Golden Star Resources: A Decent Start To FY2021
Summary
- Golden Star Resources released its FY2020 results this week, reporting quarterly gold production of ~40,100 ounces, a slight decrease year-over-year.
- Fortunately, a higher gold price helped the company to post increased revenue vs. Q1 2020, and the company remains on track to meet its FY2021 guidance.
- While Golden Star is a high-risk single-asset producer in a Tier-3 jurisdiction, the company remains reasonably valued, especially given the organic growth potential with its Southern Extensions PEA.
- I believe there are much better opportunities elsewhere in the sector, but if we were to see Golden Star dip below $3.10, I would view this as a low-risk buying opportunity.
We're nearing the halfway mark of the Q1 Earnings Season for the Gold Miners Index, and the most recent company to report its results is Golden Star Resources (NYSE:GSS). While I've previously noted to avoid the stock, the company's future is much brighter after divesting its high-cost Prestea asset, allowing it to focus on Wassa. During Q1, the company had a softer quarter due to lower grades but still remains on track to meet its FY2021 guidance. I continue to believe that there are much better opportunities elsewhere in the sector, but if we were to see Golden Star dip below $3.10, I would view this as a low-risk buying opportunity.
(Source: Company Presentation)
Golden Star Resources released its Q1 results this week and reported quarterly gold production of ~40,100 ounces, which was down 1% year-over-year. Fortunately, the company's average realized gold price was up ~13% in the period to $1,669/oz, helping the company to report higher revenue and margins despite only a small increase in gold ounces sold. In addition, the company's balance sheet continues to improve, with net debt down to just ~$39.5 million, an improvement from ~$43.4 million in Q4 2020. The balance sheet should improve even further, with $15 million due by May 31st related to the Bogoso-Prestea Mine sale. Let's take a closer look at the results below:
(Source: Company Filings, Author's Chart)
As shown in the chart above, Golden Star's production has been in a steep downtrend the past two years, but it's important to note that this is due to the sale of the company's Prestea Gold Mine which continued to underperform. Typically, lower gold production would be a negative development, as it means lower revenue, but in Golden Star's case, the company is much better off focusing its efforts on its better asset and higher-margin ounces at Wassa. The results of this divestment are clear below, with material margin expansion, helped by a higher gold price, but also due to a much lower cost profile. All-in sustaining costs are shown in red below, with the realized gold price shown in gold.
(Source: Company Filings, Author's Chart)
During Q1, the company reported improved mining rates, with mining rates coming in at ~4,500 tonnes per day, up 4% from the 4,324 tonnes per day in the year-ago period. Wassa Underground produced ~36,900 ounces while the company produced ~3,200 ounces from stockpiles, up from ~500 ounces in the year-ago period. While underground grades were up in the period (2.96 grams per tonne gold vs. 2.93 grams per tonne gold), the materially lower underground production was related to ~26,000 tonnes of excess mined material that was processed during Q1 outside of what was mined. Therefore, the two quarters were not entirely comparable, but the company did beat where it matters: mining rates.
(Source: Company Website)
As noted in previous articles, the Wassa Mine is mine-constrained, not mill-constrained, with a current capacity of more than ~7,000 tonnes per day, but a mining rate that remains below ~5,000 tonnes per day. The company is working to increase its mining rates to help to fill the mill and also using low-grade stockpiles to fill the mill during this period of elevated gold (GLD) prices. However, it's ultimately the underground that will drive production growth, which is why the company is investing to improve its mining rates and uncover additional high-grade material near-mine.
The company noted that its paste fill plant commissioning continued during Q1, but Golden Star experienced some delays, which are currently under investigation. These delays are not expected to affect the 2021 guidance of ~170,000 ounces of gold production at $1,038/oz. In total, capital expenditure was $9.8 million during Q1, and production should improve in H2 with higher grades expected as we progress through the year. Higher production should help to pull down all-in sustaining costs, which came in at $1,100/oz in Q1, reflecting lower ounces sold than the quarterly average expected this year (42,500 ounces).
(Source: Company Filings, Author's Chart)
Fortunately, while gold production was down marginally year-over-year, revenue was up, with this being driven by higher gold prices and slightly higher gold sales. The company sold ~38,900 ounces of gold at an average realized price of $1,669/oz, translating to ~$65 million in revenue in Q1. This translated to 20% revenue growth in the period, up from ~$54.1 million in Q1 2020.
(Source: YCharts.com, Author's Chart)
If we look at Golden Star's earnings trend, we can see that annual earnings per share [EPS] finally returned to positive levels last year and is expected to increase by up to 20% this year. Assuming the company can meet estimates of $0.48 this year, the stock is trading at a very reasonable valuation of ~7.3x earnings and roughly ~6.2x FY2022 earnings estimates ($0.56). Generally, I would argue that this is close to fair value for a single-asset producer in a Tier-3 jurisdiction, but Golden Star does differentiate itself from peers like Galiano Gold (GAU).
Unlike Galiano, Golden Star has significant capacity at its mill that's not being utilized and just released a Preliminary Economic Assessment [PEA] that's shown the potential to increase production materially. While this study is preliminary in nature, the hope is that production can increase to ~294,000 ounces per year up from ~170,000 ounces currently, which would lead to lower costs and significantly higher revenue.
The study is currently based on inferred resources and cannot be relied upon but has an After-Tax NPV (5%) at $1,585/oz gold of more than $780 million. This is well above Golden Star's current enterprise value of ~$450 million, so there is considerable upside here if Golden Star can convert a chunk of these ounces into reserves and release a Positive Feasibility Study for its Southern Extensions plans. Given that other single-asset Tier-3 jurisdiction peers do not have clear organic growth potential and already built-in mill capacity, I believe that Golden Star should trade at a slight premium to names like Galiano.
So, is Golden Star a Buy?
Based on what I believe to be a fair earnings multiple of 8 for Golden Star, the stock's fair value sits 10% higher at $4.48 based on FY2022 earnings estimates. However, I prefer to bake in at least a 30% margin of safety when buying junior producers, and this would translate to a low-risk buy zone of $3.13. So, while I don't see the stock as buyable at current levels, dips below $3.10 would be low-risk buying opportunities.
Golden Star remains on track to meet guidance despite a slow start to FY2021, but the real story is the laser focus on Wassa, which has transformed the company from a high-cost producer to an average cost producer with organic growth potential. It's still early to speculate on if Golden Star will be able to execute on its plans, but the turnaround thesis here remains intact for now. I see much better opportunities elsewhere as I prefer high-margin producers in safe jurisdictions, but the valuation would become attractive here for Golden Star if it dips below $3.10.
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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