Golden Star Resources: Digging Into The Q1 Results
Summary
- Golden Star Resources released its Q1 results this week, with 50,000 ounces of gold produced in the quarter.
- The company's exorbitant all-in sustaining costs at Prestea continue to drag on consolidated costs, with all-in sustaining costs coming in at $1,201/oz in Q1.
- Based on Golden Star continuing to be a high-cost producer in a Tier-3 jurisdiction, I continue to see the stock as an Avoid, and a sell into rallies above $3.05.
We're more than one-third through the Q1 earnings season for the Gold Miners Index (GDX), and we've seen some miners surprise to the upside with minimal guidance changes, while others operating out of jurisdictions with shutdowns have had to withdraw their FY-2020 outlook completely. While Golden Star Resources (NYSE:GSS) hasn't had many issues despite the COVID-19 related challenges, and the company has maintained its FY-2020 guidance. However, assuming the company's FY-2020 outlook is met, Golden Star is targeting costs of $1,130/oz, a figure more than 15% above the industry average. Thus far, the Prestea Mine continues to operate at some of the highest costs in the industry, at $2,248/oz in Q1. Unfortunately, this makes an investment in Golden Star Resources difficult to justify as any progress at the Wassa Mine is wiped out by Prestea's weakness. Based on Golden Star continuing to be a high-cost, sub-par jurisdiction producer, I continue to see the stock as an Avoid.
(Source: GHHeadlines.com)
Golden Star Resources released its Q1 earnings results this week and reported quarterly gold production of 50,000 ounces at all-in sustaining costs of $1,201/oz. While the company's quarterly production came in roughly in line with its FY-2020 outlook, cost guidance is tracking a little high, above its guidance point of $1,115/oz for FY-2020. Fortunately, some of this increase in costs year over year was due to non-recurring expenses of $0.9 million related to the relocation of the corporate office from Toronto to London, and we saw a minor impact from a deferred shipment which resulted in lower sales. Therefore, if stated on purely a production basis for all-in sustaining costs, costs came in at $1,165/oz, only 4% above the guidance midpoint. The good news is that we haven't seen the company's guidance adjusted despite the COVID-19 challenges, with an expectation for FY-2020 production of 202,000 gold ounces at $1,115/oz. Let's take a closer look at the operations below:
(Source: Author's Chart)
Beginning with the company's Wassa Mine, Q1 production came in as expected at 40,300 ounces, tracking very close to the goal of 160,000 ounces of gold production for FY-2020. Meanwhile, all-in sustaining costs for the quarter came in at $941/oz on a sales basis, or $915/oz when accounting for the deferred gold sales and late shipment. This is tracking below cost guidance of $960/oz, and these are respectable costs given that the company continues to spend money on its paste fill plant, which is scheduled for commissioning in Q4. The company is hoping that the paste fill plant will increase mining rates and be able to improve margins at the Wassa Mine. In terms of processing, gold recovery rates have been relatively stable at 95%, an encouraging sign, and this is despite significantly lower grades over the past year at Wassa Underground.
Moving over to the Prestea Mine, the black eye on the company's operations, gold production came in at 9,600 ounces for Q1 at all-in sustaining costs of $2,248/oz. This figure is more than 30% higher than the gold price and more than 100% above the industry average of $980/oz, which continues to weigh on the company's operations. This is because if we go by the Wassa operations alone and subtract out Prestea's negative contribution to the company's consolidated costs, we have a 160,000-ounce miner with all-in sustaining costs below the industry average at $950/oz. However, it's worth noting that the company continues to try to turn around Prestea following the CSA's independent review observations released in Q4. While there is still some hope for the mine, it isn't very easy to be overly optimistic when costs are tracking 25% above cost guidance of $1,750/oz for the year just one quarter into 2020. Ultimately, we'll have to see how things look by year-end, and hopefully, the company has made a decision by then about if this is a successful turnaround or it's time to cut and run instead.
(Source: Author's Chart)
Let's take a look at the company's earnings results below:
(Source: YCharts.com, Author's Chart)
If we look at the chart above of annual earnings per share (EPS), Golden Star has made little in the earnings department with earnings finally swinging back to positive in FY-2019 at $0.21 per share, and FY-2020 estimates are looking for $0.27 in annual EPS. It's important to note that this $0.27 in annual EPS translates to only 28% growth year over year and is tracking below the industry average of 34% growth in annual EPS for the Gold Miners Index based on estimates. Therefore, while a 28% growth rate is undoubtedly respectable, we are still sitting roughly in line with FY-2016 annual EPS levels when gold was 25% lower, and we've made no real forward progress the past three years in annual EPS growth. To put this is in perspective, other African miners like B2Gold (BTG) have seen a surge in annual EPS growth in the same period, with annual EPS growth for B2Gold up 127% from FY-2016 levels.
(Source: YCharts.com, Author's Chart)
As we can see in the below chart, ranking gold producers based on both costs and jurisdictional rank, Golden Star stacks up horribly against its peers. This is because Golden Star's costs are in the worst quartile at $1,159/oz last year, and the worst jurisdictional rank as the company is based solely out of Africa. Therefore, while other African producers have jurisdictional risks like B2Gold, Teranga Gold (OTCQX:TGCDF), and others, they make up for this with industry-leading margins that offset some of this risk. For Golden Star Resources, however, this is not the case and won't be until we have a clear path to profitability and sub $1,200/oz costs at Prestea. Based on the fact that guidance for Prestea is $1,750/oz, we are a country mile away from consistent sub $1,200/oz operations at the mine.
(Source: Author's Chart)
While Golden Star Resources is on track to meet guidance and is one of only 10 companies to report to date that hasn't withdrawn guidance, the problem is that the cost guidance is extremely underwhelming when compared to peers. In a rising gold price environment with dozens of companies growing annual earnings per share at strong double-digit rates with costs below $950/oz, it's hard to justify buying a company in a riskier jurisdiction with cost guidance above $1,100/oz. Therefore, until this changes, I see no reason to invest in Golden Star Resources. A rising tide, in the form of the gold price, will lift all boats, but I continue to see Golden Star as a market underperformer in a risky jurisdiction with no real redeeming qualities. Based on this, I would view any rallies above the $3.05 level as selling opportunities.
This article was written by
Analyst’s Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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Comments (7)
The only places I will consider mines are in the US, Canada, Australia and to a lesser extent, Mexico. Obviously Venezuela is fresh out, and I think that Argentina would be a gamble for me. Mix that in with lousy AISCs and that usually cinches it for me. Ditto for large debt and large floats. As Grandpa Shrekish use to say, "There's better deals out there, sonny." Again, thank you for sharing with us. Be well. Be safe.
