Golden Star Resources: A Look At The Southern Extension PEA

Summary

• Golden Star Resources reported its updated mineral reserves for FY2020, with a 22% drop in reserves to 1.09 million ounces at a gold price of $1,300/oz.
• This translates to a 6-year mine life at 177,000 ounces per year, which is slightly above FY2020 production levels.
• The good news is that the company has released a PEA for inferred material at Wassa, that should allow the mine to continue production into the mid 2030s.
• This is a positive development for the company and it's a major step-up from current production levels, even if it is very preliminary in nature at this time.

The FY2021 Resource & Reserve updates for the Gold Miners Index (GDX) have begun to pour in, and one of the first names to report an update is Golden Star Resources (NYSE:GSS). While the company's reserve update has outlined a sub-10-year mine life, which pales relative to peers, Golden Star concurrently announced a Preliminary Economic Assessment [PEA], outlining a growth strategy and significant mine life extension if confirmed by definition drilling. This PEA suggests the potential for a more than 65% increase in annual gold production by FY2027, with Golden Star utilizing its mill's full capacity. Overall, this is a very positive development for the company, though it's important to note it's preliminary in nature.

(Source: Company Presentation)

Golden Star Resources released an updated Reserve & Resource update last week and reported an updated reserve of ~1.09 million ounces at an average grade of 2.94 grams per tonne gold. This was a sharp decrease from the ~1.41 million ounce reserve the company entered 2020 with, translating to a 23% drop in reserves year-over-year. However, it's worth noting that the updated reserve is higher-quality given the grade lift we've seen, and the company stuck to its relatively conservative $1,300/oz gold (GLD) price to measure reserves. Let's take a closer look below:

Reserves & Resources Update

(Source: Company Filings, Author's Chart)

As shown in the chart above, we've seen mineral reserves decline for the past two years at Wassa, from ~1.47 million ounces to ~1.09 million ounces. The silver lining is that grades have increased in the period from 2.86 grams per tonne gold to 2.94 grams per tonne gold, and the company has continued to maintain its gold price used to calculate reserves of $1,300/oz. Based on the current reserve base, Golden Star expects to produce ~1.02 million ounces over the next 6 years at average all-in sustaining costs of $881/oz. This is not a long mine life by any means, even for underground mines, and would normally be a cause for concern.

(Source: Company Presentation)

Fortunately, Wassa is sitting on a significant measured & indicated resource [M&I] base of ~3.54 million ounces using a gold price of $1,500/oz. Therefore, if the company can convert some of these ounces and the gold price can remain above $1,750/oz, there's no reason to believe they can't extend this mine life. It's important to note that the ~3.54 million-ounce M&I resource base includes the current reserves, but this still leaves ample room to add ounces.

Southern Extension Zone Preliminary Economic Assessment

(Source: Company Presentation)

The other piece of good news and a welcome surprise was the release of a PEA for the Southern Extension Zone, which relies on strictly inferred material. Based on the PEA results, Golden Star envisions an 11-year mine life based on this inferred resource base, with total gold production of 3.46 million ounces at higher grades than the current reserve base. Based on plans to utilize the mill's full processing capacity at 2.7 million tonnes per annum, this would translate to a much larger production profile of ~294,000 ounces per year at all-in sustaining costs of $778/oz. Compared to the expected production profile from FY2021 to FY2026, this is a massive improvement.

(Source: Company Presentation)

The plan to achieve a much higher production profile is to increase mining rates to ~7,000 tonnes per day, up from an average mining rate of closer to ~4,500 tonnes per day in FY2020. This will allow Golden Star to fill its mill instead of using well below its 7,400-tonne per day capacity currently, with higher grades also helping to beef up the production profile. The project's growth capital is estimated at ~$229 million, with the biggest items being ~$98 million in underground development to obtain access to new mining areas and ~$46 million for development drilling. Assuming the company is successful, this would be a major improvement to the investment thesis. It's important to note that the mill already has a nameplate capacity of 7,400 tonnes per day, is permitted, and has run at this level previously. So in terms of processing, the capacity is already in place and doesn't require any major investment.

(Source: Company Filings, Author's Chart)

(Source: Company Presentation)

So, what are the risks?

While this PEA for the Southern Extension Zone looks great, it's important to note that it's based on strictly inferred material currently, and lots of work will need to be done to convert this resource to reserves. Inferred resources are riskier because they have much wider drill spacing than measured resources, so less confidence can be placed in the assumption that they can be mined economically. However, Golden Star noted that it's seen strong resource conversion to date at Wassa, so this does offer some comfort in making this PEA a reality and converting a good chunk of the current resource base used for the PEA. Let's take a look at the economics and Golden Star's valuation:

(Source: Company Presentation)

Valuation

Based on a conservative $1,300/oz gold price, the PEA has an After-Tax NPV (5%) of $452 million, which improves to ~$783 million at a consensus case of $1,585/oz. Given that the Southern Extension Zone will not ramp up until 2027, I believe it's safest to use the most conservative base case of $1,300/oz, but this still shows an impressive NPV (5%) figure. Even if we only give a valuation of 0.3x NPV, given that this study is very preliminary in nature, this translates to ~$136 million in additional market cap. Combining the current mine plan's NPV of $336 million and a valuation of 0.3x on the PEA's After-Tax NPV (5%), giving us a fair value for Golden Star of $471 million. This is substantially higher than the current market cap of ~$340 million.

(Source: Company Presentation)

While the declining reserve base at Wassa is not ideal, the substantial resource suggests the mine life can be increased, and the recent PEA suggests significant upside to the current production profile. The current mine plan does not factor in any upside from regional exploration targets that could help to utilize additional processing capacity, which could help push production above ~200,000 ounces per annum while development work continues on the Southern Extension Zone. Based on Golden Star trading at 1x NPV (5%) at a $1,751/oz gold price and 0.72x NPV (5%) if we apply a 0.30x multiple to the current PEA, the stock looks to have upside from here. Therefore, I continue to see Golden Star as a Speculative Buy. However, with more diversified producers also on sale like Kirkland Lake Gold (KL), this is where I remain focused currently.

Analyst’s Disclosure: I am/we are long GLD, KL. 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.

Comments

[Brian Cellars]

Thanks for the article. I've had this on my watch list but haven't bought. As you say, too many other good companies on sale.