An announcement from Ghana’s public utilities committee that power rates may more than double for mining companies and steel mills appears to be the result of growing consumption and higher oil prices. The cost of power from the West African nation’s grid is expected to rise from $0.10 per kilowatt hour [kWh] to $0.20-$0.24 beginning on July 1. However, this is still under negotiation.
Ghana has experienced a chronic shortage of power that some feel poses a sever threat to economic productivity. However, new projects, some with the help of China, are expected to ease its electricity woes.
One company that will be affected is Golden Star Resources Ltd. (NYSEMKT:GSS), a pure gold play with two operating mines in Ghana. Golden Star said the price hike will translate into a cost increase of $60 to $85 per ounce based on forecasted production of 370,000 to 425,000 ounces of gold.
In a statement released on Thursday, Goldstar CEO, Tom Mair said:
We are disappointed that the PURC appears to have specifically targeted the mining industry to carry the burden of the increased power generation costs.
Its cash operating costs guidance is currently $500 to $650 per ounce, according to Credit Suisse analyst Anita Soni. She estimates a cost increase of $40 to $55 per ounce in fiscal 2008 and new cost guidance in the range of $540 to $615 per ounce. Including royalties of 3%, which are also under review and may rise to 6%, costs could climb to $560 to $635, Ms. Soni told clients. The analyst is forecasting $588.
She rates Golden Star shares “neutral” and cut her price target to $3.60 from $4.40. Ms. Soni called a preliminary cost increase estimate of $65 “fairly negative” and reduced her net asset value estimate for the stock from $3.19 to $2.81.
However, with the near-term impact potentially being bigger than the $65 to $80 forecast, Ms. Soni says such an increase is not sustainable and will likely not endure for the life of the mine. She also noted that this is an election year in Ghana.
The news forced Blackmont Capital analyst Richard Gray to downgrade Golden Star from “hold” to “sell.” He cut his price target by C$1 to C$2.75.
In a note, the analyst said:
While the company believes these power costs should be closer to the C$0.14/kWh level, we believe the decision to increase the costs is a significant blow to the company’s ability to survive.
He expects cash cost to rise above $600 per ounce, causing margins to become “dangerously slim.”