Macro Tsimmis

intelligently hedged investment

Golden Star Resources (GSS) update #10

Posted by intelledgement on Wed, 25 Feb 09

Variety is the spice of life, and along with the quarterly dose of castor oil we have come to count on from our profits-challenged gold mining play, Golden Star Resources (GSS)—an eighth straight money-losing quarter, this time a record $86.8 million of red ink—there was a golden glimmer of hope: cost per ounce for 4Q08 was $637, down from $897/ounce in 3Q08 and the lowest figure achieved in 2008.

This cost number is still too high. The losses looked worse than they really were, due to a $59.1 million impairment write-off and a $16.4 million of transition ore stockpile inventory adjustments. But that still means we legitimately lost $11.3 million in 4Q08, as selling gold at $808/ounce—the lowest figure for 2008—evidently doesn’t answer for GSS when their costs are running at $637/ounce. However, at least the vector—a quarter-over-quarter decrease of 29%!—is a happy one.

And production continues to improve. Gold sales for the full year totaled 295,926 ounces, a new record…although it did fall short of management’s projection of 315-to-350 thousand ounces (the failure of the second milling unit at Wassa in the third quarter is the main reason for the shortfall). 2008 revenues amounted to $257.4 million, another all-time record. GSS ended 2008 with $33.6 million cash, up from $25.3 million at the end of 3Q08. Management anticipate that in conjunction with income generated from operations, that $33.6 million suffices to meet cash requirements for 2009.

Management have lowered their guidance for 2009; they now project production of 400,000 ounces of gold—down from their prior projection of 460,000-to-520,000 ounces—at a cost of $550/ounce.

Another ill effect of the higher costs of production in 2008 was the need to reclassify mineral reserves—estimated gold reserves that can be economically mined—to mineral resources (which may not be economically recoverable). According to the press release (click here and then on “Golden Star Reports Record Annual Gold Sales and Financial Results for Fourth Quarter and Year-End 2008”), “Mineral Reserves, after mining depletion, decreased by 1.65 million ounces, or 33%, during 2008 to 35.5 million tonnes grading 2.87 grams per tonne (g/t) for contained gold of 3.28 million ounces at year end. The decrease was the result of a combination of factors including depletion, increased costs associated with mining and processing, and design and engineering changes resulting in increases of cut-off grades…. Measured and Indicated Mineral Resources, exclusive of Mineral Reserves, increased to 27.0 million tonnes grading 2.76 grams per tonne of gold while Inferred Mineral Resources decreased slightly to 19.0 million tonnes grading 3.94 grams per tonne gold.” It is likely that if the company succeeds in reducing costs to $550/oz, some mineral resources could be reclassified to mineral reserves.

Golden Star continued to conduct exploration activities, to the tune of $15.8 million in 2008. Most activity was in Ghana near the existing operations and “We have had encouraging results during the year and a number of these targets merit follow-up work in 2009,” according to the press release. Other exploration actvities are ongoing in Sierra Leone, Côte d’Ivoire, Burkina Faso, Niger, Suriname, French Guiana and Brazil.

All-in-all, GSS has been a major disappointment. Many other gold mining companies have done much better over the last couple of years. We calculated that Golden Star’s relatively challenging operational environment in Ghana had been discounted and that they would gain outsize benefits from the run-up in bullion prices. Alas, it seems everyone including us underestimated their challanges. At this point, we are looking to take advantage of the increased price of gold and—we still hope—late-but-better-than-never improved operational performance by Golden Star to drive the stock price northwards from here. We are willing to give it another quarter or two, and then we will re-evaluate.

Previous GSS-related posts:

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