Golden Star Resources' (GSS) CEO Sam Coetzer on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Golden Star (GSS)

Golden Star Resources (NYSEMKT:GSS)

Q2 2014 Earnings Conference Call

July 31, 2014 14:00 ET

Executives

Sam Coetzer - President & CEO

André Van Niekerk - EVP & CFO

Daniel Owiredu - EVP & COO

Martin Raffield - SVP, Technical Services

Analysts

Rahul Paul - Canaccord Genuity

Andrew Breichmanas - BMO Capital Markets

Operator

Good morning everyone and thank you for joining us to discuss Golden Star Resources Second Quarter 2014 Financial Results and Operational Update. Today’s conference is being recorded. The financial statements were filed yesterday afternoon and these are available on the company's website at www.gsr.com. Please, also note the forward-looking statement and legal disclaimer at the beginning of the webcast presentation.

On the call today is Sam Coetzer, President and CEO; André Van Niekerk, Executive Vice President and Chief Financial Officer; Daniel Owiredu, Executive Vice President and Chief Operating Officer; and Martin Raffield, Senior Vice President Technical Services.

Today, management will discuss the financial results for the second quarter 2014 and provide an update on operations.

Now I will turn the call over to Sam.

Sam Coetzer

Good afternoon all and thank you for joining us this afternoon. First time we have done this call 2, I’m glad you all are here. Let me just by saying the second quarter was a very challenging quarter for the company. And that is regarding our inability to process the higher grade order we expected especially that we got to the bottom of both Chujah and Bogo pits. This was due to the high rainfall we experienced during the second half of the quarter. We also had a slow start to the third quarter due to power related issues impacting on our processing facilities.

So for these reasons that we had decided to adjust their outlook for the remainder of the year. However on a positive note the push backs are complete and we continue to reduce our expenses. I’m greatly encouraged with the continued success we see from the drilling at our Wassa pit, especially with a high grade wide with intersection in another step out holes. This hole is truly spectacular indicating 70 meters over 5.8 grams per tonne.

Also during the quarter we have evaluated a lower CapEx development option for Prestea underground and with these favorable results we will be moving into a PEA in the third quarter.

Revenue was lower in the quarter and that was a result of the fewer ounces produced. As I said earlier on a positive note the team continued to reduce mining cost and expenses and that was even further reduced in the quarter. As a result cost balance decreased quarter-on-quarter even with a lower denominator of ounces.

And the net result is that we’re narrowing our losses. We settled into a lower monthly cost base which I’m sure will be with better production we will see that benefit going forward.

As you can see in this graph, cost and expenses continued to reduce. This is whole part of this team’s long term strategy and that is restate our cost base.

Mine operating expenses are down 25% since the beginning of 2013, something that we as a team are truly proud of. We remain cost conscious, we remain committed to better mine planning, effective management and we continue to improve our availability and our productivity at this stage.

On a cost balance basis we’re also trending down. This is due to our lower strip ratio now at both operations and especially at Wassa we have seen operating efficiencies being achieved which has improved the cost base there. We expect cost to continue to reduce further in 2015.

Our goal remain to achieving cost close to $800 an ounce which will be dependent on the developing of the two potential underground opportunities that we’re furthering at this stage.

To achieve this with our strategic shift to the non-refractory plants that we’re sort of higher grade mining. As a result the production interruptions at both operations at the end of the second quarter and in the beginning of the third quarter and the forecast of the lower grade was for the next two quarters we have decided to adjust our guidance and revised it down by 12%.

Full yea cost downs are expected to increase in-line with the lower production but I must state that our Bogoso cost from now on should be below a $1000 an ounce for the second half. In terms of our CapEx budget with both the deferrals and savings for instance we completed the push backs at a lower cost and a better productivity.

Turning to our Wassa mine, ore mine in the quarter increased to the large pit at Wassa as strip ratios have reduced of mining from Father Brown being suspended and the haulage cost has reduced. Wassa plant is performing well and at greater capacity we are running at steady state.

Recoveries are consistent quarter-over-quarter and indicative of likely recoveries at the current rates we are mining and the current ore we’re mining resembling the future of the company. Production guidance revised downwards will change and expected to aid grade and lower throughput due to the power interruptions we saw in the start of the third quarter.

Wassa has been successful in achieving operating efficiencies which has reduced our operating expense and on a quarter-over-quarter we have reduced our cost from $34 million down to $29 million.

Cost guidance has increased in-line with the lower production and demonstrate our imperative of mining the high grade ore as we continue to go down the pit and look at the higher grade underground opportunity.

At Wassa we reduced our CapEx for the remainder of the year by 1 million for a total of 80 million for the year.

Moving to Bogoso, refractory ore mine was impacted by the rainfall as I stated earlier. The (indiscernible) was supplemented by ore from the low grade stockpile and despite adding the low grade stockpile overall grade increase as we have reached a higher grade better recovery zone.

Mining of tailings was difficult as the tailings dam became water logged and was difficult to keep the density up and keeping the hydraulic pressure problems during the rain event. We have now changed our mining in these dams, have created three different areas so if it would raise again we can pump one dry and work in one while we move the water out of the others instead of having one big tailings dam mining.

Production guidance has been revised to defer production to 2015 and taking into account the power issues that were impacting mill uptime in July. I expect that Bogoso from now will start producing positive cash flow going forward.

Mine operating expenses have reduced in the quarter with few tonnes mined and has reduced by $4 million quarter-over-quarter. Low strip ratio has contributed to the cost reduction and this low strip will continue to reduce until the end of 2015.

Cost guidance have increased in-line with the lower production in the first half of the year but Bogoso cost in the second half of 2014 is expected to reduce to below a $1000 per ounce. We expect the operation to be cash flow positive going forward. CapEx budgets are being reduced to savings on push backs and reduce expenditure on non-core development projects.

Looking at the balance sheet of the company, at the of this quarter we had cash on hand of about $43 million, accounts payable has been reduced as a result of a deferral agreement but we have reached a certain of their large creditors and as a result of the lower production we had a negative working capital at the end of the quarter.

Revenue and cash flow is expected to improve in the second half. We have reduced our CapEx budgets for the full year by about $40 million, we still have the 10 million available in undrawn on the Ecobank loan.

Turning to our long term strategy, drilling continued in the last quarter yielding very positive results. High grade mineralization is still open down plunge and that is very exciting to the team and myself. We have now drilled 450 meter south of the defined ore body where we drilled one hole with quite remarkable results. You will have seen this on last night’s press release.

This intersection as I said earlier of 70 meters wide, 5.8 gram a tonne is truly spectacular. We also had infill drilling confirmed, the continuity of what we have seen and highlights the potential of parallel high grade zone in (indiscernible). Even here we continue to confirm our expectations of this ore body.

Looking at Wassa growth, latest dollars are showing wide zones of high grade have now been incorporated into the PEA which our engineers are busy working on. The wide zones are allowed for larger blocks which improves efficiencies in any underground mine. We expect the better return on this project as a result. The infill drilling continues in the third quarter which will improve our confidence to support the resource modeling. The PEA will be completed by the end of the third quarter and panning a positive outcome we could raise to feasibility study.

Golden Star focused to develop low cost non-refractory ore sources into our existing permitted processing facilities continues. Prestea underground offers us this opportunity. During the last quarter we reevaluated our development plans for this project. Internal studies on non-mechanized mining completed with favorable results by using the existing infrastructure reducing back us surface -- our relocation cost and we have decided to progress to be on this study based on these results.

If all goes well we will roll out studies and approvals, we could be looking at production in 2016 of higher grade ore. In conclusion, as my appointment as the CEO I have been focused with my team on turning the company around and transitioning it into a lower cost company. I did expect at that point there will be a lot of noise in terms of positive things and negative things that will happen. We remain committed to that goal.

As a shareholder I’m aligned with investor desire to create long term value. Our strategy remains to favor increasing modules over growth in ounces produced and I believe we’re on track to deliver this.

To-date we have been successful in reducing the cost and what you see today is testament of that. But even at a lower production rate we have been able to reduce our cost which is a critical component of our future state of this company.

Next step is to bring in our new low cost ore sources into production. My intention is to achieve that by 2016.

In conclusion I want to thank my team; I want to thank my team. I want to thank for the support of our key shareholders and everybody who is in this call and I will now turn it over to questions. Thank you Kim.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rahul Paul of Canaccord Genuity.

Rahul Paul - Canaccord Genuity

Sam you spoke about cost reductions at Bogosa and Wassa, I’m just wondering how much of that is due to a lower strip and how much of that is due to savings in relation to fixed cost coming down?

Sam Coetzer

At Bogosa the bulk of it is the strip ratio because we didn’t know that once we get those waste tonnes away a lower strip ratio will add the bulk of it. And at Wassa it has been the change in terms of haulage cost and productivity gains moving into larger equipment and being more high availability equipment. We have also seen cost reductions and our ability to run our plants, our maintenance components had been better and the productivity in the plants have been better. So Bogosa’s majority would be strip related. At Wassa it would be productivity gains and plant productivity cost that we will see as an improvement. I haven't broken those numbers down Rahul in percentages but I can get it to you.

Rahul Paul - Canaccord Genuity

And I’m wondering, when you look at fixed cost at Bogosa and Wassa do you see any more room for improvement there?

Sam Coetzer

What we’re focusing firstly at Bogosa in terms of our fixed cost, we’re getting to the point where we will be starting to reduce our labor force and obviously that labor force has a fixed cost component to that. That is number one at Bogosa, and the fixed cost component at Wassa will be reduced because of the 85 kilometer haulage road that we maintained in the past and that cost will be reduced, which was never really reflected in the cost of the Father Brown but was reflected in our G&A and our maintenance cost of the company.

Rahul Paul - Canaccord Genuity

And you mentioned the change to larger mining equipment at Wassa. Is that change already done? Are you in the process of changing equipment over?

Sam Coetzer

It was changed within the first three weeks, you remember that transition happened very quickly in the first quarter. We are all concerned we have to train people from smaller to larger equipment because Wassa historically ran with smaller equipment, either we had a nucleus of people at the site who were well-trained and having moved into the larger agreement, obviously larger excavators at the Triple 7s [ph] have allowed us to get the productivity gains. Dan is there anything I can add on -- you want to add on?

Daniel Owiredu

The work was done as he said in the early part of the year but we moved it and we haven't had any issues with the productivity has improved since then.

Sam Coetzer

Actually Rahul I think the transition that Dan and Niekerk [ph] has done on the site in preparation for that transition has worked very well in our favor. We plan that for that three months before we went into it.

Rahul Paul - Canaccord Genuity

And then just final last question, I guess you spoke about increased productivity but the larger equipment are you seeing more dilution?

Sam Coetzer

Martin do we see -- because we’re designing for the equipment I guess.

Martin Raffield

We have designed for the equipment Rahul and we’re not seeing significant increase in dilution, it's pretty much the same as it has been in Wassa over the past two years.

Operator

Our next question comes from Andrew Breichmanas of BMO Capital Markets.

Andrew Breichmanas - BMO Capital Markets

Just sticking on Wassa maybe, you mentioned you’re expecting lower grades through the rest of the year. Can you maybe just provide a little bit more color on what the difference from the original plan might be there?

Sam Coetzer

I will hand it over to Martin. I will just say, over the last 18 months as you know we have had generally a positive correlation to the grade at the Wassa mine, at stages it was as high as 3% on our grade profile. We are still seeing the trial 15 (indiscernible) we expect now to go into the lower grade benches in the next two quarters and we don’t see that positive correlation that we have had before Andrew, but short term we expect that graphite gold [ph] fee to come off the table as we have seen before. Martin do you want to add anything on the grade looking forward?

Martin Raffield

As Sam said Andrew we have, it's up and down in this pits and we have had two years of really good positive correlation. In Father Brown in the first half of the year we were somewhat disappointed with some of the Phase 3 mining and we have been pushing the tonnes to make up for that but we’re in a lower grade portion of the pit at the moment and we expect that as we go through the rest of the year we’re going to see some positive reconciliation above where we’re now. So, it's up and down.

Andrew Breichmanas - BMO Capital Markets

I’m just going to jump around a little bit but just taking a step back, many of your peers in Ghana have seem to really discussed the rainfall to the extent that you’ve and I’m kind of just curious given how long you have been operating there. Why was the impact so severe? Is that just a function of trying to get into Chujah and opening up new pit or is there something else there?

Sam Coetzer

Andrew it's hard to explain. We pump 35 million liters of water in that very year, it rained and it (indiscernible). We normally when we do our mine plan we plan for that and generally over the last few seasons we had three high volume pumps in those pits and we could deal with it as you know over the last few years we haven't had any event. It didn’t -- rain I don’t want to comment on other companies. If the rain was more permanent at Bogoso and we loaded it up with five pumps within those pits and we struggled over that four week period to empty the pumps. We pumped a lot of water it was very challenging.

So it's very hard in Ghana to say the average rainfall as all other countries, all I know is that we saw that flooding into the pit in a very short period of time.

Andrew Breichmanas - BMO Capital Markets

Shifting to Bogoso for a second, can you talk about the performance of the non-refractory plant because it seems like recovery is there then declining fairly consistently. What do you expect in terms of recoveries and production going forward and is that component of the Bogoso operation still profitable?

Sam Coetzer

Yes it's purely a function of the type of ore we’re putting in. We always know that the deeper Chujah will be higher grade and we will have higher recovery. We had just before it went down we had a bad weak of running well Chujah Ore and the recoveries of the ore went up to 72% and we expect the recoveries to continue to increase. You will see it's gone up I think from 60, it's up in the refractory plant it's gone up tremendously. Sorry did I miss your question, was it non-refractory or refractory plant?

Andrew Breichmanas - BMO Capital Markets

Yes I was asking more in the non-refractory plants.

Sam Coetzer

Non-refractory ore, what happened there was firstly when you try to get the densities in and water log we couldn’t mine according to the rate that we wanted. We were running more water through the plant than we were running ore, that’s the one thing. The other thing is we now realize that at 12 meters deep in the tailings dam there is change a metallurgy. We have just subsequently drilled holes in the tailings dam indicating that there was a distinct deposition of ore below the 12 meter horizon -- you can actually see Andrew in the -- I visited the pit and you can see the line of where there is different ore and for a part of the quarter we were running below that line. We have now adjusted in this quarter and the recoveries are back up. So what we’re going to do is we’re going to mine the tailings dam to a level of 12 meters deep indicating that we’re probably having the range of 12 million tonnes and not the 50 million or higher than I indicated earlier but we have now adjusted our mining that we will mine a deposition of tailing down to 12 meters deep and not ore that has lower recovery below the 12 meter bench.

Andrew Breichmanas - BMO Capital Markets

And I guess back to Wassa, you mentioned that you managed to defer some of the expenditures on tailing storage facility. Can you just explain that a little bit more and how much capacity do you now have in tailings dam?

Sam Coetzer

I will hand it to Dan because it's really Dan – Dan has been very good with the deposition plan, the new deposition plan.

Daniel Owiredu

We do have improved deposition which is our largest, having more capacity in our current tailings dam and on top of that there is an adjoining ground which has deep (indiscernible) which has been dug up, but we’re -- permission has not been -- the permit is in process which will allow us to further deposit in that pit will close out which has an impact on the timing of our building of new TSF2. So that’s been pushed back to say capital.

Sam Coetzer

Really Andrew, what the team has done -- we are addressing everything in the company. We are planning everything, one of those is deposition plans. There is always value in everything in a mining company not one single area and what Dan and the team has done here is spectacular and the way that we are depositioning now with our figures had allowed us to extend that cost out but more like that is the ability to utilize a portion that was (indiscernible) before which was now dug out was cheaper to dig it out and open that up than to rebuild another dam. So that and I commend the guys what they are doing with the dam.

Andrew Breichmanas - BMO Capital Markets

So how much capacity, how much time does that give you before you do have to expand the --

Sam Coetzer

That give us capacity to appear of about 12 to 18 months.

Andrew Breichmanas - BMO Capital Markets

My last question, the first six months of this year, if you compare the maintenance CapEx to the first six months of last year. You spend about a 10th of the amount on sustaining capital, this is what you did previously. Is that kind of level sustainable going forward?

Sam Coetzer

I think I’ve always stated one of the areas that we focus on. We want to get our sustaining CapEx and I will talk about maintenance now to about 10% of working cost not more than that and in the last two years we spend a lot of money to upgrade our plants. We have new gear boxes on the bio-ox, we have changed the power supply units to the bio-ox -- we have a different system in terms of how the oxygen work in the bio-ox and the team has much more vibration monitors in place so we could catch maintenance issues ahead of time which allows us to deal with reducing the maintenance cost.

I do believe that we have settled into a new cost structure and a more focus maintenance. Dan do you want to add to that?

Daniel Owiredu

Well as you can recollect there is a lot of effort went into reengineering the impacts of the plant that includes the gearboxes, so we’re not seeing as much -- the availability of the plant has gone up and reliability and as we said there is a condition monitoring programs and everything that we have put in these assisting us and is dragging our cost down.

Operator

We have no further questions at this time. That does conclude today’s question and answer session and I would like to turn the conference back over to Sam Coetzer.

Sam Coetzer

I just want to thank everybody for listening and at times you take one step back and when you take the step forward you will realize everything that you have done correctly and you rebuild on that and that’s what the team and I do. We have had a challenging time but we’re focusing on moving this company forward. We know what lies ahead of us and we want to achieve that price. So thank you for the support and thank you for dialing in.

Operator

And that does conclude today’s conference. And thank you for your participation.

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