Golden Star Resources Ltd.
Q4 2017 Earnings Call Transcript

Published: 21 Feb 2018

[Operator:]

Good morning, my name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Golden Star Resources Fourth Quarter and Full Year 2017 Results Conference Call. [Operator Instructions]. Thank you. Sam Coetzer, President and CEO of Golden Star Resources, you may begin your conference, sir.

[Samuel Coetzer:]

Thank you, Krista. Good morning, everyone. As you know, I'm Sam Coetzer, the President and CEO of Golden Star Resources. Thank you very much for dialing into this call this morning following the release of our fourth quarter and full year results yesterday after market close. Before we get into the results, I'd like to say, thank you to the Golden Star team. I'm truly impressed by what we as a team have achieved in the past year. This has been made possible by the motivation and the dedication of people at every single level of this company. In addition to achieving our guidance on all metrics, we also brought two mines into commercial production, maintained a significant cash balance to deliver our future milestones and maintain the trust of our host communities. Golden Star is now well positioned for the future, as we focus on generating strong cash flow and robust returns for all our stakeholders. However, I'm sad to say we had some very difficult times during the year as well, in particular the two incidents that resulted in the deaths of three of our colleagues. Safety and well-being have always been at the heart of our company. Following these events, we redoubled our efforts and implemented a significant number of new safety measures to ensure events like these never happen again. I'm really proud to be leading this team and I'm looking forward to taking our company to the next stage of its growth. This stage, please take note of our disclaimer and now let's turn past. Joining me on the call this morning are Andre Niekerk, our Chief Financial Officer; Daniel Owiredu, our Chief Operating Officer and Katharine Sutton, our Vice President of Investor Relations. After the presentation, there will be opportunity to ask questions of all team members. But first, let's take a look at where we stand today. I won't spend too long on this Slide as I expect it to be familiar to many of you, but to briefly recap, Golden Star is a West African focused gold mining company with two producing mines in Ghana. Our assets are situated on one of the world's most prolific gold belts, the Ashanti, in a very favorable mining jurisdiction. This coming year, we expect to produce 230,000 ounces to 255,000 ounces of gold, all-in sustaining costs of $850 to $950 an ounce. Although we will still be focused on delivering our production and cost targets, this year, our focus will turn more towards future growth of our business. We allocated $6.6 million to exploration and that will be spent on near-mine drilling at Wassa and Prestea, but also on generating new high-grade underground targets to supply additional ore to our molds. Our total capital budget for the year excluding exploration is just under $30 million and at the end of 2017 was approximately $28 million in cash. Now looking at our gold production in a little more detail. 2017 was a very good year for the company. We produced just around 268,000 ounces, which represents a 38% increase compared to 2016. Our production was well within our guidance range again, and we are continuing to show the market that we deliver on our promises. Both, the Wassa and Prestea complexes increased production significantly compared to 2016, as a result of Wassa Underground ramping up and the high-grade Mampon deposit contributing to production at Prestea. A few weeks ago, commercial production was achieved at Prestea Underground representing the final milestone in its development. Moving into costs, I'm happy to report that both our cash operating cost and all-in sustaining cost were well below the bottom end of our guidance ranges. For the second year in a row, we have seen material decrease in our cash operating cost and all-in sustaining cost balance and they are expected to reduce further as we focus on high-margin ore. We anticipate that this will mean that we deliver more cash into our balance sheet and continue to strengthen our financial position. We look now more closely at our operations, and I'll hand over to Daniel Owiredu, after which Andre will discuss the financials.

[Daniel Owiredu:]

Thanks, Sam. Turning first to Wassa. Wassa is located in the Southwestern Ghana and it became an underground only operation in January 2018. We produced 137,000 ounces of gold in 2017 from both the underground and open pit operations. This represents a 31% increase compared to 2016 as a result of a ramp up of Wassa Underground. We declared commercial production at Wassa Underground on January 1, 2017 and saw more than a fourfold increase in production in 2017 compared to 2016. As a result of the increasing gold sold, Wassa reported a 6% decrease in cash operating cost per ounce compared to 2016, and as you can see at the bottom of the slide, Wassa's cost size is expected to reduce further in 2018 as we focus on high-grade underground ore. Looking more closely at the fourth quarter of 2017, Wassa Underground performed very strongly during the period. We saw a 31% increase in gold production compared to the third quarter, primarily as a result of a 55% increase in grade to just over 4 grams per tonne. In the third quarter, we had some challenges with grade. However, we doubled the number of rigs underground and we now have three months of definition drilling ahead of mining operations. As a result the grade in the fourth quarter was in line with our expectations, and in my view, we're now beginning to really find our stride. The mining rate at Wassa also continued to be very strong during the fourth quarter. Our targeted mining rate for 2017 was 1,400 tonnes per day and on average in the fourth quarter, we delivered 1,100 tonnes per day. In 2018, we're planning to accelerate our mining rate further to an average of 2,700 to 3000 tonnes per day. As we will be focusing on high-grade, high-margin ounces, this will allow us to deliver our guidance of 137,000 ounces to 142,000 ounces of gold for the year. I'm really, really very impressed with how the Wassa team have performed over the last year, and I'd like to give them all my congratulations on an impressive first year of commercial production. Now turning to Prestea. The Prestea gold mine is approximately 40 kilometers from Wassa and it's also in the Southwestern part of Ghana. We saw a notable 45% increase in gold production in 2017 compared to 2016 due to the contribution of higher-grade ounces for Mampon deposits in the Prestea Underground. Prestea reported 21% decrease in cash operating costs per ounce compared to 2016, again, as a result of the higher-grade ore from Mampon. All supply from Prestea Open pits is expected to conclude at the annual first half of the year and then Prestea will become an underground only operation truly. However, by this time, production from Prestea Underground would truly have ramped up significantly. Looking now at the fourth quarter, as with most new mines, there were some wrinkles to iron out, and unfortunately production from Prestea Underground was lower-than-expected in the fourth quarter due to blasting issues. However, by adjusting drill design patterns we're able to improve efficiencies and the mining sequence is now working well. We have six stopes at various stages of development and the final draw down of the first stope is well underway. As Sam mentioned earlier, we declared commercial production at Prestea Underground on February 1 and production is expected to continue to ramp up through the year 2018. Our targeted average mining rate for the year is 650 tonnes per day, we are well on track to achieve that. Both operations have come such a long way since the start of 2017, and I believe we are now well positioned for a strong 2018. So now, I'll hand you over to Andre to tell you more about our financial results for 2017.

[Andre Niekerk:]

Thank you, Daniel. We saw a 43% increase in revenue due primarily to the increase in gold production from our operations as explained by Daniel. Golden Star's mine operating margin in 2017 increased by 108% to $57.2 million. This is due to the higher grade and therefore higher-margin ore processed in 2017 as compared to 2016. The mine operating expenditures for 2017 also included a $9.2 million severance charge for costs related to the transition of our mines becoming an underground mining operations only. Net income attributable to Golden Star shareholders increased to $0.10 per share in 2017. This is compared to a loss of $0.30 per share in 2016. The higher mine operating margin to gain on the fair value of financial instruments and the deferred income tax recovery were the primary reasons for the significant improvement in earnings. In 2017, we spent $69.6 million on CapEx, of which $39 million was spent on Prestea Underground. With Prestea Underground now being in commercial production, our capital expenditure is expected to reduce going forward. At the end of 2017, we had $27.8 million in cash and in late January 2018, we drew down the remaining $15 million of the Ecobank facility. As we continue our transition into a margin focused gold producer, our financial position is expected to strengthen further and give us more flexibility. Now, I'll hand it back to Sam to tell you more about the company's upcoming growth opportunities.

[Samuel Coetzer:]

Thanks, Andre. Now let's look at the aspect of Golden Star that I am most excited about and that is exploration. Both of our underground operations have now achieved commercial production, so we're starting to turn focus towards organic growth. Firstly, looking at Wassa, a week ago, we released the latest results from the deep drilling at Wassa Underground. They confirmed that the F shoot in addition to the B Shoot extends a 180 meters beyond our inferred mineral resources and remains open down plunge. This suggests that the ore body may be significantly larger than our previous estimates. And there's potential for us to extend Wassa's mine life. The drilling to the north of the B Shoot also confirms that there's potential to add more stopes and increase near-term production. And we discovered a new target late in 2017 in the footwall of the 242 zone. Our first hole reported an intercept of approximately 7 meters wide at 8 grams per ton. And this target may have the potential to provide additional high-grade ore to Wassa processing plant. We'll be doing further drilling in 2018 to confirm this result and improve our understanding of this new target. Slide 16 is a long section of the Wassa Underground ore body and it focuses on the extension of the ore body to the South. The colored area towards the top left of the diagram marked as B Shoot is where we are mining at present. We are only 18 months into the Wassa Underground's mine life and as you can see, our operations are still fairly shallow. The B Shoot planned stopes shown in gray blocks represent the Wassa's Underground current mineral reserves of 750,000 ounces, and that is estimated to give us approximately a five-year mine life based on the current planned mining rate. However, we also have 1.9 million ounces of inferred mineral resources, which are shown as the pink shaded block at the end of the planned stopes. The holes we drilled in 2017 from the 18,900 drill pad are 180 meters further south of the inferred mineral resources and they also returned strong intercepts, suggesting that the ore body continues at depth. Last week we announced further drilling results from the daughter holes that were drilled from the same spot. And one of those reported the widest intercept we had received to date from the Wassa property. The estimated true worth of this intercept was 94 meters at a grade over 4 grams per tonne. The ore body remains open at depth and we'll be doing more drilling in 2018 to further confirm these results. We're very excited about the potential of the Wassa Underground as we believe it's a much larger deposit than we previously estimated. Turning to Prestea, the slide is a long section of the northern area of Prestea Underground showing the Central Shaft on the left and West Reef ore body on the right. In 2017, we drilled 23 holes in an in-filling program, and it continued to confirm the high-grade nature and strong continuity of the ore body. We also conducted a small amount of extension drilling into the inferred mineral resources and that too returned strong results. However, the extension drilling we have done so far is just the beginning. It was conducted from within the mine's workings but later this year we will construct a drill chamber to the north of the current West Reef 24 level access. This will do us - to allow us to explore larger longer-term exploration target, which is the down plunge extension of the West Reef. And this drilling is represented by the green lines in the slide. It will also help us gain a better of understanding of the potential to increase Prestea's annual production rate and potentially extend its life mine above the current five years. I'm very excited about our exploration program and I'm looking forward to releasing the results throughout the course of the year. Now let's look at our future expansion potential. Those that have listened to me before, this is my favorite slide in the presentation as it really encapsulates the opportunity that we have and also the vision of this management team. It shows that if we have exploration success, we will be able to substantially increase our production rate without having to incur significant additional capital, and that's an opportunity that not many companies have. I'll take you through it now in a bit more detail. When we started to developing the two underground mines, we decided to building more capacity than we originally needed in order to allow us to grow our production profile in the future. At Wassa, the target mining rate of the feasibility study was 2,200 tonnes per day. However, as Daniel just mentioned earlier because of the mining operations doing so well in 2017, we decided to accelerating it further in 2018. And this year, our targeted average mining rate is 2700 to 3000 tonnes per day. We also engineered the decline to handle 4000 tonnes per day and our plant's capacity is nearly 8000 tonnes per day. So you can see there's no bottleneck to expansion. At Prestea, the story is very similar. The planned mining rate in the feasibility studies is 650 tonnes per day, but the shop has the capacity of 1,500 tonnes per day and the plant can process 4000 tonnes per day. Once Prestea Underground has hit it its stride, we will look more closely at the potential to ramp up further. So now, the focus is on our exploration team to unlock the potential of our ore bodies and further demonstrate the largest scale, longer-term opportunity within both underground mines. Now looking at our 2018 guidance, as I mentioned earlier, this year we expect to produce 230,000 to 255,000 ounces of gold. Production is expected to be weighted towards the second half of the year due to the ramp up of production at Wassa Underground. Looking at cost over the past two years, our cash operating cost and all-in sustaining cost have reduced by approximately $200 per ounce. That reflects our move towards becoming high-grade underground producer. Our capital for the year is expected to be $36.5 million, which is a significant decrease from 2017's guidance of $69.3 million. The reason for that is that both underground mines are now in commercial production so going forward, less capital will be required. I believe this guidance offers a compelling investment case, which we expect to be enhanced by the exploration upside potential of both our assets. Thank you very much for listening, and at this point, I hand it over back to Krista to take some more questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Nana Sangmuah with Clarus Securities.

[Nana Sangmuah:]

Congratulations, gentleman for another good year. I think it marks the third consecutive year of meeting guidance and actually costs came in much lower than you had forecasted. A couple of quick questions for me on Prestea. I just wanted to know what the current throughput rates are. And if you could comment what split that is from production ore and stoping ore and sort of grades that you are encountering, and potentially if you can comment on the cost profile right now whether it's pointing in the direction that makes you very comfortable?

[Samuel Coetzer:]

Thanks, Nana firstly for the congratulations. A lot of questions, I hope I answer all of them. As you know, we went into commercial production on the 1st of February and met our target at the plus 60% of what the throughput need to be. So we are sitting above the 60% mark and it continues to improve. Soon we will have the second stope, which will contribute another 10% to 12% on that with the development moving forward. So I'm very happy of how the underground mine is now starting to come in into its production profile. It's very early for me to indicate to you the cost structure, obviously, you know, we're only 2 to 3 weeks into the commercial production. But I can guide you that you utilize the guidance that we set out. We have considered, like we did last year, the guidance of a full year considering slower startups, faster startups, moving certain things forward. So utilize at this stage the guidance that we've indicated for Prestea a whole. As we did at Wassa, when you're going through a transition, we did carefully planning to ensure that the stope feed of the Prestea Pits for the first 2 quarters of this year and that always offsets any transition into a new entity. You saw how we did at the Wassa, having the open pits until we felt like Wassa can run by itself very efficiently and that will be the same approach. So it's very hard for me to give you the cost structure three weeks into it, but I would stick by the guidance we've handed out.

[Nana Sangmuah:]

Great. And moving out on to the plant, I know you guys are still working on some upgrades. Are there any bottlenecks there? Like what's still outstanding to be completed?

[Samuel Coetzer:]

I'll hand it over to Daniel because he is the guy that makes sure the plants are ready.

[Daniel Owiredu:]

Nana, thank you. The plants are ready. Most of the modifications are done. We just held that because we've got extension going on. Most of the major component, gravity circuit, land silos, everything is all in place. We just got 1 or 2 tanks that needs to be refurbished, but otherwise, it's not an operation for us at all. We are ready whenever we get into single operation. The only modifications we'll do is just pipe changes to allow us to throttle down to the 650.

[Samuel Coetzer:]

I think I can add to Daniel, he's done an exceptional job, the good news there is the gravity circuit we can see is working well as we pick up gravity gold from Prestea Underground. We can already see the gravity component improving.

[Nana Sangmuah:]

Great. And my last question to Andre on the deferred tax asset, I think, you have booked about $363 million as of the end of December. How do you expect - I mean what would the recovery be like? Can we recover all that through the life of the existing reserves? How should we be modeling that?

[Andre Niekerk:]

Yes, we booked a deferred tax asset of $12.9 million. In our footnote, we disclosed all the tax pool and loss carry forwards as available to the company. However, the deferred tax asset that was realized was just related to Wassa because we expect Wassa to become taxable in the near future in the next couple of years. The majority of that last carry forwards that we have is actually relating to Prestea. And now that Prestea, just announcing commercial production, we will look at - like an assessment towards the end of the year and whether we need to recognize any additional deferred tax assets related specifically to Prestea.

[Operator:]

And your next question comes from the line of Heiko Ihle with HCW.

[Heiko Ihle:]

So at Prestea, you anticipated the open pits to finish in late 2017, now you expect Q1 '18, late Q1, it's the end of February essentially. Is there a chance this gets extended again?

[Samuel Coetzer:]

Heiko, how we look at it. Firstly, you would see we talked about ore supply. In the fourth quarter we mined more, so that we have supply of ore for two quarters to allow the transition of - transition of the underground to be completed in full. That carried a bit of cost with it obviously, but we now have enough ore supply for two quarters going forward and that is in our guidance as well. At this stage, we only have clarity to mine until about end of this month, but Daniel and his team constantly look for additional areas and pits. I'm not ready to talk about that. Should we find that any of these parts that we are looking at could be an enhancement to our production profile, I will update it, but we have sufficient stockpile sitting at the romp pad right now, so we don't need to truck it. There should not be a lot of cost associated with it, but it'll be a great supply of ore going into the plant going forward.

[Heiko Ihle:]

So given this extension, could this change the $2.8 million severance package that you reported in the release? I think at one point in time we were sort of expecting severance north of $3 million?

[Andre Niekerk:]

Yes. We need to right size the mine in this year. Somewhere in this year, we need to right size it, we saw the benefit a year ago - a 1.5 year ago when we did Bogoso for the first time how that immediately gets to the bottom line. Daniel is keenly aware of that. I would use the guidance at this point in time that we have used and given. So we have a certain amount at Prestea, as you know, a certain amount at Wassa and the total is 18.6 for the year. If we do find any other avenues of extending mine lives that might be slowed down, that's what, I can tell you.

[Heiko Ihle:]

So you spent $69.6 million in CapEx for 2017, which included $40 million of development capital for Prestea Underground. So if you net that, adds about $30 million. You also expect $36.5 million for '18, where is that development capital going to be spent this year? And do you have any sort of - I don't know if you internally break it out between development capital and just sustaining, but is there any idea of how much development capital you are going to spend in 2018?

[Samuel Coetzer:]

I don't have the number, but I can tell you what we're looking at. We're preparing Wassa Underground to go to 4000 tonnes a day, so we are developing - putting some cash available to ventilation systems and adits like that. Andre, do we have development for each site?

[Andre Niekerk:]

So the total capital we're going to spend is $36.5 million of, which $18.8 million is going to be development capital and $17.7 million is going to be sustaining capital. So at Wassa, we're looking at round about $15 million in a sustaining capital and Prestea, around $3 million in sustaining. And from the development side, at Wassa, we're looking at that $6 million in development, Prestea, $6.3 million. And then we have $6.6 million of exploration as well.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Cosmos Chiu with CIBC.

[Cosmos Chiu:]

Maybe first off on Wassa here, good to see that head grade has increased in Q4. My question is on the throughput in terms of you reached about 1,800 tonnes per day in 2017, you're planning to increase that to 2,700 to 3000 tonnes per day in 2018. Is that just a function of more stopes? More transverse stopes, bigger stopes? Could you give us a bit more detail?

[Samuel Coetzer:]

Yes. Thanks, great question and you - 80%, correct. So as you saw, we've been drilling the north side, and we have added stopes to the north side, which is a positive conversion on the ore body. Over the last year, we've seen that there is a positive conversion. So that was the one fact that we have more stopes available to us. Secondly we also had better efficiencies from the underground team than what we predicted and we - end of last year, we purchased 4 new trucks, and that combination has allowed us to very easy make wet gold going forward without jeopardizing grade. This is the planned indication of first quarter that we should be able to continue that.

[Cosmos Chiu:]

Okay. And as you have mentioned, I think Daniel mentioned, you've increased the number of rigs underground to make sure that you're about three months ahead on definition drilling, grade-control drilling. Do you have enough - sufficient drills at this point in time to account for the potential or the planned throughput increase?

[Samuel Coetzer:]

Oh yes, as Daniel said, we're running very heavy in front of us. I'd like to draw attention to the team, if you would look at how we've laid out the mine, there is a panel 1 and the panel 2 area, 2 big areas, and you see there is a GAAP between those 2 and the reason why that GAAP just hasn't been drawn before, because when we draw that early last year - oh! in 2013, '14, we haven't done any significant drilling and we hope that will add to our reserves as we go forward. So having those draws and considering this year to put an exploration drift out in front of the operations, we believe that would significantly enhance our clarity of how we can take this mine to 4000 tonnes a day.

[Cosmos Chiu:]

Of course. And as you pointed out, Sam, it's good to see that there is a good exploration upside here at Wassa. Referring back to your press release, that came up about 1.5 week ago now on exploration, it looks like you're drilling both the F Shoot and the B Shoot at Wassa and it also looks like you're pulling pretty good grades out of the F Shoot. If I remember correctly, historically, B Shoot was the higher grade portion, F Shoot is the not as high grade. Has that sort of changed?

[Samuel Coetzer:]

Well this is a good question. I constantly ask my exploration guys, what are we seeing down there. Because the F Shoot and the B Shoot are now starting to look really exciting down there. We haven't drilled the shallow part of the F Shoot. As we drilled these very deep holes, we get into mineralization, we put some daughters in and we're intersecting both the shoots down there. So it is hard for me today to say what - all we see is some significant imperfections at depth, and that is exciting for us. Those drills haven't stopped. We hope to continue to update you. Obviously, I'm starting to see the results and we will continue to push the drill strings through the B Shoot into the F Shoot. So even if it takes a bit longer hole, while you're into that hole, we're now pushing it through because we're starting to see that the F Shoot looks exciting down there.

[Cosmos Chiu:]

Maybe moving on to Prestea, just one question for me. Again, it looks great. It's good to see that Q4, the head grade has improved once again to about 8.4 gram per tonne. The reserve grade is 14 grams per tonne, Sam, could you just talk about when would you expect to reach that reserve grade?

[Samuel Coetzer:]

I think yes, so every quarter as we go - well, not quarter, every month, things move really rapidly forward as we get more stope supply or it diminishes the development component. And then the grade will just constantly move up. I - we keep on seeing, in terms of our raise development that the ore body grades are what we predicted it to be. it is now the ratio of stope to development that needs to increase - that's what we're focusing on and I'm starting to see as we bring in the second stope there'll be more stope ore compared to development ore going in.

[Operator:]

We have no further questions at this time. I'll turn the call back over to Mr. Coetzer.

[Samuel Coetzer:]

Thanks, Krista. And thanks everyone, and I hope to see some of you next week. Bye.

[Operator:]

And this concludes today's conference call. You may now disconnect.