Here's Why I Bought This Junior Gold Miner

To say that I'm enamored with the gold sector of late might be a gross understatement. A mixture of near-record gold prices and increasing mining efficiency has created an almost perfect storm of value among gold producers.

The pickings in the sector are vast, so choosing which company I was potentially going to invest in next was difficult to say the least.

Barrick Gold (NYSE: ABX  ) has been catching my attention as the second-largest gold producer in the world, and with its dividend tied to the yellow metal, it allows shareholders to essentially play along without having to own physical gold.

Gold Fields (NYSE: GFI  ) is also looking particularly cheap at just seven times forward earnings. The reason I was considering purchasing this company was its additional deposits of copper, a metal that will continue to benefit from growth in the BRIC countries. But then I realized I already have this wonderful stock named Thompson Creek Metals (NYSE: TC  ) that is a core holding in my portfolio that's sitting on 2.1 billion pounds of copper and 6 million ounces of gold at its Mt. Milligan property.

So what stock did I finally decide on? Get ready for this...

Claude Resources (AMEX: CGR  ) .

Yes... puny old Claude Resources, which currently has only one gold-producing mine, the Seabee mine. But don't let Claude's size fool you -- there's more to this junior miner than meets the eye, as Foolish precious metals junkie Christopher Barker has touched on before.

Within the past week Claude Resources increased its inferred mineral reserve estimates by a whopping 236%. You heard me correctly: a 236% increase that implies 873,400 ounces of gold over its year-end 2010 figures based on drilling estimates.

The biggest boost to Claude's inferred estimates came from the Santoy Gap, which is projected to yield 495,000 ounces of gold at an almost identical grade (6.6 grams/tonne) to that of the current Seabee mine. Santoy 8 also provided a nice boost with inferred resources more than doubling to 149,000 ounces from 66,200 ounces.

Stay with me now, because here comes the fun part. Adding together the proven and probable reserves of Seabee and Santoy 8 at 355,600 ounces, the measured and indicated reserves of 70,700 ounces, and the recently boosted inferred reserves of 873,400 yields about 1.3 million ounces of gold. That's about $2.16 billion worth of gold at today's prices currently sitting in the ground.

The kicker is that Claude Resources isn't valued anywhere near this $2 billion mark. In fact, it's not even valued at the $200 million mark. With an enterprise value of $166.4 million, Claude is just barely trading above its book value despite being profitable and forecasting a 13% rise in gold output over 2011. It's as if investors are completely ignoring the long-term prospects of its Seabee operations and focusing on the lowered production forecast for 2012.

As for me, I'm certainly not. I see an unbelievable value in Claude Resources and I may just add even more to my recently initiated position when the Fool's disclosure policy allows me to. What I do plan to do now is to make a CAPScall of outperform on Claude Resources.

Give it to me straight, fellow Fools -- am I a genius or a certified wacko? Tell me in the comments section below and consider joining me in making a call on Claude Resources on CAPS.

I've made my choice in Claude Resources, but our highly trained team of Fools sees another small gold stock that could add riches to your portfolio. See what company is making their eyes glitter for free!

Fool contributor Sean Williams owns shares of Claude Resources and Thompson Creek Metals, but has no material interest in any other companies mentioned in this article. He loves digging up a good value in the mining sector. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's more valuable than all of the precious metals.


Read/Post Comments (10) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 21, 2012, at 12:36 PM, TheDumbMoney wrote:

    I can definitely see the logic. On the other hand, it is easy to fool oneself by thinking about earnings in the mining sector, when really one is betting on the future movement in the price of gold. If gold goes higher in the next year, or even it remains within a couple hundred of where it's at, this bet should pay off well.

  • Report this Comment On March 21, 2012, at 4:03 PM, donncanzano wrote:

    the home run potential with claude resources is their madsen property, which this article does not address. goldcorp, whose power base was built by a nearby mine, bought out another company, gold eagle, in 2008 for about $1.4 billion.gold prices were under $900/oz. at the time. so if madsen, which is very close geographicaly, can produce similar drill results, cgr could be a 10 bagger from here not counting the sizeable value of the seabee and surrounding deposits.

    donn

  • Report this Comment On March 21, 2012, at 8:04 PM, TMFUltraLong wrote:

    Donn,

    The Madsen property is actually something that the Fools Christopher Barker touched on. The reason I didn't even bother going there is that I wanted to focus on the data that Claude was providing and not add any "hope clauses" into the mix. Madsen definitely could and should be a great addition for Claude, but I think 1.3 million proven, indicated and inferred ounces is enough to sway me regardless of how the Madsen drilling results turn out.

    TMFUltraLong (Sean)

  • Report this Comment On March 21, 2012, at 9:59 PM, BobRhomas39 wrote:

    I think you mentioned 6 million pounds of gold for Thompson Creek Metals in your comments above. I can not remember ever hearing of a mine having even 1 million pounds of gold. Gold is usually listed in ounces.

  • Report this Comment On March 21, 2012, at 11:54 PM, egenesis wrote:

    How about production costs? Dont production costs figure when considering gold miners? If it is prohibitively expensive to extract, it doesnt matter how much there is. Also wrt inferred and probable, there is a reason why these terms are used. For example recently Nevsun announced what they thought was in the ground wasnt really there.

  • Report this Comment On March 22, 2012, at 12:43 AM, TMFUltraLong wrote:

    BobRhomas39,

    See what happens when your fingers and your brain don't listen to each other? Yes... 6 million OUNCES at Mt. Milligan.

    If they had 6 million pounds I'd be doing a happy dance in the streets right now.

    TMFUltraLong

  • Report this Comment On March 22, 2012, at 1:17 AM, TMFUltraLong wrote:

    egenesis,

    Production costs for Claude has risen right along with the price of gold. If you check out page 5 of their third-quarter report that I'll link below you'll see that their margin actually increased thanks to the rising price of gold.

    As for inferred resources... you bet there's always a possibility that something like what happened at Nevsun "could" happen, but it's always sort of rare in the mining sector given all the precautions and drill tests that are run before mines are built. As of now, there are about 426,000 proven, probable, and indicated ounces in the ground and that alone will sustain Claude and keep it profitable for the next 7-8 years by my "guestimate." If the Santoy Gap has as much gold as estimates suggest, then the Madsen property might just be the gravy on the mashed potatoes.

    TMFUltraLong

  • Report this Comment On March 22, 2012, at 6:58 AM, OHGtop10 wrote:

    Here is the best and the worst part of the story. When CGR released news that their inferred resources increased by 236 percent their stock price only went up two cents. That is when I bought more. I figured if it was valued at 1.08 before then 1.10 with that news was a steal. On the other hand, I have often thought the best definition of a bottom in a stock is when they release very bad news and the stock price does not go down. If the opposite is true there may be some pressure facing CGRs stock price atleast in the short term. I look at Madison as the icing on CGRs cake. I think I read somewhere that they may have some drill results for Madison in the later half of the year. Does anyone know for sure? I also own BRD PPP and KBX because they all look undervalued as long as gold can atleast stay above 1500.

  • Report this Comment On January 23, 2013, at 5:11 AM, kajarga wrote:

    You posed the question. The answer would appear to be a wacko. I don't care how much potential any share has. You can make a list as long as your arm, but if it is trading below its 20MA you can forget it until it has bottomed and rises above.

    If ever there was an apt illustration of not trying to catch a falling knife, your recommendation was it. Your right to be considered a financial analyst must be severely questioned on this article alone. How many readers followed your advice I wonder?

    You must have bought at somewhere above 160.

    A 60% loss in less than 12 months

    Readers may not be aware of my 20MA rule? Here's some advice from me for your readers.

    Go through the 1yr Charts of any 12 large Mining Companies, and enter the 20MA on say the Yahoo Interactive Chart.

    If you superimpose say 4 stocks at a time on the GDX Chart, [Compare]you will observe that they mostly Bottom and Top within a week or so of each other.

    Obviously you BUY below a flat Bottom 20 MA and reverse above a flat Top. On average you will find 3 or 4 Trades a year per Share, so no frantic Chart watching. Assuming you reinvest the gains each time, your compounded results should average in excess of 50% and with SLW for instance it is over 100%.

    Eat your heart out Buffet!!

    Maybe future Foolish Advice will become unnecessary?

    Would someone write a Foolish article and prove me wrong or endorse my research?

  • Report this Comment On January 23, 2013, at 5:17 AM, kajarga wrote:

    Correction.to my CGR Comment. At around 110 not 160, so a loss of about 54%.Apologies.

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