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Claude Resources Inc. (NYSE:USA) (NYSEMKT:CGR)

Q22012 Earnings Call

August 12, 2012 11:00 am ET

Executives

Marc Lepage - Manager of Investor Relations

Neil McMillan - President, Chief Executive Officer

Rick Johnson - Chief Financial Officer

Analysts

Sam Crittenden - RBC Capital Markets

Paolo Lostritto - National Bank Financial

Cosmos Chu - CIBC

Joseph Hopper - Private Investor

Raghu Gurram - Private Investor

Jean Hammond - Private Investor

Operator

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Claude Resources Inc. second quarter operating and financial results conference call. All line shave been placed on mute on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Marc Lepage, Manager of Investor Relations. Please go ahead, sir.

Marc Lepage

Thank you, Michelle. Good morning and thank you for joining us on our second quarter 2012 earnings call. We would like to welcome all analysts, current and prospective shareholders and the media. On the conference call today we have Neil McMillan, President and CEO; Rick Johnson, CFO and Vice President of Finance; and Brian Skanderbeg, Vice President of Exploration.

I would 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 the read our cautionary note located on page two in today's presentation which is located on the homepage of our website within the corporate presentation icon on the left hand side.

Also we have placed the 2012 second quarter MD&A and financials on our website in the investor stage under financial reporting. I would like to now turn the call over to Neil McMillan, President and CEO for comments and then we will go to questions.

Neil McMillan

Thanks very much, Marc and thanks everybody for taking the time to sit in on the call. I am looking forward to giving you an update on the second quarter, a bit of a forward looking outlook for the balance of the year and then answering questions.

If you have had a chance to go through the numbers for the second quarter, you would note that our production of 12,166 ounces of gold, we actually produced a bit more than that, but those ounces sold is up substantially over the first quarter. Slightly below our internal forecast, most of that grade related, some tonnage, but it did generate a net profit of $700,000 in the company.

Our cash costs while they did decrease are still higher than we are forecasting going forward and they are a result of a decreased grade in the second quarter production. I can tell you that over the balance of the year, we expect our cash operating cost to come down into the mid-900s, so that would imply that we expect to be under 900 for the second half of the year.

We also stepped out and staked an additional 30,000 acres adjacent to our Amisk Gold Project during the quarter. That’s a reflection of our confidence in the geological potential of that project and questions about that can be directed to Brian Skanderbeg, our VP of Exploration after I have done the call.

We continue to run three rigs at the Madsen Project. Two of them are operating underground from the 16th level and there are 24 levels in the mine. Those two rigs are pursuing down plunge extensions of the high grade number 8 zone and we have one surface rig that is doing a lone test folds to generate information about the down plunge continuity of the original ore body, the Austin and McVeigh. We only budgeted three holes there and that surface rig will be done here in the next week. We also plan to provide a press release update on our year-to-date progress at Madsen. We will do that in the third quarter as well.

Revenue was up in the quarter, obviously the higher gold price helped quite a bit. Again, cash costs have been frustratingly high. It's predominantly a function, probably 50/50 of the lower grade and then higher labor and consumable rates that we are all facing in the industry but again, notwithstanding, that 12,000 ounce number, we expect to see increase. We were profitable and did generate reasonable cash flow during the quarter.

Gold production, as I said, was just over 12,000. We sold 12,300 ounces. Net profit was modest but again it gives you an idea about what we can accomplish going forward as production increases.

On page six, if you are following on our chart, we have been getting questions about our balance sheet. At the end of the quarter, we were negative $1.6 million in cash. We did have a line of credit available. Short term debt increased substantially and long term debt went down substantially during the quarter and the reason for that is our $10 million, or $9.8 million debenture which matures in May of 2013 became a current liability because it is under one year to maturity. So it moved up the long term debt in to short term debt.

As well, in the short term debt, we have about $9 million worth of just under that equipment lease or equipment financing at the Seabee operation, where we used to lease that equipment. We have converted that to a fixed term debt and the fact that it's got gold provisions on it, means that we have to include it in short term liabilities as well, although we don’t have any expectation that that debt would be called.

I can tell you that clearly we are interested in strengthening the balance sheet over the balance of this year. We have no plans at this time to do an equity issue, nor do I believe we will do one. With the possible exception of very small flow through issue but that’s dependent on our share price. We expect to address this issue, the liquidity issue with the debt financing. We currently have non-firm term sheets in the office and at this point in time the debt window is open and we are in decent shape,

We are currently generating free cash in the company on a monthly basis and expect to do so through the second half of the year on a monthly basis. We expect to finish the year with some cash in the bank, although modest and unused line of credit of $5 million. We will wait until we have our life of mine plan updated by the end of the third quarter and we may very well access the debt market in the fourth quarter.

$10 million would be a target to roll over the debenture when it matures in May and we will know when we are done with the life of mine plan update, whether we require additional liquidity through the first quarter of 2013 which happens to be our winter re-supply time and usually has a heavy cash requirement but again, I reiterate, we are generating free cash in the company as we speak. Again, we have no intention at this point to go to the equity market.

Our 2012 production forecast is 48,000 to 50,000 ounces. That’s just modestly lower than our start of the year forecast. You all can do the math, we have produced over 21,000 ounces in the first quarter. We clearly expect to produce 27,000 or 28,000 ounces in the second quarter. We are already in the second half, we are already halfway through the third quarter and we have no reason to change that view.

We are producing, currently, from the Seabee mine and from Santoy 8. We are currently just over 800 tons a day. Development work is ongoing on the L62 deposit which is parallel to the Seabee ore body and it is currently delivering development feedstock to the mill and is expected to be in production in the fourth quarter.

I will talk about the impact of the shaft shutdown for tie-in in a minute. The exploration program for the company continues to be robust, focused particularly at Madsen and at Seabee and Santoy Gap at Seabee from surface and Santoy 8 L62 in the Seabee mine from underground and we will talk a bit about that as well.

We have a budget on page nine, for Seabee, for surface exploration of $5.9 million and 50,700 meters of surface exploration. We have scaled that back somewhat from an original budget to reduce our cash burn rate because of the lower gold prices but we will still expect to have a record budget for exploration in the company for 2012 and at Seabee.

Our current resource at Santoy Gap started at the year with 495,000 inferred ounces at 6.63 grams per ton using a 3 gram cut off. We didn’t take a look at it in the event gold prices continue to drop. We can raise our cutoff and our grading goes up to just under 9 grams. We don’t expect to have to do that but the reality is, we have significant flexibility in our mining operation to continue to generate cash flow even with major volatility in the gold prices.

We have already completed 65 drill holes from surface at Santoy Gap this year. The focus on that is number one to update and infill drilling to update our inferred resource the to measure to an indicative so that we can turn over a model to our mine planners and include the layout for that in our Life of Mine Plan. That is very much on schedule and they are working on the mine model for the Santoy Gap already.

We will do a press release in the third quarter to update the market on the results of those 65 holes. Some of them as well have been step-out holes. We do not yet know where the edges of this particular deposit are and the step-out holes are important to us.

At the moment, with no update to the resource model at Santoy Gap and we will get one of those later this year as well. We already have 777,000 ounces here and this will form a major part of our future production at Seabee.

Page 11 is a breakdown of where our reserves and resources are in the grade. I will let you go through that at your leisure.

I will talk a bit about the mill and our shaft extension and its impact on our production through the second half. Our mill keep is currently operating at a peak capacity of about 1,050 tons a day. We forecast about an 85% utilization in the mill. So we are capable of sustaining an average throughput of about 850 tons a day.

During the third quarter, while the shaft is shut down for tie-in, we will do a planned mill shutdown and it is scheduled. We will take one to two weeks to do continued upgrades. Even that and the shut down of the shaft during late September and early October, in our view, does not jeopardize the 27,000 or 28,000 ounces of production in third and fourth quarters.

We expect to be able to produce 400 to 500 tons a day of feedstock from the Santoy 8 project. We have over 4,000 tons of good grade stock filed on surface and between those two, we expect to be able to keep the mill running at a reasonable level except for the planned mill shutdown.

We will continue to mine underground at Seabee and L62 and stockpile our feedstock underground when the mill comes back online we believe we have 1,050 tons a day of capacity to run through the last 75 days of the year. So we don’t see a significant interruption to our production in the second half because of our milling capacity. The mill has not been above the neck for us.

The shaft shutdown was originally forecast for about six weeks. That has been shortened to four to five weeks. One of the reasons for that is, we have scheduled a five day re-roping for that during the shaft shutdown. That re-roping of the shaft occurred earlier in the year and is no longer in the shutdown schedule.

So I reiterate, we have some confidence that notwithstanding the shaft being shutdown for four to five weeks in the second half and the mill being down for one to two weeks for a planned shutdown, we are still comfortable that we can produce 27,000 or 28,000 ounces in the second half. Then again, we are already half way through the third quarter and don’t see any reason to change that forecast.

We have done some significant work on upgrading our camp. This camp has been in place, most of it since 1991 and it requires some upgrades. We have done some of that. That will be complete in the third quarter. We have deferred some capital projects at Seabee, nothing major for the time being, again, to ensure that we can continue to operate with free cash in the company.

We worked as well on the Amisk Project. We announced you that we were working on a preliminary economic assessment on the Amisk project to try and get a base case or where the project was. That work is ongoing. We are reviewing a number of options with respect to how that project is approached and when we have completed that we will give you an update on the PEA.

We also plan to provide an update on their reserves or the resources at Amisk and the drilling that we have done earlier in the year. We will do that hopefully in the third quarter as well. Again, we feel good enough about the project to have stepped down and added significant land package to the Amisk project.

Pages 14 and 15 are information you may have seen before and I will let you go through that at your leisure.

Page 16 deals with the Madsen Gold Project. 23,550 meters. As I said, 2 underground rigs and 1 surface rig, targeting about 30 holes and I have told you where we were focusing that drill work. We will give you an update on that in the third quarter.

Again, page 17 is a long section to show you where we are drilling. The project, I remind you, is fully permitted with a functional mill and a fully serviced shaft, (inaudible) to the 18th level out of the 24 levels and are permitted tailings pond.

On the exploration summary, we had started the year budgeting $15.5 million which is a record exploration budget for us by nearly 50%. We have scaled that back somewhat because of gold prices and currently forecasting about $12.5 million to be spent. Still substantially above our previous high exploration budget of $10.6 million.

Again, for 2012 and as a summary, I will give you a bit of a forward looking statement. We expect to have a very good second half from a production point of view. We are currently in the midst of finishing our updated life of mine plan at Seabee. It is extremely important to us because we have 1.3 million ounce in reserve and resources at Seabee, double what we had this time last year and we are scheduling that out through production.

So we are hoping to see substantial increase in production going forward. This plan will also put an envelope around capital costs associated with expanding the project and I am anxious to see what that is. Again, we are hoping it's completed by the end of the third quarter and will certainly form the basis for our budgeting process of through 2013. Our drilling at Seabee continues to be encouraging and we will have an updated reserve and a resource number out of Seabee before the end of the year.

Again, Madsen, it remains an important project for us. I know that our shareholders are frustrated that we haven’t been releasing spectacular holes on a regular basis, but people should not assume because of the lack of current drill results should not assume that the project isn’t going well.

It is a slow project. These are long drill holes. Very expensive drill holes. The information that we are gathering is very important to us.

That’s the summary of where we are at the moment and at this point I would be happy to open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joseph Hopper, private investor. Your line is open.

Neil McMillan

Go ahead, please. I haven’t received a question.

Operator

Okay. We will go to the next one. Sam Crittenden, RBC Capital Markets. Your line is open.

Sam Crittenden - RBC Capital Markets

Just a question on the cost of the $13.3 million in the quarter. Is that primarily up over Q1 because of labor as you mentioned and is that a good number for the back half of the year as a quarterly run rate? Then, if you could just comment on what you are seeing in terms of wage inflation at the moment at Seabee?

Neil McMillan

Thanks for the question, Sam. I think the biggest single issue would be labor and payroll but I do not believe the $13.3 million will be the run rate through the second half of year. We expect our full year operating cost to come in under $50 million and stay tuned on that front.

The labor cost have been a challenge for us for two reasons. I think in some respects we are a little behind the curve in terms of our wage levels. We have put real significant effort into making sure we are running at above middle of the pack with respect to compensation and we made some very significant adjustments to compensation in the second quarter.

I think, going forward, it is going to be fairly stable. We are finding the pressure to get the right people is being reduced and we have had great success in adding key people to our operation. I think the consumables and the labor thing will continue to be a challenge for us but in our case we don’t see that destroying our ability to generate free cash and to expand the operation.

Sam Crittenden - RBC Capital Markets

Then, just to clarify the grades on the second half. Are you able to provide guidance on that? Is that what gives you the most confidence in reaching your second half numbers? Is it that you are going to be in some higher grade areas?

Neil McMillan

No question, Sam. We have budgeted about flat 6 grams for the year for the project. We were below that in the first half. I think we have the potential to be comfortably above that in the second half. So that’s the first issue. Again, we are halfway through the third quarter and we feel really good about where we are at.

Secondly, it is our flexibility from a production point of view. Where some people have assumed that when the shaft tie-in happens that we have to stop mining and stop milling and that is not the case. We are in good shape out of Santoy to increase our daily production. That order is trucked across to the Seabee mill. So its production is not disrupted by the shaft shutdown.

Then, again, we have the extra capacity in the mill, nearly 200 tons a day. So that when the shaft starts up again, we would hope to be able to run through the balance of the year. On a daily basis, anyway, targeting 1,000 day or slightly over 1,000 tons a day.

We have gone through this backwards and forwards with our operating staff and they remain comfortable that that’s an achievable objective for us, the 27,000 or 28,000 ounces in the second half.

Sam Crittenden - RBC Capital Markets

Okay, and then going forward, 1,050 tons per day at an 85% utilization, is that a good number to think about for 2013?

Neil McMillan

At this point, we don’t have any additional information to provide you. The life of mine plan is going to give us a real good idea whether we have some potential during 2013 to see that increased. At this point in time, my view of the mill is, there is really nothing substantive that’s required to increase production. I am hoping our life of mine plan shows us how we are going through 1,500 tons a day in capacity and again, I am looking for potential barriers to getting there, don’t see anything significant.

Our mill is fairly modular. We currently have lots of leech capacity, lots of crushing capacity. We may ultimately be talking about a fourth (inaudible) mill and maybe pressure stripping at the back end of our current circuit to do it. So there is no obvious major issues. It’s a little preliminary today to say anything. I just think we are going to exit the year with a capability of producing 850 tons a day through that mill and that would be a good number to date for all of 2013.

Operator

The next question comes from Paolo Lostritto from National Bank Financial. Your line is open.

Paolo Lostritto - National Bank Financial

Can you give us a sense of where cash balance is now and what the grade profile has been so far during the quarter?

Neil McMillan

The cash is flat, Paolo, so it has improved from the end of June and I feel a little careful about the grade but again I think all I could say is we are forecasting 27,000 or 28,000 ounces in the second half. You could assume that there is a limit on the tons we can process and we are real comfortable at the moment with our forecast. So you would have to assume that 27,000 or 28,000 ounces, that the grade is higher than it was in the first half.

I think the important point here, Paolo, where it can be frustrating when we forecast 6 grams in the quarter and we come in at 5 grams. By the same token, when we forecast 6 grams, we can just as often hopefully come in at 7 grams or higher and that’s the nature of our ore body. It’s the nature of our history and one of the reasons we are comfortable with our forecast going forward is that we are clearly seeing that potential continue at Seabee.

Operator

The next question comes from Kevin Chu from CIBC. Your line is open.

Cosmos Chu - CIBC

Good morning, guys, it's actually Cosmos here. Neil, maybe conceptionally speaking, can we talk about how you look at free cash flow? Because based on my calculation, I think you mentioned earlier that you are free cash flow positive at this point in time but based on my calculation, if I take a look at profits minus CapEx, I have you generating negative free cash flow at this point in time. Maybe just a different definition but maybe can we chat about that quickly?

Neil McMillan

There is no question. We consume cash quite significantly in the first half of our capital projects. So at the moment, July is finished. We don’t have the financials completed yet but we have a pretty good of where we are at. Our definition of free cash flow here is revenue minus total expenditures and the total expenditures include everything. G&A, cash for operating cost, capital development, sustaining capital and exploration and depth service.

So our expectation through the balance of the year is that we will generate more than $7 million a month in revenue and write checks for less than $7 million out of the treasury. So this is genuinely free cash in the company. It is frustrating in some respects because some of our shareholders became quite concerned about our balance sheet after the first quarter and I understand that.

If you took our first quarter and multiplied it times four quarters, it was going to be difficult but our business doesn’t work like that. So at the moment, based on some of the capital expenditures we deferred including some of our exploration and the revenue we are generating we do expect to generate surplus cash in our bank account each month through the balance of the year.

Cosmos Chu - CIBC

Okay, and I guess, leading into CapEx, your CapEx budget for the year was or is still $48.4 million. How much of that has been spent and how much of that still needs to be spent in 2012?

Neil McMillan

The bulk of it has probably been incurred because $29 million of that was PP&ESCB shaft extension rolling socket et cetera and we brought in all of the materials for that over our winter resupply. The other $18 million was for capital development underground. That number is going to stay pretty consistent but our capital spend has gone down substantially since the end of the first quarter because of the one time expenditure on materials for capital projects.

I can tell you right now, we are reviewing already our long lead items for 2013 and our expectation is that our capital spend in 2013 will be substantially lower than it was in 2012. This has been a big build year for us. We upgraded our rolling stock for example in our underground equipment in a substantial way to enable us to expand our production.

So we are not being flippant. Internally here, we are more comfortable with our balance sheet and our financial situation than understandably some of our investors are. We do want to maintain or generate reasonable liquidity to deal with the volatility in our business and hence now we are looking at the debt market, hopefully, by the end of the fourth quarter.

We have significant capacity right now to deal with debt. Our debenture that we are currently servicing, the $10 million debenture has a 12% coupon on it. I would think in the market today, we can comfortably replace that at less cost. So we are pretty cautious guys. We tend to be fairly conservative and we don’t like to be in a position where bank account is flat and we have a limited line of credit but I can tell you we are going to address that and we are not overly concerned at this point in time.

Cosmos Chu - CIBC

Maybe on a financial flexibility, how much more can you draw on these demand loans, because as of June 2012 or Q2, you had about $6.5 million drawn on these demand loans. Is there any more room to draw on these? If not, is there any other room in any other line of credit that you can draw upon at this point in time?

Rick Johnson

Cosmos, this is Rick. That is something we are discussing with our bank right now. We have been talking to them for about 45 days and there is some possibility there.

Cosmos Chu - CIBC

Okay, but as it stands today, the $6.5 million, the total, you draw at this point? You have drawn on whatever is available to you at this point in time?

Rick Johnson

Right.

Neil McMillan

We have room left in our line of credit and as I say, we are generating free cash. I can tell you that one of the things I am watching because I have no interest in doing a major equity issue in the company. Management team has no stomach for that and the board, particularly, at these prices.

So we are watching the debt window carefully because that will release some of the potential stress that we could incur during our winter resupply in the first quarter of next year and we will wait till we see what the life of mine plan is. If we continue through 2013 on a quarter basis, producing 14,000 ounces of gold, for example, it takes a lot of the pressure off all of our requirements. But the debt window is important to us. We are in discussions with a number of parties about access that. At this point in time, there is substantially more money there that we could access than we see a need now.

So we will look at a combination of our existing bank, who is anxious, I think, to extend us some portion or all of what we might require and beyond that we will up to the debt market that you guys are more familiar with.

Cosmos Chu - CIBC

So, Neil, just to confirm, so you mention that there is line of credit available. That’s pending negotiations, right?

Neil McMillan

That’s correct. We have non-binding term-sheets on the desk right now. So, as I say, they are non-binding.

Rick Johnson

But we do have $5 million line of credit that we can access now.

Cosmos Chu - CIBC

Okay, and then that’s totally undrawn upon at this point of time?

Rick Johnson

(Inaudible) that reflects the fact that we are dipping into that line of credit.

Cosmos Chu - CIBC

So $1.625 million.

Neil McMillan

But I think, total, we have 2,000 ounces of gold we haven’t sold yet, too. Its okay, I mean we will see the July numbers. We expect to be better than breakeven. We are generating, in our view, free cash and we expect that to continue through the balance of 2012.

Personally, we have been through some $400 gold and we have had an awful lot of tighter credit situations than we are in right now. Let's say we don’t want to be flippant about it but we definitely would like to provide additional liquidity to the balance sheet.

At this point, we don’t intend to do that with equity and we do see the window open to that between now and the end of the year.

Operator

Your next comes from Joseph Hopper, a private investor. Your line is open,

Joseph Hopper - Private Investor

I would like to know about Amisk. Do you have any idea what the cash cost of producing gold from Amisk is?

Neil McMillan

Thanks for the question. It's preliminary to put a number on it. I can tell you a very high level scoping look at it gives us an idea about the nature of a pit deposit that grades 0.9 grams per ton and has 1.6 million ounces in it, which is where we stand at the moment.

We would expect the cash operating cost there to run north of $600 an ounce and my expectation is in all likelihood by the time we get there, they will run at the average international cash operating cost which today would be $750 an ounce.

It’s a different beast than we are used to at Seabee which is an underground operation and we get significant volatility in our cash operating cost quarter-to-quarter. These things tend to be more homogenous and at this point, it has the potential ultimately to be an economic and robust producer of gold but we are a long way from that today.

The preliminary economic assessment is not designed to be final. It is designed to give you a little better look at what the potential is for the project and typically where you might go to make improvements to the economics, whether it's on process or expanding your ore body.

So just to tell I am going to tell you that I expect in the long run, if it goes into production it will be because the cash operating cost will be about the average of the international number.

Joseph Hopper - Private Investor

And you also have some zinc and copper and all of that. Are you drilling for that right now?

Neil McMillan

No we are not drilling on Amisk as we speak. We did a lot of work on the profile of the pit shell and we did drill a couple of holes outside of the pit shell that we will release here in the next quarter. But again, the surface expressions of what we have seen here, geophysics and others have given us some enthusiasm for the potential of this to be a standard VMS or volcanic mass of sulphide project that happens to host what may ultimately be an economic ore body.

This is west of Flin Flon, Manitoba by 12 miles and west of Flin Flon, Manitoba and area is a huge base metal producer. We are inside that large geological envelope.

Joseph Hopper - Private Investor

Okay, and Santoy 8, you are expanding that?

Neil McMillan

Santoy 8 is currently in commercial production. We are running an underground rig to in-fill drill and hopefully expand the size of that ore body. Santoy Gap is the new discovery that was made in April last year and it is already at 500,000 ounces of resource. The two of them are close together. There is only about 450 meters at the moment that separates them.

Our hope is, we will access them from the same underground workings at least initially and frankly we are driving an exploration drift as we speak from Santoy 8 to Santoy Gap. The tow of them, at the moment, hold 777,000 ounces combined and it is our intention to update that number by the end of the year.

Operator

Your next question comes from Raghu Gurram, a private investor. Your line is open.

Raghu Gurram - Private Investor

A quick question, this year, your spending required amounts on exploration. I want to know why you have not released any results so far? What is holding you and why, you are almost there, two third is over and I think why are you holding? What is making you to wait? Can you explain that? Then I have a follow-up.

Neil McMillan

I can tell you, Raghu, we are hesitant to release 65 holes out of Santoy Gap because nobody has been paying attention and that’s the candid comment about it. We were certainly in a position at the end of June to do that press release. We had a lot of holes and we continued to drill. Our view was people were going on holidays.

We didn’t think people were going to pay much attention to it. So we decided to give it an extra six weeks or eight weeks until we got people coming back to the office and reedy to go. So we plan to do that in the third quarter. It is absolutely nothing to do with the quality of the results that we have.

Madsen is a more challenging situation because the drilling is much slower and takes us, we do all of our assaying out of Accurassay in Vancouver. It takes us three to six weeks to turnaround drill holes. So we have fewer drill holes and fewer assays in hand.

We don’t like to release one or two or three drill holes at a time and again particularly not in the early summer months when we are not certain anybody is paying attention. So it's no more complicated than that, Raghu.

Raghu Gurram - Private Investor

Yes, I appreciate and you are very experienced, certainly knowing executive, so you know what you are doing but the market, as I said, the last time we had a good conversation, though not rewarding your efforts, you need to get more aggressive. Again, I am sorry, again I am bringing the same issue. You have results and not releasing and you are start going down because you have liquidity issue.

So the market perception, you are not addressing. We have gold, last 10 year bull market and you are stock last 10 year you can see yourself. This, your shareholders, are suffering and you need to get aggressive and I am pleading you to do something and this is not right for you, for the company and for anybody.

So I thank you again.

Neil McMillan

Well, I can tell you we will continue to be disciplined in the work we do and how we provide information to the market. We will be doing significant updates press release on the Santoy drill results. We expect to do that before the end of September and we will provide the market with an update on our Madsen drill, again, in the third quarter, Amisk as well in the third quarter.

I am anxious to see our life of mine plan when it's completed, I don’t think we will able to talk about that probably until the fourth quarter. I think of all the things that we can show people going forward, that’s the most important one.

So we are well aware of where we are at with respect to our shareholders. We can't control the market sentiment. We are fairly disciplined in what we do. I can tell you the analyst forecast for 2012 are 47,750 ounces as a general average number and there are six analysts in it.

$967 in cash costs. Cash flow of $0.15 and earnings per share of $0.07. We don’t argue with any of that. Price to net asset value and cash flow on earnings per share, the numbers are historically low but misery loves company that’s the same most of our peer group are suffering.

So we wish we could impact the share price in short order and take some of the pressure off. We can't do that. The good news is we don’t intend to do major equity issue in this environment and we do believe there is lots of reason for the vale that we build in the company to increase going forward and over time we expect that to be reflected in the share price.

Next question.

Operator

Your next question comes from Jean Hammond, private investor. Your line is open.

Jean Hammond - Private Investor

I had a question. You have been stating that you are cash flow positive and I am just wondering if guys have calculated at what price of gold does that cash flow positive turn into cash flow negative?

Neil McMillan

Rick, our Chief Financial Officer, may have a number for you but let me tell you, in general, the amount of flexibility that we have on expenditures and in our production, gives us some comfort that we can tolerate fairly dramatic changes in the price of gold certainly quarter-to-quarter.

This company has over 20 years of positive operating cash flow consistently and because of that flexibility. So, Rick, at our current spend rate, I assume, we are $1,400 gold price would flatten us right out? Maybe $1,500? Rick is pounding his calculator right here.

Rick Johnson

$1,400 exactly.

Neil McMillan

Right. So the point I made and it is heresy but we do think about it. The numbers I quoted to you about Santoy Gap, for example, we currently have that on the books at 6.68 grams per ton cut rate with three gram bottom cut. If we decided that, and there is 457,000 ounces there at that rate of 4.95. If we decided that we could continue to mine there, but we wouldn’t mine anything that’s graded under 5 grams.

Our head rate goes to over 8.5 grams per ton and we still have 357,000 ounces in front of us. You know why I have to do that? To high grade the project in order to stay in business but we have demonstrated in the past that regardless of the price of gold, we have the flexibility to continue to generate positive cash flow.

I don’t think we are in any less of a position to do that going forward and it gives me, I having been here for 17 years, some comfort. I am not aware of any point in time since I have been with this company where I was more comfortable with our flexibility in our operation.

Jean Hammond - Private Investor

Can you comment on what level of, do you have contingency plan if we get into a period where the price of gold declines from here.

Neil McMillan

Of course we do. I can tell you in principle, like the management and we reiterated this to our board the other day, is committed to not spending more money than we generate going forward and it's that simple. Then again, we have the capacity to deal with that.

Already this year, the gold price came down comfortably below what we had budgeted in November of 2011 and we have dealt with that by reducing our exploration expenditures by $3 million and by deferring some non-critical capital projects at the Seabee mine.

We are prepared to move to make sure that our balance sheet does not become a significant risk to our shareholders.

Jean Hammond - Private Investor

Thank you. Can you comment on what the exploration guys saw at Amisk and so why they are adding a whole bunch of land over there?

Neil McMillan

At this point, that wouldn’t be appropriate. We are waiting until we do our press release quarter on Amisk. I can just tell you or reiterate. We have been taking a good look at the project. We recognized the significant geological for the area around the Amisk project itself.

We are doing surface work there now on our hands and knees. So looking to develop additional drill targets in and around the existing pits and outside of that. So it's big country for VMS deposits and we are encouraged that that potential certainly exists on our property.

Operator

Your next question comes from (inaudible). Your line is open.

Unidentified Analyst

My question is in regard to your steady stay production and cash cost. I understand you guys are going through the process to trying to bring down cash cost by mill expansion. Could you elaborate on that? I guess your strategy in bringing these cash costs down because as the gentleman asked earlier, you guys are running or walking a pretty fine line between being in the red and profitable. So if you could elaborate I would appreciate it.

Neil McMillan

Okay, if we produce 27,000 or 28,000 in the second half, it generates free cash in the company. I don’t think many of our peer group are likely going to be able to say that at the end of 2012 that went two consecutive quarters doing that. So I am fairly comfortable with the steady state at the current gold prices that we can continue to operate indefinitely.

Secondly, when we talk about accessing the debt market, part of that we won't know for a while will be related to expanding to continue doing expand our operation. We will wait and see what our forecast is for 2013 production, but I can say over the long term, we expect our production to continue to increase steadily at Seabee without a commensurate increase in capital expenditures.

It’s a great value in the Seabee asset. We have 1.13 million ounces there today. If we never find another ounce and we will find lots more there, we have a fully permitted milling facility that we can expand for limited capital expenditures and the same on the mining operations.

I think that probably cost you if you started up an operational like Seabee from scratch, it would probably cost you about $4,000 as capital for every ounce of annual production. I believe Seabee can be expanded for a fraction of that number because of the existing infrastructure.

If we were going to a steady state production for example, 13,000 to 14,000 ounces a quarter, we will be dependent, principally, on an increase in gold price to improve our margins. We can get better underground at Seabee.

Our Vice President of Mining, Peter Longo has done a wonderful job already of starting to rationalize our operating costs. We have contracted as international consulting group to come in and show us where we can get better at our operations. That project is underway. We think that could make a significant difference,. We can always get better at what we do. But I can tell you the abscess that we have in the Seabee camp and the potential expansion of that project should cause people to be enthusiastic about the value build that we can deliver in this company.

We expect that it will quarter-after-quarter of hitting our numbers for people to develop that confidence. We understand that. We are highly committed to doing that and not to risk our shareholders assets or balance sheet in the interim.

Unidentified Analyst

Now you could explain that this Seabee asset is far superior than that of your others. Has it been brought into consideration to liquidate another one of your assets in order to focus primarily on that asset and expand the resource and increase production with a high grade ore?

Neil McMillan

If I understand your question correctly, we have three assets in the company principle assets and each of them hosing over a million ounces in each of them for that reason with the potential to produce them over 100,000. So the question becomes, and it’s a good questions, are you interested or prepared to sell one of those assets to support the asset?

That question tends to be under review on a regular basis in the company. It's related to our corporate strategy. We are doing strategic planning early mid-third quarter in the company and that’s one of the issues we will talk about.

So we are open to any suggestions from our board of directors or our consultants about how we maximize the value development in the company and at this point, we don’t haven’t taken anything off the table.

Operator

Your final question come today will come from (inaudible) from RBC. Your line is open.

Unidentified Analyst

You made reference to the relevance. In fact you stressed the relevance as the life of mine study and can you just remind me again when that will be completed and how it conceivably changed the market's perception of the company and also how we go about exploiting Seabee.

I just don’t think I quite understand why it is that relevant?

Neil McMillan

Okay, there are two parts, I think, to that issue. The first is, we have 1.3 million ounces in reserves and resources at Seabee. We currently produce at 48,000 or 50,000 ounces. So we have got 25 years of ore in front of us if we don’t change anything. We believe because all of those ounces are close to existing infrastructure that we have great capacity to produce about faster than 50,000 ounces a year on a very profitable basis and that life of mine plan is designed to tell us that.

It will give us, we do level plans in each of our ore bodies and we have four. We have the original Seabee, we have the related L62, we have Santoy 8 and we have Santoy Gap, and we will approach the development of each of these ore bodies as individual mines running through a central milling facility.

We have the potential theoretically to double our production in my view. For the 50,000 ounces, hopefully through 100,000. We won’t know exactly how we can roll that out until our mine people have planned it out and they will be planning out all of our reserves and all of our measured and indicated ounces and some of that inferred in the plan they are going through now.

Then, again, they will have level plans through that detail and will have detail capital required to execute that. I think you will see and we don’t know yet a substantial increase in the forecast production out of the Seabee over the next five years. That’s my expectation.

The second part of the challenge is, how do we provide the market with some confidence that we can accomplish that. Clearly, if we are able to double our production, at Seabee off of our existing and slightly expanded infrastructure, the potential increase in cash flow and net earnings is really substantial.

So the plan will be in place on how to do that. We will use sensitivities on gold price et cetera but my view is it is likely to be a fairly robust build plan.

The next thing, we have to do is convince our shareholders and prospective shareholders that we can actually accomplish that and we think that’s a challenge for us at this point. It will require us to produce 27,000 or 28,000 in the next two quarters as the cost we say we are going to do and continue that through 2013.

As that price of those deliverables are achieved, then I expect to see the market continue to give us more and more value for our future production capacity at Seabee.

Unidentified Analyst

So Neil, when is that report likely to hit your desk.

Neil McMillan

It is likely to hit my desk in the last week of September. It will then be reviewed internally by the management team and then it goes to the board for full review and we will likely be in a position to talk probably about it in the fourth quarter.

As you might guess, it’s a fairly important document for anybody that maybe interested in providing us with fixed term debt. So we are anxious to have it available and to share with our bankers and prospective bankers.

Operator

I have no further question. Thank you. I will turn the call back over to management for closing remarks.

Neil McMillan

Thank you very much everybody for taking the time and your questions. As you know, we are available on a regular basis off line. So if you have additional questions, feel free to give us a call. I very much appreciate your being here. Looking forward, really looking forward to our third quarter conference call. Thanks again.

Operator

This concludes today's conference call. You many now disconnect.

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