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Executives

Tom Mair – President and CEO

Sam Coetzer – EVP and COO

Analysts

Paolo Lostritto – National Bank Financial

Trevor Turnbull – Scotia Capital

Golden Star Resources Ltd. (GSS) Q2 2012 Earnings Call August 9, 2012 11:00 AM ET

Operator

Greetings and welcome to the Golden Star Resources’ Second Quarter Earnings Call. At this time, all participants are in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tom Mair, President and CEO for Golden Star Resources. Thank you, sir. You may begin.

Tom Mair

Thank you. Good morning, ladies and gentlemen. I’m Tom Mair, President and CEO of Golden Star Resources. Welcome to our 2012 second quarter conference call. Joining me on the call today are Sam Coetzer, Chief Operating Officer; Bruce Higson-Smith, Senior Vice President of Finance and Corporate Development; and Roger Palmer, our Chief Financial Officer.

During the course of our presentation today, we will be making forward-looking statements based on current expectations, estimates and projections that are subject to risk. There are many factors that could cause actual results to differ materially from these forward-looking statements. So I encourage you to review the Safe Harbor language and to remain as current as possible with our activities by reviewing our news releases, website and our SEC filings on EDGAR and/or SEDAR, including Forms 10-K and 10-Q. As always, unless otherwise stated, all references to currency amounts will be in U.S. dollars.

Today, we’ll be reviewing our financial and operational results for the second quarter and six months periods ended June 30, 2012. We’ll also be commenting on operating and development activities, exploration activities, the outlook for the balance of 2012, and then I’ll provide some closing remarks. Following the presentation, we will open the call to questions from analysts.

Golden Star continued to show real progress in the second quarter. We produced approximately 85,000 ounces of gold in the quarter, a 10% increase over first quarter and a 20% increase over Q4 of 2011. Gold prices averaged $1,600 in Q2 which was $86 lower than Q1. Higher production meant our revenues were up 4%. Year-over-year, our revenues were up 24% on higher gold production and higher prices.

We’re happy to report that our combined cash operating costs are trending lower to $921 in the second quarter from $1,118 in the first quarter as we achieved lower costs at both our Bogoso and Wassa operations. In addition, our corporate G&A cash costs were approximately 25% lower than Q2 a year ago.

Operating cash flow before changes in working capital was almost $0.13 per share in Q1 which is up from $0.08 in – I’m sorry in Q2 which is up from $0.08 in Q1. We have put together four consecutive quarters of positive cash flow from operations, an indication that, in addition to gold prices remaining high and our production trending in the right direction, we are achieving solid operational improvements at both mines.

We closed the quarter with approximately $106 million in cash and cash equivalents, a slight increase over $104 million at the end of the first quarter. CapEx in Q2 was about $15 million and we used $15.5 million in working capital. Inventories, largely store ore stockpiles were up $8.5 million and we reduced payables by $8.5 million.

One additional note, we refinanced $74.5 million of our convertible debentures. At this point, it is our expectation to pay the remaining $50.5 million in cash on November 30, 2012. I refer you to complete disclosure on this matter in the 10-Q filing of yesterday.

Turning to our six-month results, Golden Star produced almost 163,000 ounces of gold in the first half of 2012, a 4% increase over the same period last year. Our average realized gold price in the first half was up 13% to $1,641 per ounce from $1,447 in the first six months of 2011, a better than $190 per ounce increase year-over-year. I’ll again remind investors that our gold production this year is completely unhedged.

Higher gold prices, in combination with more ounces produced, led to an 18% revenue increase to $267 million for the first half of 2012 versus $226 million in the same period a year ago. Combined cash operating cost declined slightly in the first half of 2012 to $1,015 per ounce. However, these costs included the effects of the oxide mill startup that skewed our Bogoso cost to the high side.

Cash flow before working capital changes was about $0.21 per share in the first half. Golden Star generated $54 million in cash flow through the first six months of 2012, a positive swing of nearly $37 million over the same period last year.

Now to give you some color on how our operations are generating improved financial results, I’m going to hand it over to Sam Coetzer, our Chief Operating Officer

Sam Coetzer

Thanks, Tom. Good morning, everybody. As a start, I should say I’m happy to comment that Golden Star operations continued to move in the right direction. On a sequential quarter basis, second quarter gold production was up 20%, and 10% and 20% respectively over the previous two quarters. I believe the key drivers in our recent success have been the successful startup of a new business line in the form of Bogoso oxide mill, the implementation of effective weather mitigation initiatives, utilizing synergies now available between our various operations and functions, and also enhancing our forward planning function in the corporation.

Looking ahead, I’m convinced that we can unlock further potential by focusing on the following. Increasing plant reliability at our sulfide and oxide processing facilities at Bogoso, completing the major data project in the CIL section at Wassa, and continuing to manage a healthy stockpiles to optimize more throughput.

Mining operations at both sites have stabilized well and, as noted, our teams are delivering very good results. We are continuing to do waste stripping where we can afford to slow down ore production. As I indicated during the last call, we were able to cease all mining in Bogoso North through the second quarter. This allowed operations to be more effective during the wet weather period and enabled us to perform critical maintenance on our mining equipment. We recommenced the mining in Bogoso North in early August.

Above operations, the wet weather plans that we instituted over the last nine months are now paying dividends. During the latter part of 2011, we focused on bringing the pits back to design which resulted in higher strip ratios. The waste movement for the six months ending June 30 is now at a more manageable level. At Pampe, due to the slip encountered earlier in the year, the strip ratio has seen a dramatic increase in the first part of 2012.

Today, I’m going to start off with Wassa, because the Wassa mine continues to deliver solid results and we are excited about Wassa’s potential to become a much greater contributor to production over time. As such, we think the Wassa operation may be somewhat overlooked by the investment community. Gold sales in the second quarter were in line with our internal forecast at 41,000 ounces, a 13% improvement over the 36,000 ounces we produced in quarter one.

Cash operating cost declined in quarter two to just under $840 an ounce from $999 an ounce in the first quarter and are clearly moving in the right direction. Recovery was up to 94.8% in the second quarter versus 93.9% in Q1. The Wassa performance was highlighted by excellent results from the higher-grade Father Brown pit, which was opened in quarter four last year and which helped push the second quarter processed grade to just over 2 grams a tonne from 1.74 grams per tonne in the first quarter. The combination of higher unit sales and higher gold prices resulted in a 13% increase in second quarter revenues to just under $66 million, up $7.5 million from $58 million in the second quarter of last year.

During the first half of 2012, we continued to work diligently to minimize the kinds of weather-related feed disruptions we have been experiencing in recent years at the Wassa plant. We implemented a number of key upgrades that included drainage systems around the Wassa plant ore pads, relocation of the heap leach feed system, profiling of non-refractory ore stockpiles and installation of equipment that will allow fine, wet, sticky ore to bypass the secondary pressure during rainy periods and go directly to the grinding circuit.

We expect to conclude this upgrade program in the current third quarter and I’m pleased to say that our work in the first half of 2012 achieved the desired results during the wet season. I should also note that we have strengthened our Wassa management team with a new Technical Services Manager and a new Operations Manager. Finally, we continue our aggressive drilling program under the Wassa Main pits with very promising results. Tom will address that subject further in a few minutes.

Talking to Bogoso and Prestea. Bogoso/Prestea gold sales in the second quarter increased 7% to 44,000 ounces over 41,000 ounces sold in the first quarter and increased 24% over quarter four last year. The increased production was attributed to the first quarter 2012 startup of the Bogoso oxide plant, which added just under 7,000 ounces of gold in Q1 and just over 10,000 ounces in the second quarter.

Despite a 6% decline in refractory ore processed for the comparative second quarters, the Bogoso sulfide plant produced just over 34,000 ounces, roughly the same number of ounces as in the year ago second quarter due to higher feed grade and improved recovery in the 2012 second quarter. We expect to achieve improved throughput of the sulfide plant going forward. As a result of the higher gold production and ore prices, revenue at Bogoso increased 37% year-over-year to just over $70 million to $51.6 million.

Our focus on stockpiled ore in the second quarter enabled us to avoid higher mining cost during the wet season and to complete maintenance work on our mining equipment. Less ore mine on a sequential quarter basis 5.9 million tonnes in the second quarter versus 8.2 million tonnes in Q1 contributed to lower cash operating cost at Bogoso of just under $1,000 an ounce in Q2 versus $1,220 an ounce in Q1. As stated earlier, in a refractory plant, we continue with efforts to resolve the various operational issues impacting in recent periods.

We’ve made good progress achieving quicker startup of stand-by power generator at the Bogoso in addressing frequent power interruptions from the Ghana grid. Faster startup of the stand-by power plant allows for a quicker restart of the refractory plant once the grid power resumes and also reduces mechanical strain on plant equipment upon restart, thereby helping to control the maintenance cost. An accelerated refractory plant maintenance program is now underway to help achieve an increase in plant availability going forward.

The maintenance component of the plant continues to remain high, yet this investment is necessary to prepare both plants for the pipeline of projects coming up in the next few years, including Dumasi, Buesichem and other long-term supply sources. In addition, we expect to move inferred resources in the footwall of Bogo North and Chujah into the indicated resource and extend the life of both these pits. As a consequence, there will be an increase in the strip ratio in 2013 for these pits. As stated above, we continue to invest and focus on increasing plant reliability at both process facilities at Bogoso and, I should mention, during July we achieved our best monthly result for tonnes processed for the last 18 months.

Lastly, I’d like to focus on the oxide plant for a moment. As I mentioned earlier, gold production increased in quarter two when we had a full three months of production versus only about eight weeks of production in Q1. So you would realize we’re only over 90 days in production in this plant. I’ll remind you that the oxide plant primarily process stockpile ore due to two bench slips at the Pampe pit in quarter one that affected about 1.2 million tonnes of material.

During the second quarter, we made excellent progress clearing that excess material and expect unrestricted access to the Pampe pit to resume in the third quarter. The Pampe pit, which will be the main source of oxide ore moving forward, is expected to provide more consistent ore than our stockpiled material and that should result in improved throughput and recovery. Nevertheless, metallurgical recovery in the second quarter jumped 8 points to 62% from the 54% in quarter one. At this point in the third quarter, we are seeing over 70% recovery and are targeting approximately 50,000 ounces for 2012 from the oxide plant.

With that, I’ll turn it back to Tom.

Tom Mair

Thanks, Sam. Turning now to exploration, we have raised our 2012 exploration budget from $10 million to about $14 million. We told you last quarter about positive drilling results under the Wassa Main pits and recently, we reported further positive results that indicated Wassa mineralization at depth is wider and higher grade than what has been mined to-date. If you haven’t done so already, I would urge you to look at our July 25th news release on this subject. We are confident enough in the potential of these results that we have increased our rig count at Wassa from two to five.

Drilling results for the first half of 2012 are being incorporated into a revised geological model and an updated resource estimate for the year-end resources and reserve statement. In addition, we have begun work on the scoping study for the Wassa expansion project to look at various mining and milling scenarios. We are continuing exploration drilling on high grade underground targets at Father Brown and Adoikrom. In Cote d’Ivoire, we have completed the first phase of deep auger drilling and the results were positive. As a result we expect to commence RAB drilling in the fourth quarter of this year.

Let me focus on few highlights of the recent drilling programs at Wassa Main pit. This slide shows the current operating pits at Wassa 242 MSN B Shoot, South East, and a few of the intercepts from recent drilling including hole 113, 18.1 meters grading 32 grams per tonne; 124, 33.9 meters at 2.2 grams per tonne; hole 90, 21.2 meters at 15.8 grams per tonne and you can see the rest of the results there. Also, complete results are available on our website.

Needless to say, we are very excited by these results at Wassa. Before any firm conclusions can be made on the future of the Wassa operation, there is considerable drilling to be completed followed by updated resource estimates and pit optimizations. In parallel, we are looking at various mill expansion opportunities. This does not mean we will expand the mill or have a large immediate need for capital.

The great thing about finding more gold within 2 kilometers of our existing mill is that we have cash flow and we can phase capital requirements to maximize value and take advantage of market opportunities. If follow-up drilling and engineering studies confirm initial indications, Wassa has much more value than is reflected in our current stock price.

A few words on the Prestea underground project for those of who may be new to Golden Star. In May, we published our Preliminary Economic Assessment, which outlined a mineable resource of 1.8 million tonnes grading 7.8 grams per tonne. This led to our decision to commission a full feasibility study which kicked off in the second quarter. We have acquired an underground drill and last week we started drilling on 17 level.

The PEA focuses on development of the West Reef area from 700 meters to 900 meters below surface, approximately 2 kilometers south of the Central Shaft. The concept is to mine West Reef using mechanized mining methods. Including scope developments, we envisioned a 1,200 tonne per day mining operation supplying 7.8 gram per tonne material to the Bogoso oxide plant, which is 15 kilometers to the North.

At full production, we expect to add 97,000 ounces per year of gold production at cash operating costs of between $600 and $700 per ounce. The estimated capital cost of development is $115 million to be invested over four years, subject, of course, to a positive development decision. The project economics suggest a post-tax net present value of $107 million at $1,500 gold price at an internal rate of return of 21%.

Historically, the Prestea mine has produced over 9 million ounces of gold along 9 kilometers of strike. And as you can see from the long section, there are numerous areas that have not been mined or explored, particularly below 1,350 meter level, the deepest extent of present workings. We have identified several areas which are prospective for explorations and, in some cases, almost ready for mining.

The results from the ongoing drilling program will be incorporated into the West Reef feasibility study, which is expected to be completed in early 2013. The full PEA is available on our website under the Bogoso Operations section. For more summary information on the project, I would direct you to our May 3 news release also available on our website. For the full year, we expect to produce 338,000 ounces, which is up from 301,000 ounces in 2012.

In closing, I want to reintegrate some highlights of our first half performance. Gold production at both mines is increasing and we added a new business line, the oxide plant at Bogoso that is contributing a growing number of ounces to overall production. Cost of both mines are trending in the right direction, downward, and we have achieved four consecutive quarters of positive cash flow from operations. And finally, we have made important upgrades to our plants and operations at both Bogoso and Wassa.

In summary, we are making steady demonstrable progress in areas that are key to building shareholder value. In the second half, we expect to complete several business-enhancing projects. These include improvements to the CIL section of the Wassa plant, work on the new tailings dam at Wassa, completion of the water treatment plant at Bogoso and commissioning of the Bogoso tailings retreatment facility.

And finally, we have an exciting pipeline of projects that we believe will add significant value over time. Chief among these are the Wassa expansion, the Prestea underground, Dumasi and Prestea South. As always, on behalf of the Board of Directors and all employees of Golden Star, I thank you for your continued support.

Operator, you can now open the call to questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from Paolo Lostritto of National Bank Financial. Please proceed with your questions.

Paolo Lostritto – National Bank Financial

Good morning, guys.

Tom Mair

Good morning, Paolo.

Paolo Lostritto – National Bank Financial

Great quarter.

Tom Mair

Thank you.

Paolo Lostritto – National Bank Financial

Just a couple of questions, on the call during the operating section you had hinted at a change in strip ratio regarding some of the pits at Bogoso and the strip ratio for 2013. Can you give us a better sense of what that might look like?

Tom Mair

Obviously, we’re still in the planning cycle, Paolo, and we’ll give you further updates later on this year.

Paolo Lostritto – National Bank Financial

Okay. And then the other thing that I had some questions on and I recognize when you’re operating you’re basically accounting for the cost as a business unit, but is there any way we can get a split or some sort of understanding of the refractory versus the oxide costs at Bogoso?

Tom Mair

Yeah, we plan to start reporting that in some detail next quarter, Paolo, but I will say at this time a couple of things about the oxide plant. One, we’re still not producing at full capacity. Obviously, at 10,000 ounces we’re guiding that we’ll produce something like 34,000 ounces there in the last two quarters or 17,000 ounces per quarter. So the cost per ounce is still above what we would expect in the future from the oxide mill.

Paolo Lostritto – National Bank Financial

Okay.

Tom Mair

And but as I say we do intend to start reporting that in detail with the next quarter.

Paolo Lostritto – National Bank Financial

Yeah, just so you have your control in place. Okay. Thank you.

Tom Mair

Thank you.

Operator

(Operator Instructions) Thank you. Our next question is coming from Trevor Turnbull of Scotia Capital. Please proceed with your questions.

Trevor Turnbull – Scotia Capital

Hi, Tom.

Tom Mair

Hi, Trevor. How are you?

Trevor Turnbull – Scotia Capital

Good, I apologize I haven’t been able to go through everything in enough detail and I don’t want to ask something that might be obvious, but can you just remind us of what the capital budget is for the reminder of the year for Bogoso and Prestea – sorry, Bogoso and Wassa?

Tom Mair

Yeah, we’ve guided that we’ll spend about $100 million for the year.

Trevor Turnbull – Scotia Capital

Okay.

Tom Mair

And to date we’ve spent – so we’ve got another – we’ve got a couple of quarters of fairly heavy capital in front of us, probably more similar to the first quarter.

Trevor Turnbull – Scotia Capital

Okay. You mentioned you are increasing a little bit your exploration budget. Is that incorporated in that capital figure or is that expensed?

Tom Mair

No, most of the increase is the additional drills at Wassa and that’s all capitalized.

Trevor Turnbull – Scotia Capital

Okay, so that’s in that guidance you’ve already given. So then given that you’ve got a pretty aggressive capital program left to go and you do have a bit of the debenture still outstanding coming up this November. Can you give us a little sense of kind of how things – how you might juggle things if you need to?

Tom Mair

How we might juggle things if you need to?

Trevor Turnbull – Scotia Capital

Or in terms of priority, are there some parts of the capital that you could defer, if need be?

Tom Mair

Yeah, that’s correct. There’s always things that can be deferred with. The two major – or I guess the three major capital expenditures that we have, which we will continue with, which need to be completed, the new tailings dam at Wassa, the resettlement of Dumasi and that’s, we’re not spending a great deal of money there right now, but that will pick up next year. And the water treatment plant at Bogoso/Prestea, but that’s a relatively modest capital requirement for the balance of this year. So we do have a quite a bit of flexibility in our capital program.

Trevor Turnbull – Scotia Capital

Okay.

Tom Mair

Of course, I should add, Trevor, of course, that drilling at Wassa is a top priority as well.

Trevor Turnbull – Scotia Capital

Right. And again, my apologies for not having picked this up out of the MD&A, but is there an allocation for underground capital as well at Prestea?

Tom Mair

Yeah, we have about $3 million to spend on the feasibility study. About half of that’s in underground drilling which, as you know, we’ve already talked about, that’s acquiring the drill and drilling geotechnical holes so we can complete a feasibility level study. And then, there is maybe another $3 million or $4 million at Prestea Underground related to upgrading the shafts, utilities, buying some new locomotives, that sort of thing.

Trevor Turnbull – Scotia Capital

And that was for 2012?

Tom Mair

Some of that will be spent in the first quarter of 2013, but the bulk of that’s in 2012. After that, we have a development decision once we have the results of the feasibility study and how we phase that capital going forward is really that we have a lot of flexibility in that.

Trevor Turnbull – Scotia Capital

Okay. Great, Tom. Thank you very much.

Operator

Thank you. At this time, I will turn the floor back over to management for any additional or closing comments.

Tom Mair

Thank you very much for attending our second quarter conference call and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

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