Golden Star Resources Ltd. (NYSEMKT:GSS) Q2 2018 Earnings Conference Call August 2, 2018 10:00 AM ET
Sam Coetzer – President and Chief Executive Officer
Daniel Owiredu – Chief Operating Officer
André van Niekerk – Chief Financial Officer
Andrew Wray – Chief Executive Officer-La Mancha
Martin Raffield – Senior Vice President of Project Development and Technical Services
Mike Curran – Beacon Securities
Justin Chan – Numis Securities
Raj Ray – Desjardins
Heiko Ihle – H.C. Wainwright
Good morning. My name is Michelle, and I will be your operator today. At this time, I would like to welcome everyone to the Golden Star Resources Second Quarter 2018 Results. [Operator Instructions] I would now like to turn the call over to Mr. Sam Coetzer, President and CEO of Golden Star Resources. Please go ahead.
Thank you, Michelle. Good morning, all. I’m Sam Coetzer, the President and CEO of Golden Star Resources. Firstly, thank you very much for dialing in to the call this morning following the announcement of our strategic partner with La Mancha and the release of our second quarter 2018 results yesterday after market close.
The presentation is going to cover the proposed transactions and then our results. But before we dive into that, I’d like to share with you some background information on how this deal came about and also my feelings about it. I have known Andrew Wray and his team for several years. La Mancha’s Executive Vice President of Discovery, Peter Spora, has visited our operations several years ago and he remained in close contact with our Vice President of Exploration, Mitch Wasel. Peter was impressed by the quality of the orebodies, in particular, with Wassa. And as a result, Andrew, Peter and their team kept track of Golden Star’s progress over the years that followed.
Earlier this year, when Andrew became the CEO of La Mancha, we met again and we revisited their idea of forming a partnership. It quickly became apparent that with our combined expertise in African mining and the funding position that a partnership would offer, we would be creating an exciting opportunity for Golden Star’s shareholders. We have seen the way in which La Mancha became the reference shareholder in both Endeavor Mining and Evolution Mining. La Mancha has consistently supported them in extracting maximum value from their existing asset bases as well I think bearing their footprint, and we very much welcome their support for Golden Star.
La Mancha has carried out a thorough due diligence process on Golden Star, including a visit to the operations in Ghana and made a decision to invest approximately $126 million in our company underlined their belief in the quality of our assets and our team. Our two teams have worked closely throughout the due diligence process, and I have to say it’s been a real pleasure. Here at Golden Star, we are all very excited to be working with you going forward and with your input and partnership. I believe our shared vision of building a leading African gold producer will soon become reality.
At this time, I would also like to thank the Golden Star team for all the hard work and commitment in getting this transaction over the line. Our company has never been in a better position than it is today, and I’m proud and excited to be leading it through the next chapter of its growth.
Let’s now begin with the presentation.
Please take note of our disclaimer and we move far back.
Joining me on the call this morning are André van Niekerk, our Chief Financial Officer; Dr. Daniel Owiredu, our Chief Operating Officer; Dr. Martin Raffield, our Senior Vice President of Project Development and Technical Services; and Katharine Sutton, our Vice President of Investor Relations. I’m happy to say we’re also joined here in Toronto on this call by Andrew Wray, the CEO of La Mancha.
After the presentation, Andrew will be available to answer questions alongside myself and the rest of the Golden Star team.
Turning now to Slide 4. We won’t spend a long time on this, but just briefly to recap. Golden Star is a West African-focused gold mining company with two producing mines in Ghana. Our assets are situated in one of the world’s most prolific gold belts, the Ashanti, in a very favorable mining jurisdiction. This year, we expect to produce between 230,000 ounces and 255,000 ounces of gold in an all-in sustaining cost of $850 to $950 per ounce. And currently, the estimate – we estimate we will be towards the top of both ranges. And with proposed strategic investment from La Mancha, I believe we have the right partner, the right operations and the right people to create long-term shareholder value.
So now let’s take a look at the transaction more closely. When my executive committee and I spoke about finding a partner or doing a deal in the past, we agreed that we wanted it to be transformative. If we were going to do a transaction, we wanted it to be with a company or asset that will significantly change Golden Star’s value in the long term. I believe this proposed deal with La Mancha truly does. Golden Star now has the ability to unlock its unrealized potential.
This slide outlines the key elements of the transaction. And over the coming slides, I’ll take you through them in more detail.
So firstly, why do we think the proposed transaction is right for Golden Star. We believe that it gives us a compelling platform for growth, and it does that in 3 key ways. Firstly, it transforms our balance sheet. The capital injection of approximately $126 million will make our balance sheet significantly stronger and more flexible. Secondly, it will give us the funding to fast-track the exciting growth opportunities we have within Golden Star. I’ve spoken a lot over the past year about the exploration upside potential at Wassa and our other assets, and this investment provides external verification of that belief. Thirdly, it will position us to act as a consolidator in the African region. Golden Star has proven itself as a solid mine owner and a mine operator, and with La Mancha as our partner, we will pursue a disciplined acquisition strategy to bring new assets into our portfolio and increase our current production profile.
Let’s talk more about the planned use of proceeds. We intend to use the proceeds in four main ways, which are listed here on Slide 8. Firstly, they will be used to accelerate underground development and increase production at both underground operations. This will commence with urgency. As I’ve discussed many times in the past, both of our processing plants have substantial underutilized capacity and our objective is to fill them all. It’s also expected to reduce our operating costs, which will increase our cash margin and our cash flow generation. Rightsizing the Prestea complex will now be paramount.
Secondly, the funds will be used to accelerate exploration and mineral reserve definition drilling at Wassa Underground at the Prestea Underground and the Father Brown satellite deposit. We believe this will lead to significant mineral resource expansion and conversion of inferred resources to higher-confidence indicated resources unlocking their true potential. More details on these, our exploration program and our expedited expansion program, will be released later in the second half of 2018.
Thirdly, we will use the fund to fast-track the necessary studies and the development of the southern portion of the Wassa Underground deposit. We’re expecting the preliminary economic assessment for Wassa Underground inferred resources to be completed in the middle of the second half of 2018 and it will indicate how we can bring them into production in the most optimal way.
Finally, the funds will be used for potential future acquisitions and general corporate purposes.
La Mancha has the reputation for partnering with companies with the ability and ambition to grow organically as well as by acquisition. We share the vision of operating multiple high-margin mines in a number of jurisdictions, and Golden Star is looking forward to working with La Mancha to crystallize these external growth opportunities.
So now let’s look at why we believe La Mancha is the right partner for Golden Star. In 2015, La Mancha invested in two other mid-tier gold producers, the ASX-listed Evolution Mining and the TSX-listed Endeavor Mining. The graph on the slide shows that since La Mancha’s investment, Evolution and Endeavor’s share prices have performed incredibly strongly, substantially outperforming their gold sector peers and the gold price in both cases. The fellow African producer, Endeavor is closest to the 2 companies to Golden Star, and prior to La Mancha’s investment, it faced several challenges, including concerns over its balance sheet. However, once Endeavor secured an investment from La Mancha, the overhang was quickly removed and their share price increased by almost 300%.
Both of these investments demonstrate that La Mancha has the ability to identify strong growth opportunities at an early stage. La Mancha takes a long-term approach with focus on sustainable shareholder value.
Moving on to Slide 10. This slide outlines the consideration of the proposed transaction. The Board of Directors takes dilution extremely seriously, and my management team and I negotiated hard to ensure we got the right deal for our shareholders. La Mancha will be investing at an approximate 14% premium to the 30-day volume weighted average price. The fact that they are prepared to purchase shares at a premium to the share price is a testament that they believe in the value of our assets and the quality of our team.
Following the completion of the transaction, La Mancha will own approximately 30% of Golden Star, making them a largest shareholder. After the proposed transaction, we are planning to consolidate our shares on a 5:1 ratio. This means that following the completion of the La Mancha investment and the share consolidation, we will have approximately 109 million shares outstanding.
So what are the next steps. Well, importantly, the proposed investment by La Mancha and the planned share consolidation are both subject to approval by our existing shareholders. We are working on an information circular that will be distributed to shareholders within the coming weeks and it will include further details of both proposals.
As part of our strategic relationship, La Mancha will have the right to nominate up to three individuals to the Golden Star’s Board of Directors, and la Mancha respects to have announced two of these before the transaction closes. And just over a month’s time, we will be holding a special meeting for the shareholders. Assuming the two proposals receive shareholder approval, we expect the La Mancha transaction and the share consolidation to close in late September.
It’s important to note that the directors and officers of Golden Star have signed voting support agreements to vote their shares in fair of the proposed transaction as we believe firmly that this is the right course of action for the company.
So in summary, La Mancha’s strategic investment in Golden Star will support our growth as a leading African gold producer. We have known Andrew Wray and his team for several years, and we believe that La Mancha’s track record of creating sustainable growth makes them an excellent partner for Golden Star. The proposed investment will strengthen our balance sheet and it will provide us with a funding position to expedite internal growth and seize external opportunities.
I believe that, together, with La Mancha, we will deliver compelling value for our shareholders on an expedited time scale. So I urge all our shareholders to vote in favor of the proposed investment. Andrew and I will be happy to answer questions on the partnership at the end of the presentation. But first, let’s take a look at the results of the second quarter.
Turning firstly to our production in the second quarter, we produced over 61,000 ounces of gold, which was in line with our expectations. We saw improvement at both operations during the period, and Wassa continued to outperform our expectations. The mine delivered a 20% increase in production since the second quarter of 2017, which is particularly impressive considering last year the Wassa operation was producing from both the open-pit and the underground whereas it’s now an underground-only operation. This underlines the robustness of the Wassa Underground deposit. I want to thank the Wassa General Manager today, Shaddrack Sowah, and all of his team for their fantastic efforts.
The Prestea Underground’s significant improvements were delivered during the quarter and we’ve applauded a 67% increase in production compared to the first quarter of 2018 and a 65% increase in grade. We remain confident in the Prestea Underground’s ability to deliver low-cost production at a rate of 90,000 ounces per year, and we are making steady progress towards achieving this goal.
Moving on to costs. Our consolidated cash operating cost was $809 per ounce in the second quarter and our all-in sustaining cost was just over $1,100 per cost. Our costs were higher than anticipated. However, it’s important to put these results into perspective.
We expect Wassa’s underground production to continue to grow throughout 2018 as we increase the mining rate and we move into higher-grade areas of the B Shoot zone. At Prestea, we anticipate that productivity will continue to improve as the mining sequence hits its stride and we have tackled the issue with grade dilution that we faced in the first quarter.
In addition, we will continue to focus on other cost reduction opportunities such as rightsizing the workforce at the Prestea Complex. As a result, we expect our cost to decrease at both operations during the second half of 2018.
So at the half-year mark, we’re on track to achieve our consolidated full year cost guidance, albeit we expected to be at the top end of the ranges. As you can see from the graph at the bottom of the slide, we expect to deliver the third consecutive year of material cost reductions.
We’ll now look at each of our operations in more detail, so I’ll be handling over to our Chief Operating Officer, Dr. Daniel Owiredu, and as you heard, I mentioned doctor in front of Daniel’s name. He was just offered an honorary degree in Ghana. And congratulations on that, Daniel. We’re very proud of you.
Thanks, Sam. Turning first to Wassa. The Wassa Complex produced approximately 38,500 ounces in the second quarter with 92% of production attributable to Wassa Underground. Wassa Underground is having a great 2018, exceeding our expectations in terms of both grades and tonnage. We saw 167% increase in Wassa Underground’s production compared to the same period in 2017 and a 10% increase compared to the first quarter of this year. We have expected an average mining rate of 2,300 tonnes per day in the first half of 2018, but the team delivered over 2,600 tonnes per day. The grade processed was expected to be below the reserve grade of 4.1 grams per tonne in the first half of the year, but we delivered almost 5 grams per tonne due to positive reconciliation with our reserve model.
Wassa Underground produced more ounces this quarter than the combined open-pit and underground operations did in the second quarter of last year, but at a much lower cost. Wassa reported almost 40% decrease in cash operating cost per ounce in the second quarter of 2018 compared to the second quarter of 2017. $610 per ounce is the lowest cost operating cost Wassa as seen in over seven years, so I would like to say well done to the Wassa – whole Wassa team. You’re making us proud, and keep up the good work.
Now moving on to Prestea. Later this year, we will see the mine transition from being and underground and open-pit operation to solely an underground operation like Wassa. This was reflected in the results for the second quarter as Prestea Underground produced more ounces than the Prestea Open Pits for the first time. We’re now reaching the end of the open-pit mine life and we expect to complete production during the third quarter of 2018. We delivered a 65% increase in grade at Prestea Underground during the second quarter to about 13.5 grams per tonne of gold, which is 10% higher than the average mineral reserve grade, an excellent result.
Our cash operating cost was over $1,100 per ounce in the second quarter and this was due to the lower-than-expected production. We expect we still have costs to reduce significantly as the underground continues to ramp up production, and I’ll tell you more about the progress we are making on the next slide.
Looking now at Prestea Underground, we disclosed in the quarter one results that we have current issues with dilution control in the first stope and consequently we made significant adjustments. As a result, gold production increased by 67% compared to the first quarter of 2018 as a result of a 65% increase in grade. During the second quarter, we learned further important lessons and this led us to make additional changes to longhole drilling and some blasting practices. We are planning to reach the targeted production rate of 650 tonnes per day in the fourth quarter of 2018 as we continue to optimize the mining sequence and operational management team continues to bear in.
I will now hand you over to André, our CFO, to give you an update on our financial position.
André van Niekerk
Thank you, Daniel. As Sam discussed earlier, the proposed strategic investment by La Mancha will dramatically transform our balance sheet. Assuming the transaction receives shareholder approval, our working capital deficit will be removed and we’ll be back on the black on a working capital basis.
Now looking briefly at the second quarter results. Revenues were in line with the second quarter 2017. This is due to the 25% increase in revenues from Wassa, offsetting the 26% decrease in revenues from Prestea.
The cost of sales, excluding depreciation and amortization, are slightly higher in the second quarter 2018 than the same period last year even though there were 8% decrease in mine operating expenditures during the quarter. This was primarily due to the cost of processing the lower-grade open-pit ore stockpiles and the write-off of materials and supplies related to the now suspended open-pit mining equipment at Wassa. This resulted in a mine operating margin of $10.2 million, which is 23% lower than in the same period of 2017.
We reported a net loss attributable to Golden Star shareholders of approximately $7 million, which was due primarily to an increasing share-based compensation as a result of an increase in our share price, an increase in financing expense, a loss from the fair value of financial instruments and the recognition of a deferred tax expense at Wassa.
On an adjusted basis, we reported net income of $2.4 million.
On June 28, we refinanced the $20 million loan with Royal Gold by securing a new $20 million term loan with Ecobank. The main benefit of the refinancing is that it eliminates the excess cash flow provision associated with Royal Gold bank and it extends the repayment of the loan over a five-year period. There are no prepayment penalties attached to the Ecobank loan, so we may choose to repay it at any time.
At the end of the second quarter, our debt position was approximately $118 million, which is a decrease of approximately $4 million compared to the end of the first quarter. This is due to the principal payments of the vendor agreement and the Ecobank’s sweet term loan.
Our cash balance was just under $22 million at the end of the quarter, and we remain focused on cash flow generation. Back to you, Sam.
Thanks, André. As you hear, with the ramp-up of our operations and with the help of our new partner, we will be moving forward with urgency in results.
Now let’s take a look at what we can expect from our internal growth opportunity going forward. As you’ve heard me present this slide before, you’ll know it’s one of my favorites in the deck. However, with the proposed investment from La Mancha, we have taken a significant step closer to changing that from a concept to a fact. This shows that with our expected exploration success, we can substantially increase our production rate without having to incur significant additional CapEx. And that’s an opportunity that not many companies have.
When we started developing the two underground mines, we decided to building more capacity than we originally needed in order to allow us to grow the production profile in the future. Assuming the La Mancha transaction receives shareholder approval, the focus will be on our exploration team to accelerate our drilling programs and demonstrate the full potential of these orebodies. We can then begin to unlock the larger-scale, longer-term opportunities within both underground mines.
Now looking at our 2018 guidance. As I mentioned earlier, at the midpoint of the year, we are on track to achieve our consolidated guidance. We continue to anticipate that production will be weighted towards the second half of the year due to the ramp-up of both of these two underground mines. As I said earlier, we expect our all-in sustaining cost to be towards the top end of the range. As a result, our operating cost will be lower in the second half of the year.
Again, assuming La Mancha’s investment receives shareholder approval, we expect to provide an update on our capital expenditures later in the second half of this year, including details of the enhanced exploration program. With La Mancha’s investment and the two robust operations, I believe Golden Star offers a compelling investment case, which we expect to be enhanced by internal and external growth opportunities going forward.
At this stage, I thank you very much for listening. We will now take questions. And just as a reminder to you all that Andrew Wray, the CEO of La Mancha, is here with me and we are available to answer questions. Thank you. Operator?
[Operator Instructions] The first question comes from Mike Curran from Beacon Securities. Your line is open.
Good morning, guys. Just a question on Prestea Underground and achieving the 650 tonne per day design throughput – or mining rate. Just wondering if there’s any changes to, I think, when we visited the mine last year, I think the idea was to get to 650 tonnes a day, you needed 2 full production stopes and then the other rest of its sort of development would get you to 650, is that still the thinking that you’ll be there in Q4? Or do you think you need 3 stopes going to get there now?
That’s correct, you have it right. So we know that we need one fully blasted with the inventory in it, one that is in drawdown and the third one just in final drilling. So that is what we want to achieve going forward and I think we’re now on track to do that. You’re correct on that.
So, say, in Q2, where you’re kind of 1.5 stopes, is that – or were you still kind of really just trying from the one stope in most of Q2?
Yes, we were very excited as we entered into getting the blast in correctly. It wasn’t about, for us, to mine tonnes, but making sure that we get the dilution to abate and to see if we can get the grade. And obviously, the stope came in. There were some tonnes that at the end of the quarter left in stope 2 and stope 3 that didn’t get to the plant. However, we started the third quarter off with that. And after the blasting, understanding the dilution control and the blast patterns, we can now accelerate as we know how to draw these orebodies more significantly, yes.
Great, thank you.
The next question comes from Justin Chan from Numis Securities. Your line is open.
Hi, everyone. Thanks for taking my call. Just first as a follow-up to Mike’s question. What are your tonnes per day targets in Q3? And where should we expect you to be [on call] in the next quarter? And similar to that, what was your tonne per day rate at the end of the quarter?
At the end of the quarter, rate was about 350 in that from the stopes. We’re now targeting just north of 400. And by the end of the quarter, we should be at 650. And that is clearly that we have a different approach in terms of how we’re blasting these stopes, and we just have to do the drilling more correctly than we’ve done before. So probably be about 450-ish in the third quarter.
Okay, great. And the greater Prestea – and actually, this question applies to Wassa, too. You had grades above reserves certainly for both of them. At Wassa, you said that the grades were above plan as well. At Prestea, what was your plan for the quarter? Was the 13.5 above that? And at both operations, do you see that continuing? Have you learned more about the orebodies in such a way that you see that continuing going forward?
Yes. What we normally reflect is the reserve grade across the orebody, and we will know that certain stopes are going to, it’s not always perfect zones, but stopes above the grade and below. At Wassa – well, Wassa was our – Wassa positive reconciliation is very encouraging to us. We do have to think that the capping of the holes we did in the exploration model might be at the low side, and we’re leaving it that way. And the reason why I say that is we see the gravity gold and the pregold component more in the plan, which you don’t really get in your normal prediction of your exploration model.
Additionally, we’re also seeing that the orebody is slightly longer on strike. We’re getting more tonnes available than what we predicted in the past. Well – so that allows us to move forward. At Prestea Underground, it is a very high-grade orebody. Once those stopes go through the plant, we see gravity just jump up within the same we have at capping and will stay, for the time being, at the same geological capping. What’s interesting about Prestea for the fourth quarter, we’re gaining through either zones. We know that the first few stopes were in the narrower part of the orebody and it kind of swells and goes bigger and they’re over a very long strike. So from that perspective, we’re managing our dilution now through the [indiscernible] patents. And if we reduced the dilution, obviously, your grade will go higher. And that’s why I said earlier, we want to spend time on making sure that we mine the gold and not just tonnes for the sake of tonnes.
Okay. That’s very helpful. And my last questions for both Sam and Andrew. When you discussed your vision for Golden Star and your [indiscernible] going forward, how do you look at the various – it looks like Wassa is well on its way. There’s still work to do. And of course, you both – or both press releases have mentioned the ability to consolidate the African gold space. How do you prioritize them going forward? Do you have a time line on when you would – when you’re looking at M&A? And I guess, when you’re looking at potential targets, do you have – I guess, what is the criteria? Is it that you can achieve? Is it all-in sustaining costs? What, if anything, of the vision can you share with us?
I’ll go first, and then I’ll hand over to Andrew to give his comments. Firstly, our number one reserve and priority is to use these funds to create a very solid foundation. We all both – at La Mancha, it’s very clear that the biggest value sits within the orebodies we know, within the installed capacity that we have in the company. So the first focus will be to take Wassa up to – what the decline we can take, which is 4,000 tonnes a day. And for that, we [indiscernible]. The second focus would be to swiftly move Father Brown into a potential of quickly becoming another source of ore into the plant. Then immediately, we will be drilling the deeper areas to make a decision on the PEA that we will be releasing very shortly.
So the Wassa complex, we see a high amount of urgency and expedited program that we all believe the rate of return of that will be critical or will be high if we get it right. And obviously, at Prestea, the focus will be to look at the shock capacity. Should we get more in now that we know how it works? Rightsize Prestea now that the pits are, have you seen, is less than 50% of the production. Obviously, that cost is higher, as Andre indicated. So it’s time like we did at Wassa 1.5 years ago, once the swing-around comes, that you need to rightsize it. And then you’ll – we’ll soon be starting to rightsize and get the cost out of Prestea Underground – not Prestea Underground, but the Prestea Complex.
Well, continuing on terms, and I will let Andrew in terms of external growth. Firstly, this team has a certain DNA that we’ve developed a certain skill set. And I think everybody on this call knows what we think we’re really truly good at. And that will be the areas that we will be focusing on. As you know, strong underground focused areas, and it will have to make sense to us as a team that we can add the same value than what we’ve done over the last five years. And obviously, you’ve always heard us say the investments we’ve done here was always based on a very strong rate of return. That’s what we, as a company, needed to do with the little cash that we had, and we’re now seeing that materialize. So we will look at something that fits our skill set and where we think we can add value going forward. Andrew?
Yes. Thanks, Sam. In terms of, I guess, a step back. So what attracted us to the business was the quality of the asset base, which is just fundamental. And we think that’s underappreciated. Not only with the assets that are there at the moment, but the potential on the land package for repeat structures and systems. So that’s got to be a priority, to extract that value, and that’s initially what we’re backing. And we’re backing the team to do that. In terms of where does the business go from there, that’s a pretty strong foundation asset if you want to provide a platform for growth. Then anything else beyond that’s got to match up to what is already in the portfolio. So it’s great to diversify businesses as a shareholder will fully believe in that, but not by diluting them in terms of the quality of what’s there. So that’s a debate, I think, that we’ll probably go on a case-by-case basis still to come. But as I say, the initial attraction for us is really what we’re buying into in terms of a very significant underappreciated system, the ability to deliver on that. And from that, we’ll flow then the ability to expand the business further.
Your next question comes from Raj Ray from Desjardins.
Just first up, a question for you, Andrew. I know La Mancha has been involved in Africa for quite some time now. Looked at a number of assets, with Andover Mining, you have a good portfolio of assets out there. As you look at the rest of Africa – and I know the M&A team is coming up in this call and in the press release as well. What opportunities do you see? And do you have a preference in terms of what parts of Africa could Golden Star grow into that might be different from where Andover is already present?
In terms of what’s going to happen, I can’t predict what’s going to happen in the future. In terms of just picking up your last point, Andover is an existing very successful investment for us that’s still got a lot of runway to go. It’s a core investment with, as you know, quite a lot of organic growth to deliver. Golden Star, clearly, at a different stage of its development, very different scale. I think what today shows is that the team at La Mancha, from our shareholders’ perspective, we’re excited at the optionality that’s available in the African market and see, the whole time, new areas opening up, new opportunities coming. We won’t talk about specific examples or targets given, one, it’s too early and not very appropriate. But suffice to say that it’s a growing region. We think it’s significantly underexplored.
There’s gold districts that have fantastic potential even where the existing Golden Star assets are. It has been known for quite some considerable time, but there’s a lot of upside just from an exploration perspective there. So clearly, the focus of the dollars we’re putting in will be in the drill bit to try and extract more value there. But we look out throughout Africa. You’re right, as a team at La Mancha, we know the continent pretty well. From previous lives as well as the last few months, we’ve been doing a lot of work on the continent and do see optionality to grow, which is why we’re now looking to build a second business with the second shareholding in the region. Because we just think that the potential is there. I don’t know, Sam, if you want to add anything.
Yes. Raj, thank you, first, for the compliment on the deal. And I have to agree, I think it’s a fantastic deal. The nice thing about the relationship with – between Andrew, myself and Pieter the team is how like-minded we are. And we will never be rushed to do something for the sake of – however, I think what we indicated, we now are sophisticated – more sophisticated company, and we are going to focus on the foundation. And that means when you are a company that settles down, that you should have the component that we’ve never been able to talk about. And now we can and indicate that we will be acquisitive in part of our strategy and vision going forward.
Okay. And as – I think, Sam, you spoke to the fact that your priority is going to be the growth project. And then – but then Andrew, if I remember correctly, I mean, this – La Mancha, when you first involved – got involved with the Evolution Mining, it was pretty quick in terms of growing the acquisition strategy through investment in Cowal. I mean, with Golden Star, do you see a similar approach?
I think the answer to that is it’ll be driven by opportunities. And if the opportunities are there, if they make sense, then yes. But from our perspective, and I think Sam and the team is the same, that will be a very disciplined approach. And Cowal is a great example. Cowal became the foundation asset, in many ways, of Evolution. And that’s really what they needed. They went on to do the Ernest Henry transaction, which has been very successful. And the business ha gone from strength to strength. But they were the right deals at the right time, so it will be very much the same approach with Golden Star.
Okay. And then, Sam, looking at the organic growth within Golden Star, now Wassa Underground with the cash infusion, the inferred resources development, I think you will be able to accelerate that. Now in terms of a time line, I mean, what does it do to the way you are thinking about bringing that on? And also, what does it do to your thinking about Wassa Open Pit? And how does that fit into the organic growth opportunity at Wassa?
Yes, great question. We’ve embarked on a road, as you know, Raj, you visited, that we’ve looked at accelerating before we even do the La Mancha deal, that we knew that the Wassa orebody need to be accelerated. We just completed the third portal, and I – we haven’t talked much about it and I guess, we should, which allows us to increase the ventilation. We have just completed the pads to start the drilling of the [indiscernible] boreholes for the ventilation of Wassa that we did prior to this, because of our belief of growing it forward. That will allow ventilation capacity for the 4,000 tonnes a day scenario. The last component of the 4,000 tonnes scenario would be a pace for system, which Martin and the team is working very hard on to move that forward.
We believe that we – what we’re seeing now in the orebody, the positive conversion that we’ve seen from the mine plant – or from the reserve to the mine plant, that the vertical meter ounce is – the vertical meter is benefiting the business. So we will be running as the first phase to grow Wassa into the 4,000 tonnes scenario. The second phase would then be – which we’ll have potential future funding, is to determine whether or not Father Brown can come in fairly quickly if we do the exploration and the exploration is positive. And then only after that we would then look at how the deeps would be mined, which the PEA will be released very soon on that. So the Wassa, we have a very clear focus. It is following a very similar approach to what we did the first time when we looked at the potential of Wassa and we made a decision to propose declines at 4,000 tonnes a day. So that will be the main thrust of us moving rapidly forward.
So Sam, if you’re looking to, for example, try and building the – when the Wassa Deeps could be in operation, I mean, is it safe to say that? I know you’re still working to the PEA. But for – just for the sake of the analysts, is it safe to say you’re potentially looking at 2022, 2023 assuming everything else goes as planned?
I just looked at Martin. He said don’t comment yet. I – if we’re running iterations – and I think it will be unfair if we just had one and we all assumed it’s going to be a sharp 1,400 meters deep. And we’re going to do ABCD then – but Martin is still looking at iterations of how to. At the end of the day, we’re going to do something – one thing and as quickly as possible fulfill the 8,000 tonne or the 2.7 million tonne per annum with the highest grade we have in the company. And I think it’d probably be wise if I – that we’re speculating today to give Martin the chance to finish the iterations that he is currently working on, and there might be some exciting iterations that come out from that as well.
Okay. Thanks Sam and thanks everyone. That’s it from me.
The next question comes from Heiko Ihle from H.C. Wainwright. Your line is open.
Hi, guys. Thanks for taking my question.
Can you walk me sort of the sizing of this investment? I mean, do you actually plan to spend all this money? I mean, can you break down how you intend on spending it? And on that same topic, did La Mancha want a 30% slice? Or is that something that you approached then you wanted to get? And finally, there is a part in the news release that sort of states that this – part of it’s going to used for general corporate purposes. How much of the money is going to get spent on that place?
Thanks, Heiko. A lot of questions. I’ll add one, then I’ll let Andrew answer how they look at – why the 30%. As I said right in the beginning, Heiko, we wanted to come out and do a deal that’s transformative and give incentives to our shareholders. We have verification as an understanding of the excitement of our orebody. That was a fair amount. And over the last few years, we have hopped along and skipped along and trying to indicate what we have to move forward. And what we clearly understand is that the most critical is to double, if not triple, the amount of drills that can very quickly go and sit on top of Wassa South, sit on top of Father Brown and into Prestea. We needed to develop mines.
And the potential of mine, it’s critical to understand that you do not sterilize any incredible potential that is available to yourself. We’re aware of open pits, as was mentioned earlier. However, we want to understand where the biggest value is. So the first priority was to put a substantial amount to move the exploration forward and get a sense of how this mine should be designed going forward. The second part of it is to – we know in the company we have installed capacity. And every day, every minute that you do not use that, you lose return or potential for your shareholders.
So accelerating into that potential is number one. For that reason, we will, with urgency, once this is approved, move the right equipment and accelerate it to get to the 4,000 tonne a day scenario, which we believe that Daniel or Martin, myself and team believe is now possible by doing that. You asked about general corporate purposes. It’s clear that we are not getting the best consumable prices because when you are concerned, you – difficult to negotiate with the people supplying you. Now we are in the position of being – bit at the table and negotiating. So we will also deal with a small amount in terms of some of the accounts payable that needs attention. But not dramatic amounts. It’s not massive amounts.
We’re talking about – I mean, for Prestea, when you’re in the transition of going from an open pit into an underground, you’re probably carrying your open pit at a bit of a loss at the end of it because the productivities aren’t what it used to be, the grades aren’t what they used to be. So that cost, you could see, is being burdened. So in the closing of this, we will very swiftly – Dan has a plan to rightsize the Prestea, as we did with Wassa, had that one high quarter during the transition, and then immediately move that. So that is what I can answer you on that in terms of the 30% stake, we agreed with La Mancha on a view of what this company and what Wassa could be in a long-term plan.
Obviously, that long-term plan has its own scrutiny in terms of certain assumptions. Once we agreed on that, we knew what are the most critical areas to move rapidly forward. And I think La Mancha wanted to come in like they did in most of their previous areas of – become a onetime [indiscernible] and give clarity to everybody what it is we want to do. And now it allows us to move the company forward, and they have presence at the board. Then the last part was sitting around the table and negotiating the facts. And this is at a premium at a time where the market is extremely difficult, and I feel very proud of what we achieved. But Andrew, is there anything you want to talk about the 30% stake?
Sure. Yes, thanks, Sam. In terms of what we wanted to do from our perspective, one, to put a meaningful amount of capital to work. But at the same time, address any balance sheet issues once and for all and to fund Golden Star so that it’s got the optionality to pursue a number of different courses. And we think we’ve done that with this amount. It’s a similar sort of size of stake [indiscernible] that we took in Andover, we took in Evolution three years ago. Those companies’ share prices are now three or four times the level they were then with successive capital put in to help them grow. And in terms of the uses of that, we modeled quite a few different scenarios, and some of the Golden Star team, I can see, are raising their eyebrows the table over the way we looked at it.
But we wanted to make sure we understood where the existing plans are coming from and what were the options within that to bring value forward to clearly accelerating the development so that you can bring value at Wassa, Prestea but also importantly, Father Brown forward. It is important because otherwise, we’re not going to put in $126 million that’s not going to deliver a return and just sit on the balance sheet because we won’t meet our return targets that way. So the significant potential, we think, to accelerate development, to accelerate the drill-out of the assets to understand and so that study work and then be brought to a conclusion with an optimal outcome. And then the generic corporate purpose is one that in terms of rightsizing the balance sheet is one part. The other is, if any other opportunities come along, there’s some capacity there. We’re certainly prepared to back them if they make sense. We think this amount really meets all of those different criteria and sets the company up now to move to a different level.
The next question comes from Justin Chan from Numis Securities. Your line is open.
Sorry, I had myself on mute there. I just asked a vision question earlier, and I’m going to ask you the exact opposite of that now. The Prestea Open Pit stand at a couple of times. How sure are we that this is the last quarter of open pit mining there?
It is – I’m looking at Daniel. It is probably the last quarter. The reason we need – it means that it might not mean the last quarter ever in the history of Golden Star, but it’s time that we rightsize the Prestea Underground. It’s time that we get ourselves in the position of mining at a different cost base. And then what we will then do is put a start to the exploration for more substantial approaches to any outside ore that might be available. For us, it isn’t difficult to increase – or switch and let the plant go back from a low tonnage to a higher tonnage. But for the time being, I think it’s the right approach like we did at Wassa in the progress of Prestea to become an underground mine to rightsize that business so that we can clearly see the value of the main asset that we have and then take maybe a disciplined approach and look at what future pits in which format will make sense at what margins. And so for the time being, I think this is what we want to do, and it’s the right approach.
Right, okay. And then on – I guess, on Wassa, is it – I guess this applies to both assets really. Maybe just – and I realized it’ll take some time to close. Do they have any change in your CapEx plans for this year? And then, I guess, related to that, what are your thoughts in terms of timing on getting to 4,000 tonnes a day? And how much does this bring it forward? Is it something that you could see before 2020, sometime next year or...
I’m going to give – let Martin answer on what’s the best timing to get to 4,000 tonnes per day.
Yes. So I think the 4,000 tonnes a day, our current target, Justin, is towards the end of 2019, early 2020. One of the critical items to get right there is our backfilling process. We’re in the process of completing the feasibility study for a backfill plan now so that we can really take away the requirement to put waste into the stopes and allow the machinery that we’ve got underground to be pulling ore out. So we’re opening our sublevels up. We’re increasing our production at a steady rate. The backfill system is in process of being designed, and I think we’re well on target for late 2019, early 2020 to be at 4,000 tonnes a day.
I understand. What are your target – sorry, go ahead.
Okay. I couldn’t remember your first part of your question. Or was that the question?
Yes. So my question was, I guess, is there any CapEx that you would – would you expect any incremental increases to your CapEx guidance with this funding now for this year?
Yes, that’s a good question. We – obviously, we have, during due diligence and during our negotiation, agreed on what needs to happen immediately. So we will certainly come out in the next quarter after we had our next board meeting to get mandates. You can expect the drilling will increase this year, for sure. We – Mitch is already looking at, at least, three more drills to come in. Probably we can expect some increase in development rates to move us forward into the direction that we want, but it’ll all be in opening up more stopes or drilling. That’s where it would be. So you’d probably – you’re hinting that Wassa is all-in sustaining. You could probably see some kind of profit. We need to assess it in detail and then get the internal approvals to do so.
Okay. And just one last one. What are your tonnage targets for Wassa moving into Q4? It looks like you’re well underway to your 2,700 to 3,000. I’m wondering if you’re aiming higher than that now.
Yes. We should be about 3,400...
André van Niekerk
Yes. We’re running about the 3,400 tonnes a day at Wassa, and that’s what we’re referring to.
And there are no further questions at this time. I would now turn the call back over to Sam Coetzer.
On behalf of Andrew and myself and on behalf of our team, I want to thank you all for dialing in. And now it’s very easy to reach out to Katharine Sutton if you need more information. Thank you all for dialing in today.
This concludes today’s conference call. You may now disconnect.