Golden Star Is A Sure Short Miner

| About: Golden Star (GSS)

The price of gold is still following an unpredictable pattern as the dumping of the metal continues and the so called support regarding gold prices is nowhere to be seen. Holdings in the SPDR Trust dropped to 805.72 metric tonnes, which is its lowest since January 2009.

"$1,180 an ounce is the major level, so if it breaks below that then it's really just a question of how much further it can drop" said Steven Dooley, the head of research at Forex Capital Trading Pty.

Investors are no longer interested in only retaining the value of their money due to the improving U.S. economy; they also want a piece of this growth. This crave has pulled out most of the investors from the commodity market, leaving the gold prices vulnerable and greatly affecting the gold miners. The future of gold is also not looking bright as the splash damage done by the Fed taper will be felt throughout 2014, as it continues to cut the stimulus.

Jeffrey Currie, the head of commodities research at Goldman Sachs Group Inc. said "Gold is now likely to grind lower throughout 2014". In November 2013, the bank claimed that prices will reach $1,050 by the end of 2014.

Golden Star Resources Ltd. (NYSEMKT:GSS) is Canadian company engaged in the exploration, production and development of gold. The company has two operating mines situated in Ghana along the Ashanti Gold Belt of West Africa, namely Bogoso/Prestea and Wassa Hwini-Butre and Benso (HBB) mines. In 2012, the total gold production from both mines was 331,278 ounces. As of 31 December 2012, the company has a total of 4.31 million ounces proven and probable reserves. The company also has interests in other gold exploration projects in parts of West Africa and Ghana and manages exploration properties in Brazil and some other parts of South America.


Even though the last quarter proved to be chaotic for the gold industry due to the high volatility of gold prices, Golden Star managed to close the third quarter with a $3.5 million net income. However, the company had a net loss of $117 million YTD. Golden Star's share price declined by almost 79% in 2013, mainly due to fluctuating gold prices and speculations regarding the Fed taper. The company was unable to avoid the industry-wide downfall which created liquidity issues as both income and cash flow went into the negative. The company reported $12.3 million as net cash outflow.

GSS Chart

GSS data by YCharts

Golden Star's cost of sales has been increasing due to the high cost environment but its revenues have not reflected the costs. Revenues for the nine months ending 30 September 2013 were $371.8 million, 7% less than last year's revenue; whereas the cost of sales increased to $288.6 million which was 6.8% more than that of 2012. Due to the deteriorating price of gold the company charged an impairment amounting to $196 million. This is the primary reason for the poor bottom-line performance of the company.

The company's all-in cost was $1347/oz. which is higher than the realized value of the gold, i.e. $1329/oz. and the all-in sustaining cost was $1213/oz. for the third quarter. This indicates that even though Golden Star can survive in the short run, it needs to reduce its costs in order to remain profitable in the future. The company has already initiated this by bringing down the all-in cost from $1596/oz. in the second quarter to $1347/oz. However, it still needs to take more cost-reducing steps due to the falling gold prices and if costs are not managed promptly the company might be brought to the verge of a sell-off or merger.

Golden Star's management realizes this and has already taken steps to reduce expenses:

"Mine operating expenses were reduced through re-negotiations of certain supplier contracts, supplier discounts and reducing the number of contractors. Other operating improvements were initiated including transport and delivery efficiencies, and improved purchasing procedures. Maintenance cost savings and fuel cost reductions continue to be achieved through the recent purchase of two new excavators and four new drills. In addition we commenced discussions with the unions to restructure our workforce, which are on-going."

The high mining costs of Golden Star Resources Ltd. are due to a significant amount of waste material being mined along with the ore. The cost of the Wassa mine, at $800/ounce, is almost equivalent to the industry but the Bogoso mine is creating trouble for the company. 575,000 tonnes of ore was extracted from Bogoso along with 5 million tonnes of waste. This has led to an all-in cost of approx. $1500/ounce and with such a high mining cost and the declining gold prices it would be very difficult for Golden Star to continue operating this mine. The company has planned to reduce this waste by further drilling but that won't provide any immediate solution. That being said, the company only has two mines and if it suspends production from one mine in order to survive, the revenue from the remaining mine won't be enough to survive in the harsh market environment.




Quick Ratio




Current Ratio




Both the quick and current ratios are indicating a liquidity problem for the company as both are below the industry average. To make matters worse, the quick ratio is below 1 which is a grave concern for the company as it is not in a position to even pay off its current obligations.

Golden Star took out a medium term loan of $50 million to be repaid over a 60 month period at a rate of LIBOR + 9% per annum. This money will be used to finance the Wassa mine for drilling, settlements, partial reallocation and other capital expenditures. This loan started in mid 2013 and if we look at the company's present liquidity position it might be a considerable problem to even pay it off. Nonetheless, the loan might have helped as it was announced in November 2013 that the Wassa Main pit's indicated mineral resources have increased by 45% compared to the last report on 31 December 2012.


Amounts in ($ Millions)

Market Capital


Long term Debt


Cash and Cash equivalents


Enterprise Value


The enterprise value of the company is $180 million and the total number of outstanding shares is 259.1 million. It can be calculated that the EV per share will be closest to $0.69. Currently the share is priced at around $0.69 indicating that it is fairly priced and there is no more growth potential and this, along with the fact that the company does not give out dividends, make it a bad candidate for investment.


Golden Star is struggling to cope with the instability in the gold industry. Costs of mining are increasing and the price of gold is falling, leaving little margins for Golden Star. Though the company has taken some measures to reduce its expenses and succeeded in doing so compared with the second quarter, however it is unlikely to be enough to sustain the market risk. EV per share is equal to the current share price, indicating no more growth potential in this share and the company also does not pay any dividend, which makes it unattractive. Because of this, Golden Star is not worth investing in at the moment. It would be better to sell in order to avoid any future losses, even with the improving gold market, due to high production costs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Equity Flux is a team of analysts. This article was written by our Basic Material analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.