Golden Star Resources Ltd.
Q1 2017 Earnings Call Transcript

Published: 6 May 2017

[Operator:]

Good morning. My name is Devon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Golden Star Resources’ First Quarter 2017 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the call over to Sam Coetzer, President and CEO of Golden Star Resources. Mr. Coetzer, you may begin your conference.

[Sam Coetzer:]

Thank you, Devon. Thanks for the introduction as well. Good morning, everyone. As you heard, I am Sam Coetzer and I’m the President and CEO of Golden Star Resources. Firstly, let me thank you all for dialing into this call this morning, following the release of our first quarter results that you would have seen yesterday after market close. Our call is a little earlier than usual today as we are hosting our AGM later this morning, and I really hope to see some of you there. Although this presentation will be focused on our first quarter results, at the AGM, I’ll be talking about the bigger picture story. Golden Star has come a long way in the past few years and we have undergone a transformation in all parts of the company. From the operations to the balance sheet and even to our shareholder register. We still have some ways to go but we are well on our way to becoming a high-grade, low-cost, mid-tier producer. I firmly believe we made a good start to the year, so now I’m going to take you through our first quarter results. As normal, please take note of our disclaimer and then we’ll move on to the next slide. Joining me on the call today is André van Niekerk, our CFO; Daniel Owiredu, our Chief Operating Officer; Martin Raffield, Senior Vice President of Project Development and Technical Services; and then also Katharine Sutton, our Vice President of Investor Relations. As normal, after the presentation, there will be an opportunity to ask questions of all team members, but first let’s a look at who Golden Star is and why you should invest in us. I’m sure by now you’ll be familiar or this slide might be familiar to you, so I’ll just take you through it briefly. Golden Star is an established gold producer with two producing mines in Ghana, which are considered a stable jurisdiction. In 2017, we are expected to produce between 255,000 and 280,000 ounces of gold, but production is expected to expand and costs are expected to continue to decrease in the coming years. This is due to two high-grade underground development mines and particularly the Prestea Underground, which has a head grade of about 14 grams per tonne. We have mineral reserves of approximately 2 million ounces; they are all non-refractory and significant upside potential. So going forward, we’ll be focused on expanding the lives of our operations. We also have one of the largest land packages of any company in Ghana. We also have an experienced management team with a complementary skill set. And despite our strong performance over the past 12 months, we remain undervalued on a number of metrics compared to our peer group. Meaning, there’s an attractive entry point for investors to buy into our stock. All right. Looking first at our gold production in the first quarter, we produced just under 58,000 ounces. This is the highest quarterly production we’ve achieved since we closed our refractory operation in the third quarter of 2015. It was also a record for another reason, as it was the third consecutive quarter of record production at the Prestea Open Pits. As you can see from the graph on the left of the slide, production at Wassa Underground also began to ramp-up strongly, with a 40% increase in production compared to the fourth quarter of 2016. So it was great to see the high-grade underground producing production starting to make an impact. Most importantly, it underlines the change to Golden Star’s risk profile. We now have production from three sources of ore and by the second half of this year, we’ll be in four sources of ore. This gives the company great flexibility than we’ve ever had in the past and its further evidence that Golden Star is a very different company to the one before. Moving on to costs. Our cash operating costs in the first quarter was just below $800 an ounce. You can see that costs have continued to decrease since 2015 when we closed the high cost refractory operations. However, our cash operating costs was 11% higher than in the first quarter of 2016 and this was due to both operations at Wassa being in the transitional phase. Neither the Open Pits nor the underground operations are performing optimally at the moment as they’re both adapting to being a combined operation, and this has led to higher mining costs. However, I’m pleased to say this was partially offset by the strong performance at the Prestea Open Pits. During the second half of 2017, we expect our costs to decrease as Prestea Underground comes on-stream and Wassa Underground continues to ramp up. Two sources of high-grade underground ore being fit into our processing plants should deliver significant change in our cost structure. During the first quarter, we also announced our enhanced exploration strategy for the year. I get asked regularly about Golden Star’s plans for growth, so I was very pleased that we were able to enlarge our exploration program, following the bought deal. Now that our capital program is coming to an end, it feels like the time is right to begin investing in exploration again. The aim of the drilling program is to increase the lives of our operations in the short, medium and long-term. This phase of the program will include 48,000 meters of drilling and we may go much further dollars to explorations if results are positive. We began drilling at our initial targets and I’m looking forward to releasing the results later in the year. I’ll take you through a more detailed plan for each asset later in the presentation. So now let’s look more closely at the performance of Wassa and Prestea, the progress being made at the underground development and our exploration of upside opportunities. Today, I’m going to hand it to Daniel because he’s done such a fabulous job here to tell you more about what we’re doing at the operations.

[Daniel Owiredu:]

Thank you, Sam. Just to recap before we get into the results of the first quarter, Wassa is an open pit and underground mine in Southwestern Ghana. Wassa has always been a completely non-refractory mine and now it’s sourced from a single-ore body that is mine [indiscernible] Wassa Main Pit and Wassa Underground. In the first quarter of 2017, production from Wassa was just over 31,000 ounces, which represented a slight increase compared to the first quarter of 2016. 63% of gold production this quarter came from the open pit operation and 37% came from the underground, and we expect the contribution from underground to increase over time. Wassa’s cash operating costs for the quarter was $942 per ounce, which is higher than we expect to see for the full year. As Sam mentioned before, this is because both the open pit and underground mine are going through a period of transition. However, as the year goes on, we’ll see more high-grade ore going to the mill from Wassa Underground. This means that costs should go down and you can see this in our guidance for 2017 at the bottom of the slide. Looking more closely at the development of Wassa Underground, we began mining the higher-grade B-Shoot zone during the quarter. Commenced commercial production here in January. But until now we have been mining the F Shoot which is a more moderate grade area of the ore body. The B Shoot is a win [ph] of the Wassa Underground and we are using a mining method called sublevel longitudinal stoping. During quarter three, we’ll begin to mine even higher grade and larger width of gold mineralization so we’ll use the transverse stoping. This is expected to result in a significant increase in production. Our mining team has also been achieving significantly stronger mining rates than we have expected for this year. So I’m very excited about the progress being made. Now looking at the 2017 exploration program for Wassa where we have three key focuses. The first is to test the B Shoot – test of the B Shoot extension north. And if this work is successful, it may increase our near-term production. We have excess capacity in our twin decline system and in our processing plants. So if we fund our additional reserves, we would quickly be able to increase our production. The second focus is to test if the B Shoot extends to the south. This work would comprise 10,000 meters and its purpose is to evaluate the potential for increasing the mine life in the medium term. The final focus is step-out drilling on the 242 trend, which has been mined before from the surface. We’ll now be looking to access that potential to mining it from underground as well. The drilling on the 242 trend has already begun and the rest of the work is due to begin later this quarter. So in summary, good progress continues to be made at Wassa and I’m looking forward to seeing the results of our exploration program over the coming quarters. Now moving on to Prestea, our Prestea gold mine is approximately 40 kilometers from Wassa and it’s also in Southwestern Ghana. Golden Star began mining the Prestea Open Pits in the third quarter of 2015 after we stopped production from the refractory Bogoso pit. The Prestea Open Pits are oxide deposits and we are bridging the production gap until production begins from Prestea Underground later this year. Prestea delivered its third consecutive record quarter of gold production in the first quarter with gold production of over 26,000 ounces. As a result of our performance, cash operating costs at Prestea were also 15% lower than in the same period last year. That’s a job well done by the Prestea team. We reported good news from Mampon deposits during the first quarter as well, as we started mining a quarter earlier than expected. This is a real credit to our corporate responsibility team in Ghana and our mining team as well. Mampon is a high-grade oxide deposit that will be processed with ore from the Prestea Open Pits. Mampon’s greater 4.6 grams per tonne whereas the Prestea Open Pits are around 2.2 grams per tonne. So the high-grade ore will strongly enhance our cash flow this year. Now, I will hand you back to Sam.

[Sam Coetzer:]

Thanks, Daniel. I think everybody on this call will agree Daniel did a fabulous start to this year and the milestones that you’ve reached have been fantastic; well done. I was at the site a few weeks ago for an investor visit and it was fantastic for me to be able to congratulate the Prestea team on yet another great quarter. So very well done, guys. As you heard from Daniel, the Prestea Open Pits have been a real win for Golden Star. Even they are not surprised for asset Prestea. When the very high-grade Prestea Underground mine begins production, we will reach the final milestone in our transformation into high-grade, low-cost producer. Prestea Underground is one of the highest grade development projects in West Africa with a mineral reserve at 14 gram per tonne. As a result, we expect to produce 90,000 ounces per year at a cash operating cost below $500 an ounce. This slide shows the critical items that need to be achieved in order to bring the mine back into production and we are on track to do that. I’m pleased to tell you that the refurbishment work is now in its final stages and the upgrade of the winders are now complete. By this start of May, we had just hoisted over 9,000 tons of material to surface and we’ve begun blending that ore with Prestea Open pits. As I mentioned before, I was in Ghana a few weeks ago and we were able to take investors on a visit to see the first Alimak in action. The picture on the right of the slide was taken as the Alimak crew were boarding the Alimak in its nest to take up the raise. At that point, the raise was up 40 meters and today it is just over 124 meters up. It’s fantastic to see how that speed in the Alimak raises are continuing to progress. The diagram on the left of the slide shows the development work has taken place on the 24 Level to-date. 24 Level is approximately 900 meters below surface and our total development advance through the start of May was just over 1,000 meters. Although the first raise is progressing on schedule, unfortunately we’ve fallen behind schedule with our total development advance. This mainly affects our footwall drive development and it’s due to short-term commissioning-related infrastructure issues and our relatively new workforce. We have already begun trying to rectify these issues through, including further upgrading parts of the infrastructure such as new order pumps and investing in further training of our teams in the underground. Importantly, we are still on track to blast our first stoping ore later this quarter to achieve commercial production in the third quarter. Now let’s look at our plans for exploration in 2017. We began drilling Prestea Underground in the first quarter as we planned, which is very exciting as the last exploration was conducted was in 2004 and prior to that more than 40 years ago. Similarly to Wassa, there are three key focuses to our exploration program. The first is the delineation and extension of the West Reef, which is where the color mineral reserves are located. If this work gets successful, it would increase the supply of high-grade oil to the processing plant in the near term, increasing production and giving us a biggest bank to held back [ph]. The second focus is on the initial testing of the Main Reef which is ore body that was mined historically at Prestea Underground. The third focus is on the far south of the current workings called the South Gap. The objective of both, the Main Reef drilling and the South Gap drilling, is to find out if ore can be added to the mine plan in the medium term to extend the mine’s life. I’m looking forward to reporting those results as they come in during the next few months. Now let’s look at our financial results and I’ll hand it over to our CFO, André, to tell you more about it.

[André van Niekerk:]

Thank you, Sam. The first quarter financial results were in line with our expectations. We saw revenue increase by 12% compared to the first quarter of 2016 due to higher gold production and the slightly higher average realized gold price. Mine operating margin, however, decreased during the first quarter due to the higher cost of sales and an increase in the depreciation expense. Cost of sales was higher than Q1 of 2016, due to the Wassa Underground mining costs now including an in cost of sales where it was capitalized last year as we were still developing the Wassa Underground mine. Our focus is in not producing ounces for the sake of ounces. We are looking to expand our margin and generate strong cash flow. We will do this by expanding production and keep monitoring our costs as the Wassa Underground production ramps up and Prestea Underground comes into production later in the year. The company made net income of 200,000 and adjusted net income of $3.4 million for the quarter. This was lower than Q1 of 2016, due to the higher Wassa mining costs. Now looking at our CapEx, during the first quarter we spent over $16 million as the majority was incurred at Prestea Underground, as we completed the refurbishment work. Capital expenditures are expected to continue to be fairly high in the second quarter but then they’ll ease up in the third quarter as Prestea Underground is expected to be in commercial production. At the end of the first quarter, we have $36.5 million in cash and we are fully funded to complete the development of Prestea Underground and to make our scheduled debt repayments for the year. Our financial position will strengthen from the second half of 2017, which underlines Golden Star’s transformation into a low-cost, mid-tier gold producer. The top part of this slide lists the transactions we did in 2016 to transform the balance sheet of the company. In 2017, we continued this transformation with two additional transactions to ensure sufficient liquidity for the company. In January, we announced the Bought deal for just under $25 million to help ensure that our balance sheet remains strong, as we complete the development of Prestea Underground and ramp up production at both our mines. In March, we announced the $25 million financing facility with Ecobank which remains undrawn but provides further liquidity, if required. During the quarter, our debt reduced as 8.5 million of principal value of the 7% convertible debentures converted to shares resulting in a further reduction of our outstanding balance from year-end. The remaining balance of this 7% convertible debenture is now $51.1 million. During this month, the company will pay $13.6 million to settle the remaining balance of the 5% convertible debenture, which further reduces the company’s debt position. Over to you, Sam.

[Sam Coetzer:]

Great. Thanks, André. We still have some way to go but it’s great to see how far our company has come in its transformation. I’d like to remind ourselves of the guidance for 2017. This is one of my favorite slides as it clearly shows that 2017 will be the first time that we will have production from four sources of ore; two open pit mines, two underground mines. That means our risk profile is dramatically lower and our transition to becoming a low-cost, high-grade producer now will really takeoff. In terms of production, we are expecting to produce between 255,000-280,000 ounces of gold. This is an increase of between 31% and 44% with our previous year’s production. As you can see from the graph on the right, we expect our all-in sustaining cost to decrease for a fourth year in a row. And that reduction in cost will continue as our production keeps ramping up. Capital expenditures for 2017 will be 63 million with the majority spent on completing the construction of the Prestea Underground. Let me conclude by looking at the key milestones for the year. At the start of the year we announced a commercial production at Wassa Underground. As I mentioned earlier, at the end of the first quarter, we began mining the B Shoot of Wassa Underground which is a high-grade area of the ore body. We also commenced mining the high-grade Mampon deposits slightly ahead of schedule. Later this quarter, we will blast the first stopes at Prestea Underground. And in the third quarter, we will achieve commercial production at Prestea Underground. Beyond that, in the third quarter, we will begin transverse stoping of the B Shoot which will generate a further ramp up in production from Wassa Underground. So a lot of catalysts still to come as we continue our transition into a high-grade, low-cost producer. Thank you for listening. We will now take questions. I’m going to hand this back to Devon to take us through the process of questions and answers.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Nana Sangmuah from Clarus Securities. Please go ahead. Your line is open.

[Nana Sangmuah:]

Congratulations gentlemen for a great quarter. A couple of follow-up questions here concerning Prestea Underground. You mentioned a bit of congestion issues of this through the development ramp and just wanted to check how confident you are of the commercial production target for Q3?

[Sam Coetzer:]

Yes. Nana, first, thank you for your comments and also thank you for coming on the visit earlier last quarter. Number one, firstly I want to state Nana that the guidance for Prestea Underground remains intact. It’s important that we know that. Secondly, we believe in full transparency and that’s why I put that out. The development rate wasn’t in the support infrastructure, the waste development the way we wanted it to be. However, the raises are continuing to go up. You’ve seen those raises in the preparation for the stopes are in. So I’m confident that we will continue to achieve the results that we said in – we normally put in that buffer when we plan full year guidance so that if something does slip, but we have right. We have some commission issues in our shops that made us waste down, but we decided to continue mining the raises that will prepare the stopes. We believe in the next four to six weeks we will be back where we want to be. Martin, I don’t know if I should – there’s more that you can add to that.

[Martin Raffield:]

Yes. Thanks, Sam. I think, Nana, one of the – we do have a new workforce at the mine and we have been training very hard for the past nine months. And I think over the first part of that training, it was a little slower than we’d expected. However, we are seeing that coming up now and we are seeing the sort of development rates that we’d expected to see. So I think we certainly agree with Sam that we are on track to get our guidance this year and the second raise is going to be starting on Monday. And from there on I think we’ve got a much cleaner path.

[Nana Sangmuah:]

Okay, great. Thanks. And in terms of the development of the stopes, the Alimak raises, how is the ground condition so far? And basically any comments on that front.

[Sam Coetzer:]

Again, I’m going to hand it to Martin. I just want to say that raises are straight as you saw it. That’s always positive in the grades that we see in our expectations. So, Martin, in terms of ground conditions in the Alimak raises?

[Martin Raffield:]

As Sam says, we’ve been looking at the raise with the Board over the last couple of days during the meetings and it is very, very straight. The ore is exactly as we expected, straight up. The mineralization opens and closes, pinches and swells as we expected. The grades are as we expected. And we are able to keep good control of the hanging wall. So we expect our long haul mining to progress as we expect.

[Sam Coetzer:]

And the good news, Nana, is we are at the turning point at the top now, Martin, about very close to --

[Martin Raffield:]

Yes. We’re up at 130 meters of the raise. We’ve got another 10, 15 meters and then we’ll start the top connection.

[Nana Sangmuah:]

Great. And finally one last question. In terms of how we look at the grade profile going forward, it looks like you should be having a bit of B Shoot material in Wassa and some contribution as well from Prestea hit in Q2. Should we be looking at it differently that maybe the impact of much lower cost in H2 being spilled into Q2?

[Sam Coetzer:]

I think the best is follow the guidance that we’ve put out in terms of that. We’ve seen some positives that I don’t want to guide you differently, especially we mineralized waste in our raises which is good news for us. As we indicated, Mampon will be earlier in, that will have a positive impact. Daniel – you’ve seen the big stopes underground at Wassa on your tour. You’ve seen how different that B Shoot ore looks to what the F Shoot was. Grade control drilling has confirmed that the transverse stopes are the grades we want. So we expect to see the gradual continuation of increased production and reduction of costs. But the big change for us will be the third and fourth quarter going forward. But we do expect a better quarter than the last one in this second quarter.

[Nana Sangmuah:]

Thanks, guys. Congratulations. That’s all for me.

[Sam Coetzer:]

Thank you, Nana.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Robert Reynolds from Credit Suisse. Please go ahead. Your line is open.

[Robert Reynolds:]

Good morning, guys. My first question relates to the Wassa Underground. It looks like the throughput was very strong in Q1 at 1,700 versus your 1,400 expectation for the full year. And it seems like it’s just likely to ramp further from that. I was wondering how the grade has reconciled thus far versus your plan for the year, and how you see both grade and throughput evolving as the year goes forward?

[Sam Coetzer:]

Okay. Thanks, Robert. I’ll answer that. First, you’re correct. We are performing in terms of the physicals and in terms of the grade is reconciling well in terms of the way we’re mining. Taking it back to the third quarter last year when we struggled to start in the F Shoot. We stuck to one principal in this quarter is quality overruns everything and we never take shortcuts. So even if we see very similar at Prestea in the short term, we know the quality of work that we do will be giving us the ability to see the same results that we see at Wassa. So we still plan or guide at the 1,400 tonne a day rate. And until we can be comfortable and Daniel feels comfortable that we are continuing to perform. And the reason why we are performing is that the teams and the planning has increased so dramatically and our support crews in terms of maintenance and supporting the team has been fantastic. And then lastly, the ore is breaking very nicely and our unloading conditions with our scoop have been very easy to get ore profile to improve. And then lastly, the grade is really now reconciling very closer. We are positive in terms of what we see in our gravity goal, but that’s on the positive side. I feel very comfortable that once we get into the big transverse stopes, we will be hitting the mark or maybe exceeding that going forward.

[Robert Reynolds:]

Just to follow up on the grade, if I assume a 1,400 tonne per day for the full year and 60,000 to 65,000 ounces out of the underground, that sort of reverses into about 3.8 gram per tonne for the underground grade, is that – I think it was 2.4 or so in Q1 or 2.3. So I just wanted to see if we should still expect that sort of grade step-up as the year goes forward?

[Sam Coetzer:]

Yes. I’m looking at stopes coming out of – as an average, that’s fine. But we’re seeing the B Shoot stops hitting before on that range going forward. So that’s a typical blended grade which will take – the first quarter was a lot of F Shoot lower grade. So during the last month of the first quarter, we hit the first B Shoot stopes. You saw the grade being pulled up from where it was in the fourth quarter last year. Looking forward in the stopes that we’re looking at now, I think your calculation will be fine.

[Robert Reynolds:]

Okay. And then just on the unit mining cost at Wassa Underground, where are you guys at on that right now and where do you think that they’re going to go as you ramp towards the 2,200?

[Sam Coetzer:]

I think the cost will ramp $29 a tonne at this stage. And long term as we go deeper, we have predicted to get lesser to $48 a tonne. At this stage, we are tracking very healthy according to that. I did mention – I think everybody – mainly the underground and the open pit is running optimally now. As we do a transition, we want to determine where the steady state that we see will be from the underground. Obviously, we’ve put margin before tonne. So in this quarter, we started looking at what can we reduce in the open pit. So we’re looking for that optimal range. So I will take the guidance that we’ve given – what we’ve shown in terms of the cost structure, although we’re slightly better than that at this stage. We still believe that based on optimization with the handshake between the underground and the open pit, we’d have noticed that we had just under $1 million in severance that was mainly in the open pit. Daniel is looking very close what he thinks steady state is going to be. But if steady state could be higher than what we would see, that will have an impact on our cost per tonne for sure. Give us another quarter should we want to change those numbers. I’m excited what we see in the trend but I do not want to guide differently at this stage.

[Robert Reynolds:]

Okay. And then just moving to Prestea Underground. The total development advance of 1,010 meters, where did you expect to be by May 2 on that development advance?

[Sam Coetzer:]

The first point I want make, we will expect it to have one stope developed. And although raise is up to where it was and we don’t target for that. If you look at that graph, we wanted more waste development. You see it’s not a long distance; a lot of tiny little cuts that we need to take and in and out, in and out, in and out. So we would have wanted at least close through ventilation, it makes it good for our team to be there to operate. However, we’re looking at four weeks to six weeks. Martin?

[Martin Raffield:]

Yes. I think to put a number on that, Robert, it might be around 1,300 meters that we were looking to get to on our waste development. From a production point of view though, the more critical item is getting the raises up. So our first raise is done. Our second raise is just starting now and as Sam said, that second raise has started about four weeks behind where we planned it to be. Now going forward, we expect to be able to continue opening up those new raises once a month and that will get us back onto target for the year.

[Robert Reynolds:]

Okay. And just when I look at your 2015 feasibility and I get that you switched to mechanized shrinkage from I think it was a more manual process. Has the change in mining the asset change the amount of development that you needed versus what had been laid out in that feasibility, like as to reduce this?

[Martin Raffield:]

Absolutely. It changed the amount of upfront development dramatically and it was one of the main reasons we decided to go with that methodology. The original feasibility study method was a conventional shrinkage method. We would have had to put a decline down and a ramp up in developed sublevels and developed raises between those sublevels before we could even think about starting to stope. So, yes, in our new method, there is a dramatically less horizontal development required before we get into production.

[Robert Reynolds:]

Okay, great. And then just one final question. André might have mentioned it earlier but I missed it. The 15 million of convertibles due June 1st, what are your plans for redeeming those? Do you expect to pay them with cash or are you looking to refinance?

[André van Niekerk:]

We will be shifting [ph] the outstanding balance [indiscernible] convertible debentures in cash, and it is $13.6 million.

[Robert Reynolds:]

Okay. That’s it. Thanks, guys.

[Sam Coetzer:]

Thanks, Robert.

[Operator:]

[Operator Instructions]. There are no more questions at this time. I’ll turn the call back over to Mr. Coetzer.

[Sam Coetzer:]

Thanks, Devon. Thank you all for listening. The contact details are of Katharine, as you know, our Vice President of Investor Relations on the slide. Please don’t hesitate to contact her. Most of you that I’ll see at the AGM, you’ll probably hear me talk more about the bigger picture in the company. Thank you very much.

[Operator:]

This concludes today’s conference call. You may now disconnect.