Veteran miner, Claude Resources, takes aggressive approach to growing business
Claude Resources’ flagship Seabee gold mine is located about 400km northeast of Saskatoon and since it started commercial production in December 1991, the mine has produced more than 1 million ounces of gold.
Its Santoy mine, also located in northeastern Saskatchewan just 14km farther east of Seabee, has also been producing gold for the company since January 2011 and from the two mines, Claude Resources has been a continuously productive contributor to the local economy.
But in 2013, the company ran into headwinds as weaker grades and higher costs pushed its balance sheet into negative territory, analysts Joseph Fazzini and Kent Neale of Dundee Capital Markets recently reported.
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,” said Fazzini and Neale.
At the same time, said Fazzini and Neale, 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, Ontario.
“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.”
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 per cent year-on-year to 62,984 ounces of gold. Annual mill head grade last year also increased 43 per cent year-on-year to 7.32 grams gold per tonne.
Claude also decided early in the year to sell a three per cent 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 six per cent 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 a recent interview, President and CEO Brian Skanderbeg described 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,” said Skanderbeg. “The two orebodies that now form 95 per cent 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 was referring to the 120,000 ounces of gold L62 deposit found 200 metres from its Seabee mine, and the 600,000 ounces the 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 said. “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 Resources 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 of gold per tonne for the year, he says, while reserves were 6.4 grams of 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 said. “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 per cent last year; a performance better than many of its peers.
This year, Claude plans to produce between 60,000 and 65,000 ounces of 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,” said Skanderbeg, “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 said. “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,” says Fazzini and Neale, “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 of gold per tonne for 299,000 contained ounces of gold. Measured and indicated resources stand at 0.65 million tonnes grading 5.98 grams of gold per tonne for 125,200 contained ounces of gold, and inferred resources add 3.3 million tonnes grading 7.96 grams of gold per tonne for 847,300 ounces.
In addition to Seabee, 125km northeast of the town of La Ronge in Saskatchewan, and 150km northwest of Flin Flon, Man., Claude Resources owns the Amisk gold project in northeastern Saskatchewan. The company 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 said.
“The next step is to look at growth opportunities. Our focus is free cash flow, and the ability for the company to generate free cash flow gives us those opportunities.” CMJ
*Trish Saywell is a Senior Writer with The Northern Miner, a sister publication to Canadian Mining Journal.