Golden Star Resources (NYSEMKT:GSS) recently reported its second quarter earnings results. In all they weren't very impressive. Production dropped from 66,000 ounces last quarter to 61,000 ounces this quarter as heavy rain at the company's Wassa Mine reduced total output. Despite this, total operating costs fell and costs per ounce remained flat at $1,201/oz. This figure is still elevated, although investors should be pleased that costs have come down. If we look at the company's individual projects we see that the Wassa Project had relatively flat costs at $967/oz. versus $955/oz. in the first quarter. Costs came down considerably at the company's high-cost Bogoso Mine from $1,489/oz. to $1,415/oz. Production also grew at Bogoso from 26,000 ounces to 28,600 ounces, which indicates that this mine is becoming more valuable even if it is shedding cash at the current gold price.
Ultimately Golden Star Resources is a turnaround story. The stock traded at over $5/share back in 2010 (and over $20/share in the 1990s, but it now trades at just over $0.50/share. High costs, no production growth, a rising debt load, and investor apathy with respect to African miners have all contributed. Despite this I suggested that the stock is a compelling turnaround story in November, and it can really fly if the gold price starts to trend upward again. The company is bringing costs down, particularly at its high cost Bogoso Mine. It is also working towards bringing a low-cost project--West Reef--into production. This project will produce gold at less than $800/oz., which is far lower than the company's other two mines.
However the company does still have a lot of problems, and this makes it high risk: why else would a 250,000 oz./yr. producer trade with just a $140 million valuation when other companies with similar production can trade at 5 times this amount? If the gold price remains depressed then the Bogoso Project will continue to drain cash, although this can potentially change. The company also has over $100 million in debt outstanding. The bottom line is that these earnings show that the company is taking steps in the right direction, but it is still a high risk investment. Seeing, however, that it trades with such a low valuation more aggressive gold bulls can consider taking a position at the current valuation.
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