Golden Star Resources: Valuation Becoming Attractive After The Drop
Summary
- Golden Star Resources released its Q2 results last week, reporting quarterly gold production of ~37,900 ounces, a 15% decline from the year-ago period.
- Given the lower gold output and sales, all-in sustaining costs spiked to $1,182/oz in the period, an increase of more than 20% year-over-year.
- While the cut guidance and early challenges with paste fill are not ideal, Golden Star is now trading at 0.9x NPV (5%) on a mine plan that includes solely reserves.
- Given Golden Star's undervaluation, I would view the stock as a Speculative Buy below $2.45 from a trading standpoint.
The Q2 Earnings Season for the Gold Juniors Index (GDXJ) has finally begun, and Golden Star Resources (NYSE:GSS) was one of the first names to report its Q2 results. Unfortunately, the company had a tough Q2 report, as evidenced by its guidance cut, with output and revenue down 15% year-over-year. This was driven by lower grades at the company's Wassa Mine, with delayed commissioning of the paste fill plant. A guidance cut due to operational setbacks is never ideal, but at a share price of $2.55, Golden Star trades at barely 0.9x NPV (5%), based on a mine plan that assumes zero upside for its significant resources. While I don't see the stock as investable, I see the stock as a Speculative Buy below $2.45 from a trading standpoint.
(Source: Company Presentation)
Last week, Golden Star released its Q2 results and reported quarterly gold production of ~37,900 ounces, a sharp decline from the year-ago period. This was an unwelcome sign after weak Q1 performance, with H1 production now sitting at just ~78,000 ounces, well below the initial FY2021 guidance of ~167,500 ounces. Given the weak start, Golden Star cut its guidance to ~150,000 ounces at much higher costs of $1,200/oz for the year, which has led to a violent decline in the stock. However, with the recent issues not likely to translate to lost production but deferred revenue and output, the sell-off appears to be overdone.
(Source: Company Filings, Author's Chart)
For those looking at the above chart, Golden Star's production has seemingly fallen off a cliff since FY2017, with Q3 2017 production of ~73,800 ounces and just ~37,800 ounces in the most recent quarter. However, Golden Star divested its high-cost Prestea asset last year, choosing to focus on its higher-margin Wassa Mine in Ghana. This has been a smart move thus far, with the company able to generate positive free cash flow and reinvest in this mine which has significant potential to increase production long-term. However, the past quarter was not great, with production down 15% year-over-year, or more than 24% on a consolidated basis before adjusting for Prestea. Comparing solely Wassa in Q2 2021 and Q2 2020, the mine produced ~44,800 ounces last year and ~37,800 ounces in the most recent quarter.
(Source: Company Filings, Author's Chart)
As shown in the chart above, mining rates had been steadily trending up at Wassa the past two years but slid in Q2 to just 3,966 tonnes per day. This figure was down 10% year-over-year (Q2 2020: 4,418 tonnes per day), and 12% lower on a sequential basis due to stopping constraints caused by lower planned development. The updated goal is to commission the paste fill plant by year-end vs. mid-year initially and hopefully see no further issues related to COVID-19. This has weighed on operations, as noted in the prepared remarks, with lower availability of ex-patriate operators, which has impacted development rates.
To compensate for the less underground ore mined, the company processed significantly more material in Q2, with quarterly throughput of ~573,800 tonnes, up over 9% year-over-year. However, the average processed grade fell substantially with the company supplementing the underground ore with low-grade stockpiles, which is what weighed on production. During Q2 2021, ~37.6% of ore was sourced from stockpiles vs. 30.4% in Q2 2020. This combination of lower underground mined grades processed grades and significantly more low-grade stockpiles in the plant feed drove the lower production. Given the fewer ounces sold, costs soared to $1,182/oz vs. $957/oz in the year-ago period.
(Source: Company Presentation)
The one piece of good news we received is that the lowered guidance looks more than achievable, and Golden Star has seen positive progress with the most recent strength closer to the design parameters. A second test stope is currently in progress and will lead to the restart of the planned filling schedule in Q4. The plan is to use a 10% cement blend or maximum fill strength, with off-site mix design optimization and test work continuing.
Between a slight increase in COVID-19 cases in Ghana, reduced development meters, and delayed commissioning of the paste fill plant, it's no surprise that H1 was disappointing. However, I am confident that the company can turn things around in FY2022. Fortunately, the gold has remained above $1,700/oz, allowing Golden Star to generate positive free cash flow during this softer period. Let's take a look at the financial results:
Given the lower production and sales, revenue fell year-over-year to $64.4 million, with an average realized gold price of $1,709/oz after accounting for ounces sold into the Royal Gold (RGLD) streaming agreement. Exploration expenses came in 250% higher at $1.4 million, with higher cash invested in the asset, but Golden Star still reported $2.4 million in free cash flow. While this was down significantly from $21.4 million in Q2 2020, it's better than negative free cash flow, helped by the gold price holding up well after a strong year in 2020. The one negative in the quarter was $5.2 million in proceeds from the company's At-The-Market Equity Program, which led to further share dilution. Let's take a look at the valuation:
(Source: Company Technical Report)
As shown in the table above, Golden Star's Wassa Mine has an After-Tax NPV (5%) of ~$336 million using an average gold price of $1,751/oz. At a current share price of $2.55, Golden Star's market cap comes in at ~$305 million, nearly 10% below the current After-Tax NPV (5%). However, this After-Tax NPV (5%) is based solely on reserves and a 6-year mine life, with no upside given to the Expansion Case outlined in a Preliminary Economic Assessment [PEA] recently. This much longer mine life based on resources carries an After-Tax NPV (5%) of ~$783 million at the same gold price, a figure that is more than double Golden Star's market cap.
Given that the Expansion Case (11-year mine life at 294,000 ounces per annum) is very preliminary in nature and relies on resources, it makes little sense to assume this will come to fruition when making an investment decision. However, even if the upside case is more optimistic than it should be and only carries an After-Tax NPV (5%) of ~$600 million based on less resource conversion than planned, this still translates to a material upside from current levels. In summary, purchasing the stock at $2.45 or lower is obtaining the stock at a valuation of closer to 0.85x NPV (5%), suggesting a limited downside. The upside is if the company can build on reserves and deliver on the Southern Extension PEA.
(Source: Company Presentation)
The one major risk worth noting about Golden Star is that it is a single-asset Tier-3 producer, making it uninvestable, in my view. Single-asset producers in Tier-3 jurisdictions carry the highest risk of all other miners in the sector given that they have to rely on one mine, and risks are elevated due to being in a less favorable jurisdiction. Having said that, Golden Star makes for an attractive trading vehicle when it dips to oversold levels since the stock should find a floor near the $2.00 level given its discount to NPV (5%). Therefore, while I see Golden Star as a Speculative Buy at $2.50 based on its very reasonable valuation, it's essential to take profits into sharp rallies as small-cap single-asset miners make for risky long-term investments.
(Source: Company Presentation)
2021 will clearly be a year to forget for Golden Star with lower production, higher costs, added share dilution, and what looks like a 10% plus miss vs. initial guidance. However, with the stock now down nearly 50% from its highs last July, the worst looks to be priced into the stock. So, if we do see further weakness below the $2.45 level, it would provide a low-risk entry for a trade back to the $3.20 level or higher. For now, I see better opportunities elsewhere in the sector, but I may look to buy the stock for a trade if we do see the stock head back down towards its recent lows hit in late July.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GLD either through stock ownership, options, or other derivatives. 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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