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Golden Star Resources (NYSEMKT:GSS)

Q3 2012 Earnings Call

November 08, 2012 11:00 am ET

Executives

Thomas G. Mair - Chief Executive Officer, President and Director

Samuel T. Coetzer - Chief Operating Officer and Executive Vice President

Analysts

Jason Schacht - Heartland Advisors, Inc.

Phil Russo

Paolo Lostritto - National Bank Financial, Inc., Research Division

Lawson Winder - BofA Merrill Lynch, Research Division

Operator

Greetings and welcome to the Golden Star Resources' Third Quarter Earnings Call. [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, Mr. Mair, you may begin.

Thomas G. Mair

Thank you. Good morning, ladies and gentlemen. I'm Tom Mair, President and CEO of Golden Star Resources. Welcome to our third quarter 2012 conference call. Joining me on the call today are Sam Coetzer, our Chief Operating Officer; Bruce Higson-Smith, Senior Vice President, Finance and Corporate Development; and Roger Palmer, 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 third quarter and 9-month period ended September 30. 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, I will open the call to questions from analysts.

Golden Star sold nearly 81,000 ounces of gold in the third quarter, up 9% over roughly 74,000 ounces in the same quarter last year. We poured an additional 2,461 ounces during the -- during Q3, bringing our grand total production to about 83,500 ounces. Average realized gold price in Q3 was $1,653, down slightly from the same period last year, but up from $1,600 in Q2. Higher gold production for the comparative third quarters offset lower gold prices to push revenue up 6% year-over-year to $133.5 million for the quarter.

We're again pleased to report improvement in consolidated cash operating costs, which declined to $992 an ounce from $1,108 per ounce a year ago. Both Wassa and Bogoso achieved lower cash operating costs year-over-year.

Operating cash flow before changes in working capital in Q3 totaled $29.8 million or $0.12 per share. This is a significant improvement over the same quarter last year when we reported $7.2 million or $0.03 per share. We have now achieved 5 consecutive quarters of positive cash flow from operations.

We closed the third quarter with approximately $106 million in cash and cash equivalents. CapEx in Q3 was about $19 million, and we used $5.5 million in working capital. Inventories, mainly finished gold inventory, were up $3.3 million, and we reduced payables by $2.7 million.

Also, in the third quarter, we redeemed approximately $6 million of our 4% convertible debentures due November 30 of this year. As previously stated, we expect to pay the balance of just over $44 million in cash.

Turning to 9-month results. Golden Star produced almost 244,000 ounces of gold year-to-date, up 6% over the same period last year. Our average realized gold price in the first 9 months of 2012 was up 8% to $1,645 per ounce from $1,529 in the same period of 2011. Higher gold prices, combined with more ounces produced, led to a 14% revenue increase to nearly $401 million through the first 9 months, and this is up from $352 million in the same period a year ago.

Consolidated cash operating cost declined slightly year-over-year to $1,007 per ounce from $1,054 per ounce last year. Cash flow before working capital changes was almost $84 million year-to-date or about $0.32 per share. That's more than triple the $25 million or $0.10 per share in the same period last year.

I'm going to hand it over to Sam Coetzer, our Chief Operating Officer, who'll provide some color on our third quarter operations and future plans at both Bogoso and Wassa. Sam?

Samuel T. Coetzer

Good morning, everyone. Today, I want to start by giving you a sense of our main focus areas in and around our operations. I'm happy to state that during the third quarter, progress was made on various aspects of the operations that will allow us to operate better going forward.

To mention a few highlights, the Bogoso refractory plant operated at a higher level of throughput, achieving in excess of 680,000 tonnes for the quarter. Various improvements, including an additional surge tank allowing for downstream feed to the BIOX section to continue when upstream work on the circuit is done. A third-party review was conducted, which identified bottlenecks existing in our plant. Additionally, we made progress on our new water treatment facility at Bogoso, setting the stage for water discharge to commence in the new year.

At the Bogoso oxide plant, a gravity circuit was introduced during the quarter, which allows for gravity gold to be drawn off early and has improved recoveries. At our Wassa mine, we made improvements to the crushing circuit and continue to upgrade the CIL circuit.

From a planning perspective, as I indicated before, we have done a full mine plan review. Although the plan is not finalized, we are confident that we have clarity and direction on what we need to focus on going forward. The plan indicates that we have flexibility to move certain future components around. The flexibility exists by focusing on supply of both refractory and non-refractory ore components of the block. The main contributors of Bogoso for the future remains Bogoso North, Chujah, Dumasi, Pampe and Mampon. A combination of both oxide and sulfide ore is available in all these pits, allowing us to bring pits online to fit planes, recovery and throughput criteria. We are now in the midst of finding that sweet spot.

At Wassa, I'm pleased to say that the exploration drilling is continuing to achieve positive results, and with 5 rigs drilling below the Wassa pits, we are continuing to advance this project. At Prestea underground mine, a full infrastructure, mine plant and access review was conducted for completing the feasibility study. We also completed all geotechnical drilling on the 17 level, and finally, we continue to upgrade the Central Shaft to prepare for early start of Phase 1 mining.

Turning to our Wassa operations, which have been performing very well for us this year, the essence of 2012 compared to 2011 is high-grade and improved plant reliability. Following completion of mining at the SAK 1 and Benso pits in the first quarter of 2012, Wassa accelerated mining rates at the Father Brown pit and the Wassa pits to maintain a constant flow of ore to the Wassa processing plant. Since the Father Brown ore that replaced the Benso ore has a higher gold grade, the average ore feed grade increased in the third quarter of 2012, and Wassa sold just under 41,000 ounces in the quarter, up from 33,000 ounces in the third quarter of 2011.

During the third quarter, we noted increased vibrations at the Wassa mold to [ph] drive motor and we reduced throughput in that mold to a safe level through this mold. During the first 14 days of the fourth quarter, we rebuilt the foundation, refit the mold onto a new plate. This mold is now back up and running. We estimate that this shutdown has deferred about 2,000 ounces into next year.

Cash operating costs continue to decline for the third consecutive quarter, now down to $817 per ounce in Q3. Additionally, land acquisition for a new tailings disposal facility is well advanced at Wassa and construction of the new facility is expected to occur over the next 3 quarters. This project, along with the drilling below the Wassa pits, are the major capital projects now underway at Wassa.

As stated in the previous slide, our focus on plant reliability has resulted in improved plant performance at Wassa. In addition to progress in debottlenecking the plant, there is -- improvement projects were completed to mitigate the effects of wet weather. During the latter part of 2011, as you might remember, Wassa was impacted by wet, sticky ore. In response to this, we redesigned and modified the secondary screen and installed air cannons on the jaw crusher bypass chute. These projects have already resulted in a dramatically reduced downtime in the crushing circuit during this year's wet season.

Additionally, we continue to upgrade the CIL circuit to allow for easier processing of harder ore. This project will also be beneficial in the event that the Wassa expansion becomes a reality in the future. As we move away from mining a high blend of oxide ore into fresher and harder ore types, this project remains critical.

Turning to our Bogoso refractory operations. Gold sales from the refractory plant at Bogoso totaled just over 30,000 ounces in the third quarter of 2012, down from 40,000 ounces in the same period of 2011. While tonnes processed in the third quarter was 19% higher than a year earlier, lower ore grades and lower gold recovery were responsible for the drop in refractory ounces sold. However, during the quarter, due to the high inventory levels on the stockpiles, we decided to reduce the stockpiles by mining less from the Bogoso North pit. This resulted in lower grade ore delivered to the process facility. The low grade for the past quarter is not reflective of the grades from the pit. The average stockpile is about 2.1 gram per tonne versus our average input grade of 2.5 gram per tonne.

For the fourth quarter, we will supply higher grade ore from the pits to the process plant. This is now possible as our plant is operating at much better levels than before. During the quarter, we completed a full review of both plants to assess the best way to improve plant reliabilities. Various projects are underway, including a maintenance system overhaul that is expected to continue to improve results.

The oxide plant produced almost 9,600 ounces in the third quarter, which was slightly below our expectations. We continue to experience plant reliability issues and the Pampe pit bench slips we encountered earlier this year resulted in having to mine ore with lower grade and lower recovery characteristics. Oxide plant feed was enhanced with supply from Bogoso North, partially offsetting the lower recovery ore from Pampe. Gold recovery in the oxide plant continues to show improvement, although we have not, so far, supplied it with high ratio of fresh ore from the Pampe pit. It's expected that the plant will perform better in the fourth quarter from a plant throughput perspective, and we will now start receiving more fresh ore from the Pampe pit.

During the latter part of the third quarter, we encountered issues with the 5 tonne elution circuit which delayed the sale of gold. However, even with the challenges we face, we continue to show plant improvements quarter-over-quarter. While both plant reliability issues still prevailed during the quarter, both plants continue to increase the rate of throughput.

Preparation for 2013 is currently underway with the team focusing on the following: completion of the Prestea Underground feasibility study; commence the pushbacks of the Chujah and Bogoso North pits, which will result in increased stripping ratios and a higher mining cost in 2013. However, in this context, I have to remind you that we are going into 2013 with more than 500,000 tonnes of ore on stockpile; advanced development of the Dumasi project; continue with our exploration drilling under the Wassa Main pits and continue upgrading our activities at all plants; and work to unlock the synergies existing between Wassa and Bogoso in the areas of equipment sharing, supply chain and administration to continue to reduce costs.

I'll now hand it back to Tom.

Thomas G. Mair

Thanks, Sam. Turning to the Wassa exploration results. We continue to be very excited by drilling results at Wassa. As announced last quarter, we added 3 drill rigs at Wassa in July, giving us a total of 5 rigs. During Q3, we completed 49 holes for a total of 16,000 meters. If you haven't had the chance, I encourage you to look at our October 15 press release on this subject along, with the complete drilling results that are available on our website.

Let me focus on a few highlights of the recent drilling at Wassa Main pits. The drilling continues to encounter high-grade intercepts below the current Wassa pits. This slide shows the current operating pits at Wassa: 242, MSN, B Shoot, South East, et cetera. Hole #137, we cut 54.3 meters at 4.8 grams per tonne, including 27.5 meters at 8.8 grams per tonne. Hole 135, 17 meters at 2.5 meters -- at 2.5 grams per tonne and another zone of 10.9 meters at 6.3 grams per tonne. And finally, Hole 131, 17.1 meters at 3.2 grams per tonne and another zone of 14.4 meters at 6.1 grams per tonne.

These holes tested the up and down plunge of the high-grade intersections in our previous released Hole 90, which intersected 21.2 meters at 15.8 grams per tonne, and Hole 113, which intersected 18.18 meters at 32 grams per tonne.

Before any firm conclusions can be made on the future of the Wassa pits, 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 face 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 you who may be new to Golden Star. In May, we published our Preliminary Economic Assessment, which outlined a mineable resource of 1.84 million tonnes, grading 7.8 grams per tonne. This led to our decision to commission a full feasibility study.

In this quarter, we made substantial progress on the study. The required geotechnical drilling will be complete by year end. On the engineering side, we had a number of visits and inspections by our consulting engineers, and the required studies are underway. We expect to complete the feasibility study in Q1 of 2013. The PEA focuses on development of the West Reef area from 700 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 stope development, the PEA considers a 1,200 ton per day mining operation, supplying 7.8 gram per tonne ore to the Bogoso non-refractory plant, which is 15 kilometers to the north.

At full production, we expect that 97,000 ounces per year of gold production at cash operating cost of between $600 and $700 per ounce. The estimated capital cost of development is $115 million to be invested over a 4-year period starting in 2013 subject, of course, to a positive development decision and permitting. The project economics suggest a post-tax NPV of $107 million at $1,500 gold and an IRR of 21%. The full PEA is available on our website under the Bogoso operations section. For more summary information on the project, I refer you to our May 3 news release, also available on our website.

Turning to our 2012 guidance. For the full year, we expect to produce between 338,000 and 338 -- 333,000 and 338,000 ounces of gold, which is up from 301,000 ounces in 2011. We have adjusted guidance at Wassa up from the previous guidance of 150,000. And in reflecting the issues we're having at the oxide non-refractory mill, as Sam has already discussed, we've adjusted the guidance of Bogoso down from 188,000 ounces.

In closing, I want to recap some performance highlights through the first 9 months of 2012. Gold production at both mines is increasing, and we have achieved 5 straight quarters of positive cash flow from operations, including nearly $84 million in operating cash flow before working capital changes year-to-date. We added a new business line, the oxide plant, that is contributing a growing number of ounces to production. Costs at both mines are trending downward. And finally, we have made important upgrades to our plants and operations at both Wassa and Bogoso.

In summary, we are making steady progress in areas that are key to building shareholder value. We still have work to do, including unlocking synergies between sites and increasing efficiencies across all aspects of our business. We are completing several business-enhancing projects, including improvements to the CIL section of the Wassa plant, work on the new tailings dam at Wassa and the completion of the water treatment plant at Bogoso.

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, Mampon and Prestea South. As always, on behalf of the Board of Directors and all the employees of Golden Star, I thank you for your continued support. Operator, you may now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jason Schacht with Heartland Advisors.

Jason Schacht - Heartland Advisors, Inc.

Just one question for you all this morning. Is there any update on the progress of the permitting at Prestea? Or is that kind of frozen until after the election this December?

Thomas G. Mair

Well, actually, Jason, we had a -- on October 31, we signed agreements with the communities around Bogoso, Prestea, all the communities in that area, 3 community agreements, and we feel that paves the way for the permitting and the public hearing on Prestea South. However, as you rightly pointed out, there is an election in early December, so we don't expect that to happen until early in the new year.

Jason Schacht - Heartland Advisors, Inc.

Okay. Is that something -- is the -- would the potential exist to have something in hand in the first quarter? Or would that be a little bit aggressive at this point?

Thomas G. Mair

With the history of Prestea South, I'm very reluctant to make any future prediction of how we're going to go there. All I can tell you is we've reached a milestone with these community agreements and that's another step forward. We still have work to do, and timing, et cetera, is always an issue, particularly in that area, as you know.

Operator

Our next question comes from the line of Phil Russo with Raymond James.

Phil Russo

Just 3 quick questions. Just apologies if I missed this one, but at Bogoso, you guys talk about these pit hole pushbacks. How many tonnes are we talking about here? How much is that going to cost?

Thomas G. Mair

We're still doing the planning there, Phil, and we'll be updating guidance in detail on that when we're through the planning cycle, which would be early next year.

Phil Russo

Okay. And you guys expect the grade for that, for there to sort of be the same as what you now are experiencing or are you going to update that as well early next year?

Thomas G. Mair

We will, but generally, the grade will be fine. Obviously, we're doing a pushback to access ore depth, but there is grade in the pushback, particularly at the top of the pushbacks, we're encountering some non-refractory material, which is a positive, as we now have our operating non-refractory mill and we can put it through there. So that's one benefit.

Phil Russo

Okay. And then just lastly then. Just with all these cost saving endeavors that you guys are working to implement, what's the goal here? Like, what's the sustainable cash operating cost level that you guys are sort of working towards trying to achieve here in 2 to 3 years' time? Like, what's the sustainable number you guys are aiming for?

Thomas G. Mair

Without meaning to be flippant, as low as we can possibly get them. But you've got the guidance for 2012. We still think that there's -- as a management team, we talk about our being able to do 10% to 15% better over time than that in cost and production. There are still inflationary pressures in the marketplace, as you know, particularly in labor. We're seeing some ease in some of the commodity-based things, oil-based, although that's always subject to change, chemicals. The industry is still very tight. There still are inflationary pressures, and all I can say is that Sam and the team have worked very, very hard and with some good results to keep us where we are. But that's the way we look at it as a management team.

Operator

Our next question comes from the line of Paolo Lostritto with National Bank Financial.

Paolo Lostritto - National Bank Financial, Inc., Research Division

With regards to kind of having a couple of studies out next year and maybe the budget, are you guys kind of hoping to provide an Analyst Day or some sort of information session where we can sit down and kind of get a sense of what 2013 is going to look like?

Thomas G. Mair

Yes, it's certainly in our plans. We were hoping to do something before the end of the year, but that's probably not going to happen with everyone's schedules. So we'll be planning something in the first quarter.

Operator

[Operator Instructions] Our next question comes from the line of Lawson Winder with Bank of America Merrill Lynch.

Lawson Winder - BofA Merrill Lynch, Research Division

One question. On the 2013 CapEx, do you guys -- are you guys providing any breakdown as to how the $100 million to $125 million will be spent between Wassa and Bogoso/Prestea?

Thomas G. Mair

We're not -- we haven't provided anything -- any details at this time, but we will say that we're still going through the planning cycle, and as you can tell, a wide range there between $100 million and $125 million. So until we've -- until we tighten that down. But it's -- I can say it's probably 40% at Wassa and 60% at Bogoso is the way it's looking right now.

Lawson Winder - BofA Merrill Lynch, Research Division

Okay, that's great. And then just one sort of follow-up question on the earlier question on the pushback at Chujah and the North pit. I think on the call, one of you had indicated that there is also 500,000 tonnes of ore stockpile. Is that correct?

Thomas G. Mair

That's correct, yes. We've been building stockpiles over the last 3 to 4 quarters.

Samuel T. Coetzer

Yes, about the last 4 quarters. The essence there, Lawson, is it's a good time. As I indicated, we have flexibility to determine our pushbacks, as Tom also indicated. In our pushbacks, we now can have some oxide ore that we can bring into the plant. And when you have the 500,000 tonnes sitting that you've actually mined this year already, you should think about when you look at your pushback ratio as you have ore already on the stockpile.

Lawson Winder - BofA Merrill Lynch, Research Division

Of course. And what would the average grade of that stockpile be?

Samuel T. Coetzer

I mentioned it earlier. It's about 2.1 gram a tonne versus our mining grade is now 2.5 in that range. And that's reflected very well, we saw that in the third quarter. In the third quarter, when we put -- we ran stockpiles, so we know what the recoveries and the blends are on that. So we know it's a little bit lower, but it doesn't have that mining cost with it. So for us, in terms of when to do good pushbacks is when you have the opportunity of having significant stockpiles. And then I indicated earlier on the flexibility of our plan does exist, that we can do certain things that helps us.

Lawson Winder - BofA Merrill Lynch, Research Division

And that's all oxide ore?

Samuel T. Coetzer

No, no, no. The top is oxide and then we're going to transition, then we're going to fresh refractory ore.

Operator

Gentlemen, there are no further questions at this time. I would like to turn the floor back over to Mr. Mair for closing comments.

Thomas G. Mair

Thank you for tuning in to our third quarter conference call, and we look forward to speaking with you all again at the end of the fourth quarter.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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