Dundee update and resuming coverage
| Claude Resources Inc. (CRJ-T: C$1.43) (CGR-A: US$1.45) INTRADAY |
| BUY, High Risk* 12-month target price: C$2.60 (was Restricted) | February 7, 2012 |
| Paul Burchell / (416) 350-3499 pburchell@dundeesecurities.com Vanessa Gravina / (416) 350-3389 vgravina@dundeesecurities.com |
| Reiterating our BUY rating Claude Resources completed the acquisition of St. Eugene Mining on February 2. As Dundee Capital Markets acted as an advisor to Claude on the transaction, we were restricted from commenting on either company during the process. Now that the transaction has been concluded, we thought it timely to review our opinion of Claude's properties, including the now 100%-owned Amisk property in northern Saskatchewan. Claude's main asset is the Seabee Mine located in the province of Saskatchewan. Seabee produced slightly more than 47,000 oz of gold in 2010, a level we expect to be repeated when the company reports its 2011 production results. Given recent exploration success on the property, Claude is looking to expand the operation from an average throughput of around 650 tonnes of ore per day (tpd) to upwards of 1,250 tpd or more - the mill has already been upgraded to 1,000 tpd. The increased throughput is forecast to drive production to around 80,000 oz per year by 2015. The Amisk property, also located in Saskatchewan, hosts a large tonnage, low-grade gold and silver deposit. The most recent estimate suggests the deposit contains 827,000 oz of gold and almost six million oz of silver in indicated resources, plus an additional 589,000 oz of gold and 3.7 million oz of silver in inferred resources. We expect the upcoming (third quarter) preliminary economic assessment on Amisk to review the viability of developing an open pit operation capable of producing upwards of 120,000 oz of gold and 750,000 oz of silver per year beginning as early as mid to late 2017. Last but not least, Claude continues to explore and develop resources on its Madsen Red Lake property located in northwestern Ontario. As we have noted before, we believe the Madsen property exhibits geological characteristics that are similar to the high-grade structures at Goldcorp's (G-T, BUY, C$60.00 target, last C$47.27) Red Lake Mine and the company continues to drill test the promising 8 Zone. We have revised our operating and cost forecasts for the Seabee Mine and, with the completion of the St. Eugene transaction, are now including the Amisk property as an operating asset in our valuation of Claude. Our new net asset valuation estimate of C$2.57/share is based largely on our forecast of future cash flows discounted at 5%, plus expected cash at the end of 2012 and resources not included in our mine plans (primarily Madsen). We expect upcoming exploration and development news (including the potential to increase production from less than 50,000 oz per year to 200,000 oz by 2018) to drive the share price higher, and we are resuming coverage on Claude Resources with a BUY rating and a 12-month price target of C$2.60/share. |
Plenty of catalysts ahead for Seabee Production from the Seabee property is split between the long-running Seabee Gold Mine and the new, lower cost Santoy 8 Mine (Figure 1). We expect Claude to report the production of approximately 47,000 of gold, including 13,000 oz in the fourth quarter, when the company announces its 2011 operational results in the next month or so. Total cash costs are expected to average slightly more than US$800/oz for the year and US$715/oz for the fourth quarter. Claude has not yet published its official 2012 outlook; that said we are expecting production of approximately 50,000 oz of gold at total cash costs of US$760/oz. The company anticipates adding production from a third area, the L62 discovery, in the second half of 2012. As of December 31, 2010, the Seabee Mine property was estimated to host proven and probable reserves of slightly less than two million tonnes grading 5.6 g/t (350,000 oz of gold). All of the company's reserves were hosted in either the Seabee deposit (54% of contained oz) or the Santoy 8 deposit. Measured and indicated resources, including reserves, were estimated at the same time to contain 2.2 million tonnes grading 5.6 g/t (400,000 oz of gold), with additional inferred resources of 1.3 million tonnes grading 6.2 g/t (260,000 oz of gold). Claude is planning to report a resource update from Seabee in the first quarter of 2012 (likely March) - we expect the update to demonstrate both increased reserves and resources that reflect, in part, the over 100,000m of drilling conducted in 2011 on the L62 and Santoy Gap target areas. In particular, the L62 Zone is now estimated to have a strike length of up to 85m and has been traced down dip for 400m, and the mineralization remains open in all directions (Figure 2). Claude has indicated that it intends to drill upwards of 70,000m from surface and 60,000m from underground at Seabee in 2012, with a focus on the L62, Santoy Gap, Santoy 8 and Seabee deposits. Given the recent exploration success at Seabee, the company is reviewing the viability of significantly increasing the size of the operation. Our discussions with management suggested that mill throughput is likely to be expanded from the current average of 650 tpd to 1,250 tpd or more. Production is likely to increase from less than 50,000 oz per year to almost 80,000 oz by 2015. While we expect the expansion will likely drive operating costs lower, the benefits are expected to be largely offset by slightly lower grades, resulting in total cash costs similar to recent levels (Figure 3).
Amisk recap and looking ahead Claude Resources completed the acquisition of St. Eugene Mining on February 2. Each shareholder of St. Eugene received 0.0789 of a Claude share, plus 0.25 common shares of Satori Resources Inc., for a total of approximately 9.6 million shares of Claude, or a value of around C$15 million. Additionally, Claude assumed the outstanding warrants of St. Eugene. Satori Resources will hold the Tartan Lake Mine Project plus C$800,000 cash. Claude's existing net smelter return (NSR) royalty on Tartan Lake will be reduced from a sliding scale from 0%-6%, to 2% and the NSR royalty can be purchased by Satori for two million dollars, or one million dollars per percentage point. The Amisk deposit is hosted within a rhyolite flow-dome complex and overlying pyroclastic tuffs of the Amisk Volcanic Assemblage. The deposit has many high grade vein systems which are flanked by wide intervals of low grade disseminated and stringer mineralization within a broad sericite alteration envelope. Last February, Claude released an initial resource estimate for Amisk. The estimate suggested that Amisk hosted indicated resources containing 30.2 million tonnes grading 0.85 g/t gold and 6.2 g/t silver (827,000 oz of gold and 6.0 million oz of silver), plus inferred resources containing 28.7 million tonnes grading 0.64 g/t gold and 4.0 g/t silver (589,000 oz of gold and 3.7 million oz of silver). As often happens with initial estimates, much of the deposit remains un-estimated (drill spacing was too coarse in places), and we expect additional drilling to infill both indicated and inferred material resulting in greater tonnage and a potentially lower strip ratio (Figure 4). The project is envisioned as a large, low-grade open pit operation, with initial production as early as mid to late 2017. We expect permitting could take several years as portions of the deposit are located under a lake. The company expects to release a preliminary economic assessment (PEA) in Q3; in the meantime, our valuation is based on a C$275 million to C$325 million open pit mine and 15,000 tpd mill capable of annual production averaging about 120,000 oz of gold and 750,000 oz of silver for ten years at total cash costs of around US$700/oz.
Madsen continues to intrigue While arguably at an earlier stage of development in some respects, we find the Madsen property to be particularly intriguing. The area hosting the past producing mine (historic production of approximately 2.4 million oz) can be considered to be roughly analogous to the setting that hosts Goldcorp's prolific Red Lake Mine - a series of folded, intercalated mafic and ultramafic flows that are overprinted by carbonate (ankerite) alteration towards the centre of the belt and potassic (biotite) alteration nearer the margins. Mineralization within the Austin Tuff zone at Madsen shares characteristics with the ESC zone at Red Lake, in that both are hosted by sheared, buff-altered, pyritic pillowed flows that carried similar (around 10 g/t) gold grades. The 8 zone at Madsen appears to be anchored at or near the contact between folded mafic and ultramafic volcanics, an environment that is remarkably similar to the Campbell high-grade zones that have been exploited at the Red Lake Mine. The high grade zones at Red Lake can be discrete - strike length can be less than 50m with widths of less than two metres; however, the deposits are often rod-like with considerable (greater than 250m) down dip potential. Previous drilling on the 8 Zone have returned numerous high-grade intersections including 25.8 g/t over 7.9m and 127.1 g/t over 0.7m (uncut assays over core widths) (Table 1). Claude has approved a 29,000m exploration programme at Madsen for 2012, focusing on the 8 Zone, McVeigh Tuff and Austin Tuff targets (Figure 5)
Disclosures & Disclaimers
This report is issued and approved for distribution in Canada by Dundee Securities Ltd., a member of the Canadian Investor Protection Fund, the Investment Industry Regulatory Organization of Canada and an investment fund manager registered with the securities commissions across Canada. Dundee Securities Ltd. is a wholly-owned subsidiary of Dundee Capital Markets Inc. Dundee Corporation is a significant shareholder of Dundee Capital Markets Inc. Research Analyst Certification: Each Research Analyst involved in the preparation of this Research Report hereby certifies that: (1) the views and recommendations expressed herein accurately reflect his/her personal views about any and all of the securities or issuers that are the subject matter of this Research Report; and (2) his/her compensation is not and will not be directly or indirectly related to the specific recommendations or views expressed by the Research Analyst in this Research Report. The Research Analyst involved in the preparation of this Research Report does not have authority whatsoever (actual, implied or apparent) to act on behalf of any issuer mentioned in this Research Report.
| Company Description Claude Resources is a Canadian-based gold producer that operates the Seabee Mine in northern Saskatchewan. The company expects to produce between 54,000 oz and 58,000 oz of gold in 2011. Claude is also active with exploration programs at Seabee and at its Madsen and Amisk projects. |