Macro Tsimmis

intelligently hedged investment

Golden Star Resources (GSS) update #8

Posted by intelledgement on Sat, 09 Aug 08

Our consistently disappointing gold mining spec play, Golden Star Resources (GSS), announced their 2Q08 results earlier this week, and the results were…drum roll please…disappointing. Again.

The company lost $7 million, or three cents per share, the sixth consecutive quarter of red ink, but that was not the cardinal disappointment. The thesis of this investment has always been that the bio-oxidation (BIOX®) porcess that the company licensed in 2005 due to declining production numbers there at their Bogoso mine would increase production and decrease costs. 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.

Well…production costs this quarter increased still further, to a worst-ever $757/oz. According to the press release (click here and then open the 8/5/08 press release), “Rising costs of labor, energy, raw materials, reagents and other consumables increased second quarter operating costs relative to the first quarter.”

The news isn’t all bad. The company sold 78,313 ounces, an increase of 36% from the prior quarter, and 54% more than the company sold in 2Q07. According to Tom Mair, President and CEO, “[G]ood progress is being made at both our mine sites. The Bogoso sulfide processing plant improved recovery rates of the transition ores currently being processed from the first quarter’s 59% to 70% in the second quarter. Toward the end of 2008, we expect to access fresh sulfide ore which testwork indicates will yield higher flotation recovery and consequently higher overall recovery. The Wassa mine continued to deliver according to expectations, construction of the haul road from Benso is progressing well, and we expect the project to be on time and on budget with delivery of high grade ore from Benso to Wassa beginning in the third quarter as planned…. As we predicted earlier this year, significant progress is being made at both our mining operations and is expected to continue in the remaining half of the year resulting in improved results in 2009 and beyond.”

Management still expect operating costs at Bogoso to come down…eventually. “As the ore pits deepen and we access increasing amounts of fresh sulfide material in the second half, we expect flotation recovery to improve and consequently overall recovery to further improve. Ongoing plant modifications and operating efficiencies should also contribute to improved gold recoveries, higher gold production and lower cash operating costs going forward,” according to the press release.

The revenue of $70.4 million in the quarter was an all-time record. The gold sold for an average price of $900/oz, down from $926 last quarter. The company ended the quarter with $37.1 million in cash, down from $54.7 million at the end of March 2008 and $75.8 million at the end of 2007, and they anticipate that combined with improved operational cash flows, this sum will be sufficient to cover capital and operating needs for the remainder of the year.

Management are projecting full year production of 315,000-to-350,000 ounces of gold in 2008 at a cost of  $600-to-$650/oz and 460,000-to-520,000 ounces in 2009 at a cost of  $525-to-$575/oz.


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