Macro Tsimmis

intelligently hedged investment

BUY Golden Star Resources (GSS)—Ghanian gold

Posted by intelledgement on Thu, 19 Jul 07

Golden Star Resources (GSS) is another Transmeridian…that is, a company that has had to overcome myriad problems to access and develop what appear to be world-class natural resource properties. Instead of oil in Kazakhstan, however, this time we are talking gold in Ghana…lots of gold. Indeed, the rich Ashanti Gold Belt has attracted several mining companies (AngloGold Ashanti (AU), GoldFields (GV), and Newmont Mining (NEM) all operate in Ghana). But actually getting the gold out of the ground and to the market has been a challenge.

Admittedly, some of Golden Star’s woes have been self-inflicted. In 2003, GSS stock had a great run from $2 in January to $8+ in December. But then management announced the first in what would become a long string of production delays associated with the company’s new Wassa mine…and then in the spring of 2004, seeking to capitalize on their inflated stock, GSS management launched a poorly planned hostile takeover bid for IAMGold (IAG), which fizzled.

Amidst a plague of logistical problems, some of which were not under management’s control—such as a pernicious drought that led to rationing of hydropower-generated electricity in Ghana—and some that were, or should have been, management then proceeded to miss production targets and cost targets quarter after quarter, for the better part of three years. The stock sank back into the doldrums, as low as $2.10 in 2005 and hovering around $3 in 2006.

Strategically, the major problems the company has to deal with are [a] while plentiful, the quality of the ore they mine is low and requires relatively expensive processing to retrieve the gold and [b] getting things done in Ghana is a challenge. Progress has been fitful, but there has been progress. As gold yields using the standard cyanidation process were low with GSS ores, in 2005, the company began construction of a bio-oxidation (BIOX®) plant at Bogoso to pre-process their ore. The gold in this ore is encapsulated in sulphide minerals such as pyrite, arsenopyrite and pyrrhotite, thus preventing the standard cyanide leaching process from accessing it. The BIOX® process destroys the sulphide minerals and exposes the gold for subsequent cyanidation, thereby increasing the overall gold recovery that can be achieved. (Don’t be trying all this at home in your kitchen sink.) The contractor, Gold Fields, have commissioned nine previous BIOX® plants worldwide, the largest of which is already in Ghana, run by AU. The plan was to start production in mid-2006, but—typically—there have been delays. However, last week the company announced that the sulfide processing plant at Bogoso had finally begun commercial production at the end of the second quarter. By the end of the year, production should be up and costs down.

Furthermore, the company has taken another strategic step to improve their logistical situation in Ghana. In conjunction with the other mining companies operating in the country, they are building their own power plant which should come online sometime this quarter. The company has been running expensive diesel generators to maintain operations during government power rationing, so this will help cut production costs.

If GSS can cut per-ounce production costs from the current $500+ to close to $400, and if they can up production from last year’s 200M ounces to (in 2008) well north of 400M, we will be looking at a highly profitable operation, with considerable upside with respect to their reported 4.1MM ounces of reserves. We believe it is extremely likely that these eventualities will come to pass, and that The Street is undervaluing GSS here at $4+/share.

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