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Tony S is an individual investor interested in the economy, and markets in general. Previously, I've been an electrical engineer and worked the electronics industry for 20 years. Interests include the stock market, precious metals, real estate, and currencies.
  • Great Basin Gold : About To Be Profitable Soon? 7 comments
    Aug 13, 2012 1:41 AM | about stocks: GBG

    Shareholders of Great Basin Gold (OTC: GBG) have been through a lot. The share price has plummeted from almost $3/share in late 2010 down to $0.51/share today (August 12, 2012). When shares have been decimated in price, that makes a stock interesting. It can present extreme and overlooked value or it could be on the way down further.

    Executive Summary

    Share prices have been decimated. Q2 earnings are about to be released. GBG has been losing money, but their Burnstone (South African) mine has been rapidly increasing production. If Burnstone meets projected production targets, then GBG should break-even in Q2, and be profitable in Q3. There are a large number of short shares, and if Q2 happens as expected, the shorts could be trapped, and we could see the stock rise significantly very soon. Q2 results will be announced on August 15, 2012 at 9:00 AM EST.

    Basics

    As always, I start with the basics:

    CompanyGreat Basin Gold
    US SymbolGBG
    Market Cap281.0 million
    Enterprise Value525.6 million
    EPS (ttm)Negative
    Cash43.9 million
    Debt288 million

    Great Basin Gold has two assets. A gold/silver mine in Nevada called Hollister, and a gold mine in South Africa called Burnstone.

    Hollister

    Hollister is currently the top producing mine by grade (at 32.8 grams/ton) in this survey which ranks the world's gold mines. Hollister is running at relatively steady state production of 80,000-90,000 oz Au per year (Q1 production was a bit lower at 16,240 oz Au equivalent, due to some carbon issues, which have since been resolved).

    Burnstone

    Burnstone tells the story of GBG stock. At full production, this mine will be operating at 200,000 oz Au per year. That's more than double Hollister. It seems that Burnstone has been plagued with difficulties, and unexpected startup issues.

    But as we see from management projections (from the last GBG AGM on June 6, 2012, Burnstone is at the cusp of starting production). Management has actually been pretty good at communicating difficulties to shareholders as they appear (In Q4, and Q1 they reported flooding and fault-line issues which have since been resolved). Since the June 6, AGM, there have not been any updates on Burnstone as Q2 progressed.

    (click to enlarge)

    My belief is that management is traumatized. They were not expecting this many problems in bringing Burnstone online. Almost every time an unexpected announcement comes out, that it has been bad news. As a result, if they are proceeding on track, management doesn't know what to say. So, they are staying quiet - until their Q2 report comes out (this coming Wed. August 15, 2012).

    If Burnstone comes in on target, we the company should stop hemorrhaging money, and break even by Q2. By Q3, we should see a profit. As a result, we can see some rapid price escalations, as this company transitions from losing money to making money.

    With Hollister operating at 16K oz Au per quarter production (same as Q1 which was below average production for Hollister), and Burnstone operating at a similar 18K oz Au per quarter (and growing), and given a gold price of about $1600/oz, that means revenues would be running at about $54.9 million / quarter, or $219.5 million / year. this means that the $288 million in debt, can be paid off in a few years. (Of course, should the price of gold rise, then it can be paid off quicker, but at the current low interest rates, there is not much point to accelerating debt repayment).

    Cash Position, Debt, and Enterprise Value

    The company's current cash position of $43.9 million is largely a result of issuing additional stock in Q1 ($50 million for 66.7 million shares). They had been losing money before, and the stock offering was necessary to keep going. But now, they should be at the break even-point, which means they should stop losing money, and by Q3 they should transition to profitability. Once they are profitable, they can consider a share repurchase program. It is interesting to note that shares are currently available at about 33% below the offering price (the share price is currently $0.51, and the offering price per share was $0.075).

    As the company is trading at significantly BELOW enterprise value, if the company reports break-even to profitability in Q2, this makes it a prime takeover target. The industry appears to be going through a consolidation phase, and mergers and acquisitions are becoming more common.

    Short Interest

    As of 7/31, the short interest is 8.1 days (with 6,398,609 shares short). Interestingly enough, there were more shares short on 7/13 (with 6,635,080 shares short), but average daily volume was higher then (volume of 1,309,626 shares for 7/13 vs volume of 790,010 shares for 7/31 time-frame). It appears that some shorts have covered. In order for shorts to cover, they have to buy shares, and the only source to buy shares from is the current longs. It appears that the longs are aware that Burnstone is about to break-even, and don't want to sell shares at the current low prices.

    Conclusion

    Q2 Earnings will be announced on Wednesday, August 15th at 9:00AM EST. With current sentiment so poor, if the company just breaks even in Q2, then we could see some significant price appreciation and possibly even a short squeeze, in the short term. In the long term, as Burnstone production increases, the company can pay down debt, and buy back shares, resulting in significant gains.

    Disclosure: I am long GBG.

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Comments (7)
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  • Ludie
    , contributor
    Comments (7) | Send Message
     
    With such a world-class resource, Burnstone is alone worth $2.00 per share. I am long and will hang in there until GBG has been restored to a +$2 stock.
    13 Aug 2012, 11:05 AM Reply Like
  • Ludie
    , contributor
    Comments (7) | Send Message
     
    Just a Exploration/Mine Geologist with 13 years u/g experience in the Witwatersrand basin.
    13 Aug 2012, 11:07 AM Reply Like
  • Tony S
    , contributor
    Comments (17) | Send Message
     
    Author’s reply » Thanks for your input Ludie. I appreciate having a geologist comment. With Burnstone worth at least $2, and I think that Hollister is probably worth at least a buck as well, that means we could get back to $3/share.

     

    Once the stock hits even $1/share, then it will trigger a short squeeze as the 6.4 million short shares look to cover.
    13 Aug 2012, 11:25 PM Reply Like
  • Tony S
    , contributor
    Comments (17) | Send Message
     
    Author’s reply » Correction - GBG will be announcing Q2 results on Tuesday after the market closes, and the Q2 Conference Call and Management Discussion is at 9:00 AM EST, August 15th.
    14 Aug 2012, 02:31 PM Reply Like
  • silverwood
    , contributor
    Comments (189) | Send Message
     
    So we made a new 52 week low today, just hours before the quarters results are revealed. So has the news been leaked? or are the shorts so confident that GBG will disappoint again? Disclosure; I am a long suffering GBG share holder.
    14 Aug 2012, 03:51 PM Reply Like
  • Tony S
    , contributor
    Comments (17) | Send Message
     
    Author’s reply » ... so, here's what I found out.

     

    The SEC documents have been filed at :
    http://1.usa.gov/Mw3Ufl

     

    (both Financials and MD & A)
    (these are just my first/gut reactions)

     

    I had just gotten back into GBG.

     

    Turns out Burnstone (as of end of June) is NOT experiencing the ramp-up in production. According to the MDA, they experienced a "delay in the completion of the vertical shaft and the associated permanent infrastructure (see below). The delays in completion of the associated shaft infrastructure impacted on service water supply, handling of excess water and the cleaning of spillage in the vertical shaft bottom which negatively impacted shaft availability. Water is required to clean, support and drill and the time lost in replacing burst plastic pipes from the temporary infrastructure and de-water the affected area severely impacted production goals."

     

    ... so, this issue with water took place and was KNOWN by Management by the June AGM, and yet, as far as I know, was NOT MENTIONED. As a shareholder, I'm find this to be unconscionable. They should have talked about this during the AGM on June 6.

     

    Net Result : earnings -0.04 (negative)

     

    My current take is that the company still has lots of value in the Burnstone mine, but that management needs to improve communications to investors.

     

    Currently trading at below enterprise value, this company now becomes ripe for takeover.
    14 Aug 2012, 07:55 PM Reply Like
  • Tony S
    , contributor
    Comments (17) | Send Message
     
    Author’s reply » (still first impressions...)
    the other thing to note is that planned production for 2012 has now dropped. In Q1, they planned to mine 90K-100K Au eqv oz from Burnstone in 2012. That number has now dropped to 30K Au eqv oz in 2012, with 90K-100K Au eqv oz in 2013.
    14 Aug 2012, 08:07 PM Reply Like
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