Macro Tsimmis

intelligently hedged investment

Golden Star Resources (GSS) update #9

Posted by intelledgement on Tue, 04 Nov 08

We are beginning to wonder if our red ink-producing gold mining spec play, Golden Star Resources (GSS), might be better off reincorporating as a non-profit charity, in the wake of their 3Q08 results announced today. This comes in the wake of the juxtaposition of last month’s announcement (click here and then on “Golden Star Awarded Nedbank Capital Green Mining Award”) that the company had won the Nedbank Capital Green Mining award—in consideration of the company’s Golden Star Oil Palm Plantation Project (GSOPP), which grants four-hectare farm plots to qualifying farmers—and their seventh consecutive (and worst-yet) money-losing quarter.

Today, the company unveiled 3Q08 losses of $22.4 million (10 cents/share) on sales of $74 million. Not much mystery here; the company sold each ounce of gold for $897, but it cost them $866 to produce each ounce…a gross profit margin that is no where’s near fat enough to cover overhead. $866 is a new record for the highest quarterly cost per ounce, and extends an unhappy trend line:

  • 4Q07 = $602/oz
  • 1Q08 = $652/oz
  • 2Q08 = $757/oz
  • 3Q08 = $866/oz

This vector is unsustainable; if management cannot figure out how to stop the bleeding here, the company—or at least their mining operation in Ghana—is doomed. Fortunately, there is a reasonable expectation for improvement: $60-to-$85 of the 3Q08 cost is attributable to doubled rates for electricity that Ghana imposed on miners (click here and then on “Golden Star Reports Increases in Power Costs in Ghana”) to offset the huge run-up in the price of oil, and the miners are negotiating for some relief, which is likely now that oil prices have retreated from their summer highs. And the mix of gold production this quarter was skewed towards the more expensive Bogoso/Prestea facility as one of the two milling facilities at Wassa was disabled (click here and then on “Golden Star Announces Wassa Mill 2 Repairs Complete”) due to a pinion gear malfunction—and that has now been fixed.

Still, the burden of proof on management to make this operation work economically is getting heavier following what is now seven consecutive quarters of red ink. This is not what we signed up for, and if things don’t improve soon, we will be looking for greener pastures.

Previous GSS-related posts:

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