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Wood Gundy had a 'strong buy 'in feb 1998
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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%
Download a PDF copy of this News Release
Wood Gundy: Junior Gold Producers - Who Will Survive?
Metals and Minerals - February 9, 1998
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