Can Claude Resources Catch Up with Its Peers?

Gold stocks have been the darlings of the investing world, and for good reason: favorable macroeconomic circumstances have conspired to lift the Philadelphia Gold/Silver Index [XAU] 30% higher in the past year and 300% higher in the past six. Gold stocks, it's fair to say, are in the midst of a secular bull run.

But not every gold issue has a run with the bulls. One notable laggard is Claude Resources Inc. (AMEX: CGR), a Saskatchewan-based gold producer. Claude earns a living from its primary revenue-generating asset, the 100%-owned Seabee gold mine in northern Saskatchewan. The company also owns the Madsen Project, a development gold mine in Red Lake, Ontario, along with lesser oil and natural gas assets in Alberta.

Claude's stock and trade is gold production, and in this milieu it has disappointed. In 2005, the company expanded mill capacity at the Seabee mine to double production to 75,000 to 100,000 ounces per year. To date, the Seabee mine has fallen far short of expectations: gold production for all of 2007 totaled just 44,322 ounces.

Lackluster financial performance has further exasperated investors. For the nine months ended Sept. 30, 2007, Claude posted revenue of $25.6 million compared to $31.9 million in the year-ago period. The 20% revenue drop produced a $5.2 million loss, which was distributed to shareholders at $0.06 share, compared to a $6.8 million profit, or EPS of $0.09, in 2006. For all of 2007, revenue is expected to post at $31.7 million, resulting in a full-year loss of $0.09 per share.

The revenue shortfall is the result of a prolonged poor showing at the Seabee mine, where revenue dropped 24% to $18.9 million at Sept. 20, 2007 from $25 million in 2006. The decrease was a result of lower gold sales volume (26,000 ounces in 2007; 36,700 ounces in 2006) offset by a 7% improvement in dollar gold prices realized ($657 in 2007; $600 in 2006). Management attributed lower volume to equipment availability and lower-grade ore.

More recent numbers, though, suggest Claude is beginning to extract itself from its self-imposed pit. In September, the company updated its proven and probable gold reserves at the Seabee mine. Updated mineral reserves now total 984,200 tons and should produce 211,100 gold ounces, a 42% and 44% increase, respectively.

In December, Claude recorded 12,165 produced ounces of gold from the Seabee mine and an adjacent property called the Santoy 7 project. By comparison, over the previous five-year period, Claude averaged 11,200 pounces per quarter. Also noteworthy is the fact that 61% of 2007's production occurred during the third and fourth quarters, which suggests an accelerating and positive production trend.

Meanwhile, prospects are looking encouraging at the Madsen Project. In November, Claude completed a non-brokered private placement, offering 3.8 million shares for $7 million in gross proceeds. Net proceeds from the offering will be used for expanding the Madsen Property, which, according to management, “will enable Claude Resources to execute its strategy of focusing on the expansion of the existing 500,000 ounce resource at the Madsen Project.”

While Claude gets its micro-house in order, continuing favorable macro-events offer additional encouragement. The subprime credit crush coupled with corresponding Federal Reserve interest rates cuts could easily fuel higher gold prices. Recent prognostications have gold reaching $935 per ounce this quarter, pushing to $975 per ounce by summer. Claude notes in its latest 10-Q that a $10 movement in gold price per ounce adds or subtracts $400,000 in net earnings. (By this equation, a move to $975 would improve net earnings by $1.4 million.)

Another macro-positive is greater investor participation. Today, investors have the option of buying shares of any of the dozens of publicly traded mining companies, or buying one of many gold-oriented exchange-traded funds (ETFs). Easier access enables more investors to diversify their portfolios with gold stocks — a good thing; gold stocks have historically been negatively correlated with other assets classes. What's more, a larger investor population makes for a more informed, efficient and orderly market.

These positive trends make Claude an intriguing, though admittedly speculative, investment. While larger-cap gold producers — Barrick Gold Corporation (NYSE: ABX), Newmont Mining Corporation (NYSE: NEM) and Goldcorp Inc. (NYSE: GG) — appear generously valued when placed in historical perspective, Claude appears undervalued, and not only to these behemoths. Claude's price-to-book ratio of 1.46 and price-to-sales ratio of 4.14 are 56% and 32% discounts, respectively, to its small-cap gold-producing peers.

Claude has no sell-side coverage to speak of, but estimates gleaned by Thomson/First Call are for revenue of $50.4 million in 2008, based on increased production at the Seabee mine and new production at the Madsen Project, resulting in a penny-per-share loss. First Call's 12-month price target is $1.88 per share — a 70% appreciation from current levels.

Of course, any appreciation is predicated on management finally proving it can turn potential into profits. If it can do that, Claude (CGR) investors could also find themselves running with the bulls.

Disclosure: none

Comments

[easy jay:]

Claude haqs a lot of promise and it may be that this is finally its year. The Madsen Project was at one time a major league producer and the potential is still there. Claude is spending a lot of money on exploration and it has all the infasturcture required at Madsen Red Lake. This could be a big winner but only for the patient.

2008 Mar 04 08:38 AM

[LightnRod:]

LONG SHOT....

2008 Mar 12 09:09 PM