Lake Shore Gold (NYSEMKT:LSG) recently announced record quarterly production at its operating mines, located in the prolific Abitibi Greenstone Belt in Canada. The company produced 52,300 ounces of gold for the quarter, representing an increase of 70% from the second quarter of 2013.
This puts Lake Shore Gold's six-month production for the first half of 2014 at 96,900 ounces, representing an increase of 79% from the first half of last year. The company appears to be well on-track to reach the top end of its production guidance for 2014 of 160,000 to 180,000 ounces of gold.
Perhaps most impressive, the company produced gold at an average grade of 5.4 grams per tonne, which is very high grade, and reported outstanding mill recoveries of 96.6%. Cash and bullion increased to $53 million, and the company also repaid $17 million in debt in the first half of the year. Here are some reasons why I think Lake Shore Gold shares will continue higher, outperforming its peers.
Stock Price and Share Structure
Lake Shore Gold is one of the best-performing gold miners this year, returning more than 50%. In fact, you'll see that over the past year, shares of Lake Shore have returned more than 200%, crushing the Market Vectors Gold Miners ETF (NYSEARCA:GDX) and the Junior Gold Miners ETF (NYSEARCA:GDXJ):
Lake Shore Gold trades on the TSX under LSG.TO and on the NYSE MKT under LSG. The shares are currently trading for $1.09. With 422 million shares outstanding, the company has a current market cap of $460 million.
Lake Shore Gold: Impressive Low-Cost Gold Production
Lake Shore Gold operates three multi-million ounce gold complexes in the Timmins Gold camp, located in Northern Ontario. The company's flagship asset is the Timmins West mine, which produced 107,100 ounces in 2013, and the Bell Creek Mine, which produced 27,500 ounces in 2013 with an expected increase in 2014.
Lake Shore Gold is growing at an astounding rate following the completion of its mill expansion in the third quarter of 2013. In 2012, the company produced just 85,800 ounces of gold, at insanely high all-in sustaining costs of $1,813 per ounce.
However, following the mill expansion completion, production has increased and cash costs have decreased: by 2013, total gold produced was 134,600 ounces at more manageable all-in costs of $1,139. For the full-year 2014, production is estimated at 160,000 to 180,000 ounces of gold, at all-in sustaining costs of $950 - $1,050 an ounce. With all-in costs at $960 an ounce for the last quarter, Lake Shore appears to be well on-track to crush these targets. This means the company will be profitable, even with a further decline in the price of gold. For example, with gold at $1,200 and all-in costs at $950 an ounce, the company would still report margins of $250 an ounce.
Investment Case is Getting Less Risky
For the first quarter of 2014, Lake Shore Gold sold 43,000 ounces of gold at an average price of $1,294 (US). The company reported revenue of $61.5 million, and cash flow from operating activities of $24.9 million (a 54% increase from the previous year), with a net earnings of $4.7 million.
Just a few quarters ago, Lake Shore Gold only had $15 million in cash and bullion, putting the company in an uncomfortable financial position. However, as production has increased and cash costs dropped, the company is quickly building up its cash position: as of June 15 of this year, the company has $50 million cash and bullion, net of a $10 million debt repayment.
The company's secured debt outstanding has decreased from $70 million in December of 2012 to the current total of $35 million - a decrease of 50%. The company also has unsecured convertible debentures of $103.5 million, at 6.25% with a conversion price of $1.40, due September 2017. However, this debt is becoming less risky as the company increases profitability and builds up its cash hoard.
Lake Shore Gold's Resource Base and Exploration Potential
Here's a look at Lake Shore's current resource and reserve base:
Timmins West Mine: 492,200 probable ounces at 4.6 g/t gold, 715,000 ounces measured and indicated at 5.1 g/t gold, and 516,000 ounces inferred at 5.5 g/t gold, for a total resource base of 1.72 million ounces of gold.
Bell Creek Mine: 106,600 probable ounces at 4.7 g/t gold, 672,000 ounces measured and indicated at 4.6 g/t gold, and 872,000 ounces inferred at 4.6 g/t gold, for total resources of 1.65 million ounces.
The company recently identified a new high-grade structure near the Bell Creek Labine deposit, intersecting 14.12 grams per tonne gold over 10.2 metres, 8.41 grams per tonne gold over 12 metres, and 11.42 grams per tonne gold over 3.6 metres. These results show the considerable upside exploration potential that Bell Creek holds. The company is currently continuing to test for new zones in this area.
Gold River Trend: The company owns this attractive growth project, which is located just 4km from the Timmins West mine. The deposit has a measured and indicated resource of 117,000 ounces at 5.3 g/t gold, and 1,028,000 ounces inferred at 6.1 g/t gold.
Marlhill and Vogel: These are two other exploration properties with a small initial resource base, adjacent to the company's Bell Creek mine. Vogel has a measured and indicated resource of 125,000 ounces at 1.75 g/t gold, and inferred resources of 169,000 at 3.6 g/t gold, while Marlhill has measured and indicated resources of 57,000 ounces at 4.5 g/t gold.
In total, Lake Shore Gold has 3 million ounces of gold measured and indicated, and 3.3 million ounces inferred, for 6.3 million ounces of gold.
Bottom Line: Lake Shore is a Gold Junior to Own
Lake Shore Gold has 6.3 million ounces of gold in one of the best mining jurisdictions in the world. The company just recently completed its mill expansion, is increasing its production while also decreasing cash costs. If you are bullish on gold, an investment in Lake Shore Gold could be a great way to gain leverage to a rise in the price of the yellow metal.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.