Macro Tsimmis

intelligently hedged investment

Golden Star Resources (GSS) update #5

Posted by intelledgement on Thu, 17 Jan 08

Our profit-challenged gold miner, Golden Star Resources (GSS), today reported record production of gold in their 4Q07 and at a slightly cheaper—but still high—cost per ounce. A company-record 88,015 ounces of gold were sold in the quarter at a per-ounce cash operating cost basis of $582/ounce. While probably still too high to enable the company to operate in the black, the cost is down 15% from the astronomical $687/ounce it cost to produce gold in 3Q07…although it is up 50% from the $387/ounce the company paid last year (4Q06).

The higher costs are all attributable to the sulfide processing plant that came on line at Bogoso in 2007. GSS commissioned this bio-oxidation (BIOX®) plant in 2005 due to declining production numbers there. Too much of 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. Sounds good in theory, but in practice it has been very hard to operate, as reflected by increased production costs at Bogoso ($746/oz in 4Q07 as compared to $309/oz a year earlier…production costs at GSS’s other Ghanian mine, Wassa, acturally declined 17% Y-O-Y from $465/oz in 4Q06 to $385/oz in 4Q07.

Obviously these costs need to come down to make the strategy work, and the story of Golden Star in recent years has been a litany of BIOX-related disappointments…the plant was originally supposed to start operating in mid-2006 and was a year late (and much more expensive than anticipated) to get working…and now it is taking longer to get it working cost-effectively. So here is the latest prognosis:

Overall, the Bogoso sulfide processing plant exhibited significant improvements throughout the fourth quarter although we did not meet our gold sales target. Overall gold recovery improved from an average of 40.9% in the third quarter of 2007 to an average of 57.0% in the fourth quarter. Plant modifications and implemented operating efficiencies helped to spur these improvements. One such improvement was the implementation of the SINOX (“Sulfide-IN-OXide plant”) processing that was thoroughly tested during the past quarter. SINOX is the processing of refractory ore through the Bogoso oxide processing plant which has its own flotation circuit. Our testing of this methodology has been successful and this provides greater processing flexibility and in future years should allow Bogoso/Prestea to maintain a higher gold production rate once the oxide reserves are depleted.

Cash operating costs at Bogoso/Prestea were marginally improved but still high, primarily a result of the lower than expected recoveries. As the plant modifications and operating improvements are implemented, our cash costs should decline accordingly. We are anticipating cash operating costs to range between $525 and $565 per ounce in 2008 and dropping to the $430 to $540 range in 2009.

The company now projects production of 370M-425M ounces of gold in 2008 at a production cost of $490-$540/oz and for 2009, production of 500M-560M ounces of gold at a production cost of $410-$490/oz.

4Q07 financial data should be available by March.


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