Macro Tsimmis

intelligently hedged investment

Golden Star Resources (GSS) update #7

Posted by intelledgement on Wed, 24 Oct 07

Golden Star Resources (GSS) shares took a hit today, down 8% on the day to close at $3.53 on the unexpected news that the company is selling US$125MM of convertible senior unsecured debentures. Each $1000 debenture bears 4% interest and is convertible into 200 shares of GSS common. In effect, GSS shares are being diluted by close to 11%, so on the face of it, the drop in the price of the stock makes sense. We are a tad disappointed to see management going back to the dilution well here after stating that they did not need more cash, but on balance, this deal is not that bad for existing shareholders, and we think the drop in the price of the stock is overdone here.

First of all, none of these new shares are going to be flooding the market anytime soon, as the conversion price is US$5. The debentures mature in 2012, by which time $5/share for GSS should be a bargain, but right now, the holders will be content to sit back and collect the 4% interest. In effect, the company just scored a low-interest loan.

Second of all, half the money is being used to retire “existing $50 million aggregate principal amount 6.85% senior convertible notes due April 15, 2009,” which will save the company nearly $2MM in interest charges, which drops right to the bottom line. For a company with $5MM in TTM EBITA, that ain’t hay.

Third of all, while management had previously stated that cash on hand was sufficient to fund operations and scheduled exploration activities until the rampup of BIOX® plant operations and other capital projects result in increased production—and concomitantly improved revenue and profits numbers—through the next twelve months, it doesnt’t hurt to have some flexibility to cope with setbacks or take advantage of opportunities.

In a separate press release, the company also announced disappointing preliminary 3Q07 numbers—a loss of $13.4MM as compared to a loss of $2.3MM in 2Q07. The main culprit was continued delays in bringing the new Bogoso sulfide processing plant up to speed. As of 1 Jul 07, the plant is considered to be in commercial production—and thus, operating and interest costs, which were capitalized in previous quarters, were expensed and depreciation also ensued. The lower production figures therefore resulted in higher overall cash operating costs per ounce. In addition, management decided to discontinue exploration of the Pampana property in Sierra Leone and return it to the joint venture partner, resulting in a writeoff of the $1.9MM spent evaluating the property.

Thus, our redemption here is delayed for at least another quarter. Never-the-less we remain confident that these teething problems will pass and that the company will report increased production and lower costs-per-ounce for 4Q07, that there will be a significant increase in reserves estimates (currently 4.89MM ounces) for year-end 2007, and that production in 2008 will top 400,000 ounces of gold. We consider GSS a bargain here and might buy more ourselves if the portfolio were not already overweighted with the stock.


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