market. Although we
are expecting gold prices to move toward a long-term
average of US$340 per ounce, thereby boosting gold
shares, the relative ranking is important for investors who
wish to be exposed to the sector with maximum downside
protection.
Within our group of stocks, the top picks for potential share
appreciation at current prices in a sideways market are:
Claude Resources, Philex Gold and SAMAX Gold. The
shares of Claude are fundamentally undervalued, while
those of Philex have been oversold. SAMAX offers
significant production growth and exploration potential.
Junior gold companies historically have offered the highest
sensitivities to moves in the gold price. We believe a
positive move in gold prices could further enhance the
potential returns we are forecasting. However, we expect
the junior sector to laG growth in the senior gold group by
one to two months in an improving gold price environment.
The volatility from sentiment caused by momentum,
however, could be higher than we forecast, and therefore
we recommend exposure to this sub-sector on a continuing
basis.
In tough times, capable management and deposit flexibility
may be crucial to the continued viability of an operation.
We have assessed the assets of each firm and attempted to
determine some of the options that might exist in order to
strengthen the companies' performance and included this in
our assessment.
Company Reviews:
Claude Resources Inc. (Strong Buy)
Golden Knight Resources Inc. (Underperform)
High River Gold Mines Ltd. (Buy)
Manhattan Minerals Corp. (Speculative Buy)
Miramar Mining Corp. (Speculative Buy)
Philex Gold Inc. (Strong Buy)
River Gold Mines Ltd. (Hold)
SAMAX Gold Inc. (Strong Buy)
Santa Cruz Gold Inc. (Speculative Buy)
Teddy Bear Valley Mines Ltd. (Underperform)
Introduction:
Many gold producers have seen their share prices decline by more
than 50% during gold's demise in the past six months. To say that
all of these stocks are presently undervalued would be incorrect in
light of the current gold price. If gold were to stay below US$300
per ounce for an extended period of time (more than one year),
there could be more casualties. By this we mean total corporate
failures rather than just depressed share prices.
We have already seen a few companies wilt under the pressure of
lower prices: Rea Gold, Pegasus Gold and, on the base metals
front, Anvil Range. Accordingly, we have written this report
assuming gold prices remain at existing levels for an extended
period of time even though out official long-term forecast for gold
is US$340 per ounce.
If gold reaches US$340/oz., all gold stocks are likely to perform
well and, from an absolute performance perspective, all gold
shares could be ranked as Strong Buys. We feel, however, it is
important to differentiate among the gold producers and look at
the relative performance and rankings of each under less optimistic
assumptions than we currently predict. The recommendations in
this report, therefore, flow from the strengths of each company at
the existing gold price and how its shares should perform with gold
in the US$300-per-ounce range over a 12-month period.
If gold prices continue to decline, no gold company can be
excused from a list of potential bankruptcies, but some are in a
much better position to weather an extended period of low prices
than are others. Those that survive will possess attributes allowing
them to maintain cash, and include companies with strong hedging
programs, good balance sheets, fewer exploration commitments,
low operating costs and strategies that allow for success. These
elements will be the true measuring gauge for investment in an
environment of depressed gold prices, rather than the typical
multiples such as market capitalization per ounce of
resource/reserve/production.
In this report we have used a valuation method that examines
companies from 15 different perspectives. Included are
comparisons on financial criteria, exploration, assets and
management factors. Our top picks based on these relative
ranking criteria are Claude Resources, Philex Gold and SAMAX
Gold. Claude Resources shares are fundamentally undervalued,
Philex Gold shares have declined disproportionately, and
SAMAX shares offer the potential for production growth and
exploration discovery.
Where Is The Gold Price Headed?
Much has been written about the demise of gold as an investment
tool, and its value as a hedge against inflation that is running at low levels. Holders of Southeast Asian currency who have seen some
of their assets chopped in half by the devaluing of local currencies
might disagree. Holders of gold in that region have fared well
during the last six months. Gold will continue to be sought by
individuals and nations, if for no other reason than because it offers
a solid substitute to paper currency. How much of this demand will
translate into higher prices becomes the tough question. At this
time, we see that demand is still extremely strong, with Canadian
Maple Leaf gold coins selling (if they are in stock) are twice the
premium above the spot price normally charged. Strong demand is
not a Canadian phenomenon - Figures 1 and 2 illustrate improved
demand, especially in developing countries, as the gold price
declines.
Claude Resources Inc.
CRJ - TSE, $2.25
Recommendation: Strong Buy
12-Month Target Price: $4.00
Claude Resources (CRJ) is a gold mining company producing gold
from the Seabee Mine in Saskatchewan. This mine opened in
1991. The company also receives revenues from oil and gas
interests in Saskatchewan and Alberta. Claude is scheduled to
conduct underground exploration at its Amisk project this year as
well as surface exploration for gold in Saskatchewan.
Seabee Mine - Operations Looking Golden
Operations at the Seabee Mine in central Saskatchewan
underwent a considerable change during 1997. Cash operating
costs have declined from over US$300 per ounce in 1996 to less
than US$210 per ounce at the end of 1997 and are likely to be
maintained around that level. The decrease has been due to a
combination of favorable circumstances that should continue for
1998. These include 30% higher gold grades, ore zones 200%
wider than typical, and reduced electrical costs. For 1998,
additional savings may be realized from the newly commissioned
shaft, capable of hoisting ore at lower costs than trucking up the
ramp. Output for the mine in 1998 is forecast to be about the
same as 1997 levels, or approximately 60,000 ounces of gold.
Although fewer tonnes are scheduled to be mined, the average
grade for 1998 is scheduled to be about 15% higher than in 1997.
Most of the ore for 1998 is already broken so the grade forecast
should be fairly accurate.
We are projecting unit costs to be about the same as at the end of
last year. Next year, gold production should rise by almost 10%
and reach in excess of 65,000 ounces, with operating costs
dropping to about US$200 per ounce. It is expected that these
lower costs can be maintained beyond 1999 as expansion at the
mine continues.
The reserves for the Seabee Mine stand at 1.2 million tonnes
grading 8.6 g/t gold, with resources of an additional 2 million
tonnes at a similar grade. These levels should be sufficient for a
minimum of another 10 years of production. The company also
holds the option on the adjacent Currie Rose ground that holds the
extension to the Seabee deposit. Mining on this portion of the
deposit is not scheduled until 1999. Few of the tonnes attributable
to the resource are located on this property as underground
development has not taken place. We expect the resources on the
Currie Rose ground to extend the mine life beyond current
estimates.
Amisk Lake - High Grades Make This Target Attractive
Exploration expenditures are largely discretionary, with the major
project being the Amisk Lake project in eastern Saskatchewan.
We suspect that drilling will continue on the project but major
expenditures at Amisk may be reduced until gold prices take an
upward turn. The project has a resource of about 600,000 ounces
of high-grade mineralization (+13 g/t), and has a much larger
resource at a lower grade. Because of capital cost concerns and
sensitivity to the price of gold, we believe Amisk is more likely to
be developed as a high-grade underground operation than a bulk
tonnage open pit. Claude's expertise in narrow vein mining suits
this method of extraction better.
Financial Health
At the Seabee Mine, there is almost a full year's production of ore
that has been broken. In a pessimistic gold scenario, mining could
cease, but ore could be trucked to the mill to maintain gold output
and cash flow. Cash flow for the company is also augmented by
an interest in oil and gas production of 1,200 Boe per day, which
enhances profits of the company.
Although operations are at their all-time best, Claude does not
have a significant gold hedging program - only about 18,000
ounces of gold are hedged at US$296 per ounce. The company's
working capital is $11.3 million and there is no debt. Most of the
working capital, however, is made up of stockpiled gold ore that
needs to be milled before converting into cash. The company's
cash position is $1.5 million. We are projecting cash flow of $0.45
per share and earnings of $0.11 per share for 1998.
Recommendation
Based on most measures, Claude Resources' shares are
under-valued. Paramount among these are its cash flow and
earnings multiples, both on a trailing and a forecast basis. Currently
the company is trading at less than 4x 1997 CFPS and less than
5x 1998 CFPA using a lower price. We know of no other gold
stock with multiples this low. From a defensive standpoint, we feel
this measure of performance should be the highest regarded by
investors. Accordingly, we are maintaining our Strong Buy
recommendation and $4.00 target price.
NET ASSET VALUE
$ mlns.
Per Share
Seabee
$56.6
$3.00
Oil and Gas
9.2
0.49
Amisk
8.9
0.47
Cash
1.5
0.08
Debt
0.0
0.00
Total
$76.2
$4.03
DISCOUNT RATES
Seabee
5%
Amisk
70% of 60,000 oz. @ US/15/oz.
Oil and Gas
10-year cash flow @ 10% discount
1997E 1998E 1999E
EPS
$0.25 $0.11 $0.27
CFPS
0.55 0.45 0.65
P/EPS
11.3 17.7 8.1
P/CFPS
4.6 4.7 3.4
Production (000 Ounce) 59 60 67
Cost (US$/Ounce) $225 $208 $203
Overheads/Year (mlns):
$2.1 Shares O/S (mlns): 18.9
Adjusted Mkt. Cap (mlns):$40.1
52-Week High/Low: $3.00 - $1.61
Reserves (000 Ounces): 304
Resources (000 Ounces): 999
Average Weekly Volume (SHs): 80,000
Ownership: Management, 20%
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