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Claude Resources Inc. (NYSEMKT:CGR)

Q4 2013 Earnings Conference Call

April 01, 2014 01:30 PM ET

Executives

Marc Lepage – Manager, IR

Mike Sylvestre - Interim President and CEO

Rick Johnson - CFO

Brian Skanderbeg - SVP and COO

Peter Longo – VP, Mining Operations

Analysts

Sam Crittenden - RBC Capital Markets

Operator

Good afternoon my name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Claude Resources Full Year 2013 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). I will now turn the call over to Mr. Marc Lepage, Manager of Investor Relations. You may begin your conference.

Marc Lepage

Thank you, Mike. I’d like to thank all of you for joining us on our full year 2013 earnings call. We would like to welcome all analysts, current and prospective shareholders and the media.

On the conference call today we have Mike Sylvestre, Interim President and CEO; Rick Johnson, CFO; Brian Skanderbeg our Senior Vice President and Chief Operating Officer and Peter Longo, Vice President of Mining Operations.

I’d like to announce that during today’s call the company may use forward-looking statements. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. For further information regarding forward-looking statements you are welcome to read our cautionary note located on page two in today’s presentation.

Please note that today’s presentation is located on the homepage of our website within the Corporate Presentation icon on the left hand side. Also we welcome you to visit our website to view our 2013 annual MD&A and audited financial statements and note there too in the Investors page under Financial Reporting.

I’d like to now turn the call over to Mike Sylvestre, Interim President and CEO.

Mike Sylvestre

Thank you, Marc. Thank you everybody for taking the time to sit on today’s call, where we will be reviewing our 2013 highlights and also talk about the [indiscernible] the company going forward and answer any questions you may have. Before we begin reviewing and discussing the 2013 results, I would like to take the time to introduce myself, Interim President and CEO. I have over 35 years mining experience mostly with the former INCO Limited at which I held several senior positions. I have a Master of Science and a Bachelor of Science in Mining Engineering from McGill and Queen’s respectively.

Over the last three years I’ve been working with Claude Board of Directors and have been fully engaged in our business. I look forward to working with the management team and the employees; I’m moving forward at Seabee and building shareholder value. Lastly, I would like to acknowledge Neil McMillan for his tireless commitment and leadership for over 18 years. I wish him all the best for his retirement. I would now like to turn the call over to Brian, Senior VP and Chief Operating Officer, and Rick Johnson, CFO to discuss the 2013 results. Brian.

Brian Skanderbeg

Thanks Mike. For those of you that are following the presentation I’ll be starting with page four with the 2013 highlights. 2013 we had a successful year of meeting many operational objectives and executing our cash flow optimization plans and that we’re able to meet the majority of our expectations and significantly decrease our operating expenditures. Our operation’s team did an excellent job in the areas of safety and environment, exceeding our targets and returning results that are among the best in the company’s history. While we are very pleased with our ability to decrease cost and our safety and environmental performance, we are not satisfied with our gold production in 2013.

And although we set many operating records, these efforts were overshadowed by lower than budgeted grades and an unexpected significant decrease in the gold price during 2013. In the first quarter, we were able to complete the shaft [inaudible] at Seabee and we’re able to accomplish it with better efficiency than we’ve scheduled. The Seabee shaft has had a positive impact on our operations. So far the project has reduced labor costs, diesel consumption, ventilation requirements and equipment utilization. It’s also been a significant contributor in the forecast decrease in our 2014 expenditures at Seabee.

2013, Santoy Gap continued to prove that it has the potential to materially impact our production profile and margins. The Gap currently represents a large portion of the Seabee gold operation reserves with 266,000 ounces approximately [60%] [ph] of our reserves at 5.68 grams per ton. In late 2013, we completed step-out drilling on, at the Santoy Gap and the Santoy 8 ore bodies and these results support our belief that there’s much opportunity to expand the current reserves and resources at Santoy Mine Complex.

At the Seabee gold operation we had record mill throughout in 2013 and we produced 43,850 ounces; ounces produced was below our budget and it’s largely related to lower than planned grades at the Seabee mine.

Our total cash cost in 2013 are $983 Canadian, a small decrease over 2012 and in line with our forecast. With the return to mining at grades closer to reserve we expect unit costs to improve significantly moving forward. Again our cash flow optimization plan was well executed and we achieved a 20% decrease in overall expenditures. We expect these trends and decreased expenditures to continue in 2014. 2013, we also made the decision to sell our Madsen Gold Project to Laurentian Goldfields. This transaction closed last month and included an initial cash payment of $6.25 million, $5 million which was used to decrease our debt load. It also included a 10% ownership stake in Laurentian and a final payment six months out at $2.5 million in Laurentian stock or cash. We are confident in Laurentian’s ability to move the asset forward. To further strengthen our balance sheet on March 20th, we raised an additional $12 million by partnering with Orion Mine Finance for a 3% NSR on the Seabee Gold Operation.

Those are our operational highlights for 2013 and I’ll now turn the call over to Rick Johnson, CFO, to discuss the financials.

Rick Johnson

Thanks, Brian. I will go Slide a 5 with discussion of the financial results. The Company recorded a net loss of $73.4 million, or $0.42 per share after impairment charges of $63.8 million. These are partially offset by a small deferred income tax recovery. Our adjusted net loss which adjusts for certain noncash items was $11 million or $0.06 per share. Cash flow from operations was $13.8 million or $0.08 per share and was down from $25.8 million or $0.15 per share reported in 2012. Again, lower grade and gold prices realized mentioned previously were the main driver in the decrease year-over-year.

Gold revenue in 2013 decreased by 21% to $63.8 million from $80.8 million reported in 2012. This decrease in gold revenue year-over-year was attributable to a 14% decline in Canadian dollar gold prices realized and 8% lower gold sales volume largely a result of the 13% decrease in grade. Our mine operating costs were $44.1 million, a 9% decrease year-over-year. Total cash cost per ounce for 2013 as Brian had mentioned previously decreased the little over 1% to $983 per ounce from 2012 numbers and it was consistent with our guidance.

If you go to Slide 6 and I can discuss a little bit on the impairment factor that was a large contributor to our big loss in our financials. Due to the significant drop in gold price in 2013 and revised assumptions relating to future production from the Seabee Gold Ops and the sale of the Madsen Gold Project, the Company had total impairment charges of $63.8 million in 2013. The impairment charges were mainly related to the Madsen Gold Project and were $41.6 million or $0.24 per share. The remaining impairment charge of $22.2 million or $0.13 per share was related to the Seabee Gold Operation and was due largely to revise assumptions relating to the future gold price that was used.

Now, I would like to the turn call back to Brian and he can discuss a little more detailed operations.

Brian Skanderbeg

Thank, Rick. Moving onto Slide 8 of the 2013 operating results and the detail thereof. First, I would like to acknowledge that the Seabee Gold Operation mined and processed record tonnes. In addition development rates also increased by 25% over 2012 despite a 10% reduction in the Company’s workforce. In addition to several operational records during 2013, I’m proud to acknowledge that our mine-site employees also achieved record production on both safety and on environmental performance.

As you see in Slide 8, during 2013, the Company achieved record mill throughput at 5.11 grams per tonne gold for total production of 43,850 ounces of gold. This decrease was attributed to a 13% decrease in grade year-over-year and the key drivers of that decrease or increased reliance on Santoy 8 ore body stope sequencing and the shaft [inaudible] at Seabee. Moving forward, we expect mined grades to more closely reflect reserve grades and with improved mine scheduling and access to higher grade portion of the L62 and the Santoy Mine Complex. Recovery rates at Seabee continue to remain excellent and consistent.

Moving onto Slide 9 on reserves and resources. At Seabee Gold Operation, year-over-year, Proven and Probable Mineral Reserves decreased 24% to 423,000 ounces; Measured and Indicated Resources increased 128% to 175,000 ounces and Inferred Mineral Resources decreased by 3% to 583,000 ounces. These year-over-year changes were driven by a decrease in gold price resulted in an increased cut-off grade being applied to our deposits, they are the result of reduced drilling meterage and a focus of our drilling meterage on better grade definition. Mining depletion for the year also contributed to the drop in reserves as did higher dilution assumptions, which is impacting the grade.

The most significant change in the Mineral Reserves and Mineral Resources is the Santoy Gap deposit. The Gap deposit is of growing importance due to its proximity to mine infrastructure, low development cost and near-term production potential. Furthermore, based on its high-grade nature and size, the Santoy Gap deposit demonstrates the potential that exists to grow production and margins at the Santoy Gap Gold Operation. A copy of the detailed mineral reserves and mineral resources table can be viewed at the company’s website www.clauderesources.com.

Moving on to slide 10, really it’s about Santoy Gap and the future opportunity for Claude. To elaborate on the potential at Santoy Gap I’d like to draw your attention to the details of this slide. As you can see we’ve made significant progress in developing and definition drilling at the deposit. We are currently in the process of developing a ventilation raise and furthering the development ramp toward the production scenario by the end of year. We expect to see initial development ore in Q2 and initial production ore in Q4 of this year.

Santoy Gap is unique in [our account] [ph] in that it contains approximately 2,000 ounces per vertical meter or typically been mining about 1,000 ounce per vertical meter at Seabee and Santoy 8. The impact of this analysis is that we’re able to achieve more ounces with less capital development and at lower costs. This not only has the opportunity to increase our production but to also drive improvements in our margins.

In addition, our exploration results demonstrate that this system has the potential to be much larger than it is today. During the first quarter, two out of three drill holes returned significant assays of 330 grams per ton over 1.55 meters and 18.8 grams over 14 meters. These holes are located outside of our current resource base and were conceptual step out holes and they demonstrate that the system continues [inaudible] long strike of these ore bodies. We expect the Santoy Gap deposit will play a significant role at the Seabee operation for years to come.

Moving on to slide 11, which is our exploration summary, one of the large changes we made year-over-year as part of our cash flow optimization plan was to significantly reduce exploration expenditures in 2013 and that continues in 2014. Exploration will be solely focused at the Seabee Gold Operation on near mine low cost per ounce target proximal to infrastructure. Drilling at the Seabee Gold Operation is anticipated to consist of 18,000 meters at the Seabee Mine and 34,000 meters at the Santoy Mine, this is underground drilling. There will be no surface drilling completed at the camp this year. No expenditures are planned for the Amisk Gold Project for 2014.

Now I’d like to pass the call on to Mike for some closing remarks.

Mike Sylvestre

Thanks Brian. During 2014, the company will continue to focus on the profitability of the Seabee Gold Operation through a combination of improved grade control, cost controls and productivity improvements; also developing the production profiles of the higher grade ore bodies, L62 and Santoy Gap. In addition, at the Seabee Mine the company is evaluating changing mining methods for long hole mining to Alimak mining and has observed encouraging results to-date. For 2014, our forecast gold production at the Seabee operation is estimated to range from 47,000 ounces to 51,000 ounces of gold. Unit cost for 2014 are expected to be comparable to 2013’s cash cost of $983 per ounce.

Capital expenditures at the Seabee Gold Operation for 2014 are expected to be 39% less [than 2013] [ph] expenditures - capital expenditures through continued investment and upgrades that are forecast to total approximately [$22 million] [ph]. Expenditures will focus on the Santoy Gap area and support the company’s Life of Mine Plan to generate future returns for the Company and the Santoy Gap deposit represents one of the Company’s best opportunities to build shareholder value.

Go to slide 13, our strategy going forward, in 2014 our focus will be on three main strategies; cash flow optimization, operating execution and strengthening of the balance sheet. We clearly need to improve our meeting our production budget at Seabee that will be our principal focus. We have strengthened the balance sheet by divesting Madsen, partnering with Orion with the sale of NSR and we will continue to decrease our debt load throughout the year. Our cash flow optimization plan certainly plays a significant role in that area of our business as well.

Our strategy on operating performance will be sharply focused on grade control, productivity improvements and bringing the Santoy Gap into production as soon as we can. We already have several initiatives underway including the utilization of the new mining method or the Alimak mining method on the L62 deposits which is demonstrating positive results and we are well underway on driving ventilation raise at the Santoy Gap, which will allow production. In addition, we will continue to develop and conduct definition drilling at the Santoy Gap that is required to [indiscernible].

We’re very optimistic in our ability to deliver shareholder value in 2014 as production growth [inaudible] improved margins [inaudible]. With that in mind, we will not lose sight of the importance to be financially disciplined. We have a strong technical team to move these strategies forward and look forward to working at building a stronger company. With that I will stop we would entertain any questions that you might have. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Richard Tilley [Ph], Private Investor. Your line is open.

Unidentified Participant

Thank you gentlemen, when Laurentian purchased, I wonder if it was announced that they were going to purchase the Madsen project. I thought Claude Resources would get 20% of their common stock outstanding. At that time of sale it ended up being 10%. Can you tell me what went wrong?

Rick Johnson

That was by agreement that the original 19.9% that we were to receive was counted 7.5 million on the agreement, after that - of that dilution. And then when they went on to raise more we wouldn’t participate in that. That was by agreement.

Operator

Your next question is from Sam Crittenden with RBC Capital Markets, your line is open.

Sam Crittenden - RBC Capital Markets

You mentioned the grade was below plan in 2013, just looking to get a bit more detail on that. You mentioned it was because of mine sequencing but where you were also seeing higher dilution. I am just curious how the block model was reconciling to the plan?

Brian Skanderbeg

I will take that question. Sam, it’s Brian here. I think it varied through the year. During Q1, we had the impact of our shaft tie-in which decreased our ability to access Seabee [D4] [ph] which is obviously our higher grade section and via that we drew more on Santoy 8. That was one of the drivers on. Stope sequencing is a driver too. And when we look at that it is the detail of the block model or the reserves that are meeting here Sam; essentially we mine the low grade bottom portion of the L62 ore body. Overall the L62 is a 9 gram ore body whereas during 2013 we mined about 4.5 to 5 grams which is the lower portion of it. So that’s what I mean when I say stope sequencing. And it is certainly in terms of the dilution assumptions and the reconciliation data we have revised upwards some of our dilution assumptions particularly at Seabee, that it is reflective of data that we saw during 2013. Those results have been incorporated into our year-end MRMR. That answered your question Sam?

Sam Crittenden - RBC Capital Markets

Yes. Thanks. So I guess, looking forward to this year, you factored in a slightly higher dilution but it sounds like you’ve got better access to the higher grade material, is that the plan?

Brian Skanderbeg

Yes, that’s a fair statement. When we look at the grade schedule from the L62, it is much more in the core of the ore body and the revised plan that we have guided for between 47 and 51 reflects mining grades more of – much closer and/or above our current reserves grade. So it [is access] [ph] the higher grade blocks.

Sam Crittenden - RBC Capital Markets

And then, just on the balance sheet. I know you have taken a number of steps here to strengthen the balance sheet over the last couple of weeks. Are you still looking at options, maybe you could discuss what those options might be. Or it is in the near term you are okay with the situation and try to just optimize cost and work through it?

Rick Johnson

It’s Rick. I mean, I think we are – in the near-term we are okay. But we are going to be looking at different alternatives to strengthen further. And of course our 2014 forecast reflects definitely optimization of our expenditures. We are going to be looking and it’s something that our strategic partner or Deloitte that we’ve directed them to investigate.

Operator

Your next question is from Timothy Stebosis [Ph], private investor, your line is open.

Unidentified Participant

I am not a gold miner by background. Maybe you can help out a little bit with, what is the execution risk involved in changing the mining methods, if any?

Mike Sylvestre

Peter, do you want to answer that one?

Peter Longo

The changing of our mining methods from long hole method to an Alimak is mostly on just dealing with the uncertainty in terms of our dilution that we pick up with our larger stope openings underground as well as manpower requirements. It’s a different skill set on the Alimak side so we’ve gone out to a contractor Dumas Ltd and they are doing most of our work underground for us, and they are specialized in Alimak work.

On the technical side, in terms of higher dilution level, we have gone out and gotten some engineering assessments. We have altered our ground support design and significantly increased our ground support. So that we expect similar if not less dilution levels than we were seeing historically with long hole mining. Overall results to date are very good. We are seeing reduced dilution levels compared to long hole and the specialized skill set the contractors has is working out very well.

Unidentified Participant

Can you tell us about the hedging program? We had a run up in gold to almost $1400 US, I think nearly a few weeks ago. Can you give any guidance on what we did, if anything on hedging?

Rick Johnson

What we try to do is maximize one quarter’s worth of production or a little better than that [inaudible] that takes the top on our hedge program. And we have been - since gold was at 1350, 1360 we started to put on small positions and just try to margin up. Right now, for example, I know that I have a - I think we have a 1519 Canadian on the books but on average right now we have got 15,000 ounces out at forwards, all forwards, vanilla forwards at 1428 Canadian.

Unidentified Participant

15,000 ounces at 1428 Canadian?

Rick Johnson

Yes.

Unidentified Participant

Okay. I am a rather large shareholder of the company, you guys have done a - it’s unfortunate that the grade or yields or whatever were down because you really did a very good job and I do want to congratulate you for that, for cost containment and/or throughputs. And looking forward we’ve resolved a lot of our liquidity issues with the moves that have happened in the last couple of months and it seems to me we have got increased quality of near-term ore that will be going through, Claude seems to have a good story. Firstly I love the Santoy Gap story, seems like an exciting story, The Street is not appreciating that, what can we do about that?

Brian Skanderbeg

I think we asked that question to ourselves Tim and the best thing we can do is deliver on results. So, when we look at the sentiment our there towards Claude it reflects a non-delivery on operational results, on ounces produced and in cost and that’s our reality. I think when we look at where we are right now in terms of the grade we have ahead of us, the opportunity on stope sequencing and the ability to impact our margins quite significantly by mining higher grades that will deliver on results and that will translate through into more credibility in The Street. The second thing that I think is quite significant that we have already accomplished is by monetizing the Madsen assets and pursuing the royalty on Seabee to address the liquidity concerns. So when we look at that sentiment out there I think addressing the balance sheet was one of our major concerns and we have done some good work on that. And we will probably look to do further work on it but it’s delivering on results and I think those are the two key pushes that would get us more credibility in the market.

Unidentified Participant

That sounds good. Now Santoy Gap is 2000 ounces per vertical meter versus 1000 ounces for our other draw areas or whatever you call them. Again I am not a miner, what level of assurance do we have because we kind of were bitten in 2013 with the low grade and we did anticipate that it would be that low I guess, what’s the level of assurance mathematically or how do you think calculated that as we go into a better area of the LG-2 this year and then as we get into the Santoy Gap that we will get those yields or those grades that we are looking for to really get cash flow up so that we can actually maybe pay down debt, assuming gold is stable to up?

Brian Skanderbeg

Yes, I think the best thing we can do and we are already pursuing that is confidence comes with infill drilling and it’s really all about more data gives you more confidence. We have tightened up our drill spacing for instance in the L62 to give us more confidence in grade prediction and an understanding of that. And also on Gap, it is what we are doing in Q4 of 2013 and we continue to push through in Q1 and Q2 of 2014 is the infill drilling by taking a drill spacing from 35 meters which is what we had at the end of 2013 for Santoy Gap down to approximately 20 meters that gives us much more confidence in it. We have already completed that at the L62 and we will move and continue to do that out at Santoy Gap. So, really it comes down to infill drilling gives us more confidence. We have amended our drill spacing as part of the review of 2013 and that will go a long way to giving us more predictable grades.

Unidentified Participant

Does that cost higher, is that increased cost to do that or…?

Brian Skanderbeg

It’s in our operating cost, so the 55,000 meters that we drill per year at $16 a meter which is our drilling cost, costs about less than a $1 million on the operating cost to give us a lot more confidence in our production grades. So, it’s built into our current and forecast cost.

Unidentified Participant

Okay. I will get back queue, I might have a few other questions but I will step back. Thank you.

Operator

There are no further questions at this time; I will turn the call back over to the presenters.

Marc Lepage

Thanks Mike. Tim, feel free, we will try to organize the call later on today and if you have any more questions we are happy to answer them. I would like to just pass the call onto Mike for just a small closing remark.

Mike Sylvestre

Okay, well thanks a lot for attending the call guys and as we said in our presentation we look forward to a positive 2014, that was a good question, what can we do to help ourselves here have people appreciate us out there on the market. Number one is meeting the production targets, getting the grades, lowering costs, price of gold obviously will help as well. So let’s hope, let’s stay upbeat that we’ll see an up market on gold. Other than that it’s our knowledge to the grindstone and deliver on what we say we will. So thanks a lot for joining and talk to you later.

Operator

This concludes today’s conference call. You may now disconnect.

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