Macro Tsimmis

intelligently hedged investment

Golden Star Resources (GSS) update

Posted by intelledgement on Wed, 08 Aug 07

Golden Star Resources (GSS) released their 2Q07 results yesterday, and they included something for everyone. Production numbers were weak—as expected given the BIOX® plant delays—and costs were high—as expected given the power supply issues—but neither were as bad as some had feared and management sees improvement through the rest of the year and into 2008.

And speaking of management and improvement, two days ago the company announced that long-time CEO Peter Bradford has resigned both from the company and board of directors effective at the end of 2007. While there has been improvement of late, Bradford presided over several years of missed estimates and poor investor relations and his departure could speed up the process of improved credibilty for GSS management.

But back to the second quarter. The company produced 42,295 ounces of gold at an average cost of $572/ounce which they sold for $665/ounce, a profit margin too narrow to avoid a loss of $2.3MM. Although production actually declined from 1Q07 (45,825 ounces), GSS have confirmed their projections of 270M-to-300M ounces of total production for the year, based on the BIOX® plant now finally being operational. And that is not the end of the potential good news: in addition to the 100 megawatt coop power station now expected to come online in August—GSS’s allotment of the output of this four-company project is 20 megawatts—the company has concluded a deal with an independent power producer to provide 10-to-20 additional megawatts. And proving that it never rains but it pours, early indications are that the drought may be lifting as so far this year, precipitation in Ghana has been near normal…although the government has not yet lifted power rationing. But taken together, these factors enable management to project full-year per ounce production costs of $480 or less, which at the production rates they envisage, will virtually assure black ink for 2007.

But wait, there’s more. The company continues to move forward on the $50MM development project for their Hwini-Butre and Benso (HBB) properties. Work is expected to commence this quarter, once permitting is completed. Construction of a 52-kilometer haul road between Benso and Wassa will commence late this quarter with completion estimated by mid-2008. Pre-stripping and ore mining at Benso is expected to commence 2Q08 with the first ore hauled to Wassa for processing in 3Q08. Mining at Hwini-Butre is expected to commence mid-2009 once a 30-kilometer haul road extension is completed. This project is expected to materially increase production in 2008 and 2009. We can also anticipate a significant increase in the company’s 4.1MM ounces of gold reserves when the numbers are updated early next year.

And finally, management project that with cash on hand and with positive cash being generated over the last six months of the year from both operating mines, there is no need for additional financing to cover everything currently on the drawing board (including active exploration in Ghana, Niger, Sierra Leone, and Suriname).

So the price of the stock, which had dipped as low as $3.20 yesterday in anticipation of really bad results continues to look very attractive here around $3.50 (about seventy cents cheaper than we bought it last month).

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