The sad story of Claude Resources, CGR ................. ......................... ..........
Claude Resources is now down ~50% this year. Now it would be easy to assume this was just a "normal" move for a junior miner under the current pressures of the dropping POG.
But alas, me thinks there is more at play and if POG remains low CGR heads for bankruptcy watch, imho.
Interesting to note is that I ran a quick Cash Flow model on CGR late last year. To be "conservative" to all of the Gold Bulls out there at the time, I started with an assumption of an average POG for 2013 of 1820. Then I escalated it at +10% per year. I also used a cost of $957/oz for production costs, assuming improvement over 2012 - an assumption, that demonstrated below, is HIGHLY favorable to CGR. This crude analysis suggested that at those levels of POG and CGR's cost of capital the shares could be worth up to 74-cents.
But alas, this isn't the reality we have right now. POG averaged about 1625 in 1Q13 with about half the time POG was below 1600. Now 2Q is a wreck and many companies are going to be facing cost pressures. If I adjust the Cash Flows for an average 2013 POG of 1625 , Claude's maximum price tops out around 50-cents.
But the real problem for CGR comes with POG below 1400. Last year CGR reported a cash cost per ounce of $997. But that doesn't tell the whole story. If one tosses in ALL of the costs to produce an ounce of Gold, the way the majors are now reporting an "all-in, sustaining cost" figure, CGR's 2012 costs were @1482 per ounce.
But wait, I see a hand in the back and the question is being asked - but don't those "all-in costs" include "sunk costs," costs that were previously spent to build the mine and are now just a paper cost as they are amortized off of the Balance Sheet? Yes, that is true. But unfortunately, CGR isn't debt free and just borrowed $25M this year to refinance some of those "sunk costs" and have enough cash to pay for some needed CapEx expenditures so they can keep mining.
So at today's prices (<1400) CGR is loosing money with every ounce they produce. Now this was confirmed by the CEO Neil McMillian in a CC on 13-Aug-2012. During the Q&A McMillian was asked at what price of gold he had to cut production. McMillian replied that under 1400 POG profits flattened out and CGR would have to increase the head grade going into the mill. In other words CGR's plan for tough times is to High Grade the mine! Well these are the "tough times" and so one should not be fooling themselves, while the CEO is off on a company paid vacation to the European Gold Forum, CGR is hunkered down into "survival mode" and is high grading their mine in order to stay alive.
So if this low POG environment continues, CGR will be faced with mining just the higher grade ore sections and leaving the lower grade ores for the future. This tends to lead to a downward spiral in the company as future profits are robbed to just stay alive. Then when (if) POG recovers, head grades will be lower than historical as CGR mines the lower grade material. So the question is, does CGR have enough higher grade material immediately available to weather this POG storm? While resource estimates show pockets of higher grade ore, CGR does not have the cash to develop declines or drifts to all of those higher grade sections. Clearly under current price environment CGR isn't generating much free cash and little Ops CF.
My cash flow model suggests that the market is using a POG of 1450/ounce with CGR in order to get the current sub 30-cents price. Perhaps more sophisticated models will prevail? A sustained low POG through 2Q and into 3Q and that note/warning CGR filed on a "going concern" is going to look quite prophetic.
Now with that analysis presented, how does one's favorite gold company shake out? One should know these answers BEFORE 1Q results start coming out at the end of the month. Will be interesting to learn what the BIG boys are doing with a POG at this level. They had already started cost reductions and project justifications, so what is next?
Good luck! |
