Golden Star Resources Ltd.
Q4 2016 Earnings Call Transcript

Published: 22 Feb 2017

[Operator:]

Good morning, everyone, and thank you for joining us to discuss Golden Star Resources’ Full-Year and Fourth Quarter 2016 Financial Results. The financial statements were filed last night and these are available on Sedar as well as on the company’s website at www.gsr.com. I will now turn the call over to Sam Coetzer, President and CEO of Golden Star.

[Sam Coetzer:]

Thank you, Lindsey, and good morning, everyone. As Lindsey said, I’m Sam Coetzer. I’m the President and CEO of Golden Star Resources. Firstly, I’d like to thank you all for dialing into the call this morning, following the release of our fourth quarter and full-year results yesterday afternoon after the market close. However, before we get into the results, and I know a lot of my team is listening, I would like to say thank you to the whole team at Golden Star. I’m so truly impressed by what we’ve achieved in the past year and this has been made possible by the motivation and dedication of people at every level in this organization. We delivered on so much more than just our guidance, the company is now filled itself in so many different ways. These include strengthening our balance sheet, delivering on important milestones at our two development projects, maintaining a sufficient cash balance to deliver our future milestones, and lastly, gaining the trust of local communities and keeping that trust. I’m very proud to be leading this team and I’m looking forward to another transformational year for the company. Now, I’m going to take you through the results of the fourth quarter and the past year and show you that as well as achieving our guidance on all metrics. We also advance significantly the development of our two high-grade underground mines. Please take note of the disclaimer and I’ll just pass that. Joining me on the call this morning are André van Niekerk, our CFO; and Katharine Sutton, our Director of Investor Relations and Corporate Affairs. After the presentation, there will be an opportunity for you to ask questions to all our team members. But first, let’s take a look at who Golden Star is and why you shouldn’t invest in us. I won’t spend a long on this slide, as I’m sure, many of you already have a good knowledge of the company. The Golden Star is an established gold producer with two producing mines in Ghana, a stable jurisdiction. Historically, we have produced over 4 million ounces of gold. In 2017, we’re 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 the two high-grade underground development projects at both of our mines, including Prestea Underground, which has a head grade of 14 grams per tonne. We have mineral reserves of approximately 2 million ounces, they are all now non-refractory and significant upside potential. But going forward, we will be focused on expanding the lives of our operations. We also have one of the largest land packages of any company currently operating in Ghana, including the major producers, such as, Gold Fields, Anglo Ashanti, et cetera. We also have a very experienced management team with complementary skill set. Regardless of our strong performance over the past year, we remained undervalued on a number of metrics compared to our peer group. Many of these attractive entry point for investors to buy into our stock. Now, let me take you through the key results of 2016. I’m pleased to tell you that we achieved our guidance on all metrics. Looking firstly, on production on 2016, we produced just under 195,000 ounces, which was in the top half of our guidance range. The fourth quarter was our strongest quarter of the year, with production of over 53,000 ounces, and was also the 2nd consecutive quarter of record production at our Prestea Open Pits. As you can see from the graph on the left of the slide, production of Wassa Underground also began to ramp-up strongly during the fourth quarter with an increase in production of over 250% compared to the third quarter. We finished the year with just under $22 million in cash, which doesn’t include the $10 million from the Royal Gold that we had received on January 3. You will also know that we did a bought deal of C$34 and we remain fully funded to complete the construction of Prestea Underground to make the scheduled debt repayment for 2017 and come back and enhance exploration program. Now, looking at our costs, I’m pleased to report that we delivered cash operating costs in the middle of our guidance range. Since 2015, our cash operating costs again decreased by a 11% due to the cessation of the refractory operation. Unfortunately, our cost in the fourth quarter 2016 were higher than expected due to decrease in ounces produced from the Wassa Main Pit. This was also a result of a reduction in head grade and the higher mining costs per tonne. However, going forward, we expect the cost to decrease as the two high-grade underground mines ramp-up. On average for the five years from 2017, our all-in sustaining costs should be approximately $900 per ounce. Moving on to capital expenditures in 2016, we spent $84 million and that was primarily on the development of the Wassa Underground and the Prestea Underground. It was a very significant investment, but the results of the feasibility study for both underground developments were highly compelling. And we see low-cost high-grade underground ore as the future of our company. During the first quarter, we spent just under $24 million, which is a 73% increase compared to the fourth quarter of 2015. Development work at both projects continued to advance well during the year. And this culminated in commercial production being achieved at the Wassa Underground on January 1, this year. This is a significant milestone in our transformation into a high-grade low-cost gold producer, and we expect to reach the same milestone at Prestea Underground in 2017. As I said earlier, I’m so product of our operational and construction team. It’s a great achievement to have hit all our guidance metrics at the same time as building two underground mines. But now, let’s look more closely at the performance of Wassa and Prestea, the progress being made at the underground developments and our exploration upside opportunities. Turning first to Wassa. For those of you who aren’t familiar with it, it’s now an open pit and an underground mine and it’s situated in southwestern Ghana. What has always been completely non-refractory mine and always now sourced from Wassa Main Pit and also from the underground mines. In 2016, production from Wassa was just over 104,000 ounces, which represented 4% decrease compared to 2015. This was largely as a result of a decrease in head grade of the all from Wassa Main Pit and this had an knock-on effect to Wassa’s cash operating costs, which were impacted by grade and higher mining costs. Wassa Underground produced just over 11,000 ounces in 2016. Although the mine was in pre-commercial production during the period, Wassa Underground’s costs are not reflected in the cash operating costs that we see reported yet. Going forward, as Wassa continues to ramp-up, we expect to see Wassa’s cash operating cost decrease as a result of that higher grade ore going into the market. You can see this in our guidance for 2017 at the bottom of the slide the production of 85,000 to 95,000 ounces from Wassa Main Pit and 60,000 to 65,000 ounces from Wassa Underground as a combined cash operating cost of between $830 and $915 an ounce. It’s worth nothing that production at Wassa is expected to continue to expand. The life of mine production is expected to be approximately 175,000 ounces per annum on average from this year onwards. The underground begins to make a more significant contribution. Looking at Slide 10, this is going to be the last time I would refer to Wassa Underground as a project, as it’s now a producing mine. We’ve mentioned it already, as it was an important milestone, but commercial production was achieved at the beginning of this year. Construction of the mine was completed at the end of the Q – the fourth quarter 2016 on all the ancillary infrastructure was installed. We were mining in the F Shoot Zone of Wassa Underground during the second-half of 2016, which is a more moderate grade area of the deposit. But now during the first quarter, we will begin to mine the higher-grade B Shoot for the first time. We’ll be using longitudinal stoping for the first-half of the year and then in the third quarter we will begin to mine the larger higher-grade transverse stopes and that’s when we’ll start to see a much stronger contribution from the Wassa Underground to our production profile. Moving to the next slide. This slide shows how Wassa Underground development will look based on the current mineral resources. As of December 2015, we had 3.5 million ounces of measured and indicated resources at Wassa and 1.6 million ounces of those were in the Underground Mine. Of those 1.6 million ounces only 42% are in the reserve category, there is a lot of potential to extent our reserves and the life of the mine for further drilling. You can see the area in the top left of the diagram, the F Shoot, where we’re currently mining and moving to the right, in the purple and red areas is the B Shoot. The red and purple colors show the areas of the highest grades and the largest works of gold mineralization. The area on the bottom right hand side of the diagram in the red dash box shows Wassa’s inferred mineral resources which totaled 1.9 million ounces in the end of their mine. The deposit is also open dump plants, so we expect to be able to significantly increase Wassa’s results with further drilling in this direction. Now we are going to move on to our Prestea mine. The Prestea gold mine is approximately 40 kilometers from Wassa and it’s also in South Western Ghana. Golden Star began accessing the Prestea Open Pits in the third quarter of 2015 after we stopped production of the refractory Bogoso Pit. The Prestea Open Pits are oxide deposits and they are the bridging the production gap until production begins from Prestea Underground in mid this year. Prestea delivered a second consecutive record quarter in the fourth quarter with gold production of nearly 24,000 ounces. The most that Prestea Open Pits have produced in first pilot production more than a year ago. During 2016 Prestea produced nearly 90,000 ounces, which was 28% higher than the top of our original guidance. Due to the increase in production, our cash operating cost was almost the third lower than in 2015, reflecting our transformation into becoming a non-refractory producer. It really has been a great performance by the Prestea team. Sticking to the theme of surface production for now, we have some more good news during the fourth quarter, when we received the mining lease for the Mampon deposit. Mampon is a high-grade oxide deposit, 65 kilometers to the north of a processing plant at Bogoso. It has a mineral reserve of 45,000 ounces, grading at 4.6 gram per tonne, which is materially higher than the head grade of the reserves we are currently processing from the Prestea South Pit. All of the outstanding permits for Mampon had now been received, including the environmental permit, a forestry permit, and capital expenditures are expected to be minimal. Ore from Mampon will be blended with ore from the Prestea Open Pit and it’s expected to provide strong cash flow for us this year. We expect to start mining Mampon in the second quarter and we are on track to achieve that milestone. The Prestea Open Pits have been a real win for Golden Star, but they are not the price for us at this year. When the very high grade Prestea Underground mine begins production, we will reach the final milestone in our transformation into a high grade low-cost producer. Prestea Underground is one of the highest grade development projects in West Africa with mineral reserves at 14 grams per tonne. As a result, was expect to produce 90,000 ounces per year at a cash operating cost of below $500 per ounce. This slide shows the critical items that need to be achieved in order to bring the mine back into production and we are well on track. I must admit I’m very excited today to tell you that our mining team just intersected the West Reef for the first time on 24 level. And the focus is now on establishing the infrastructure and the entrance to the stopes. In terms of infrastructure refurbishment, the upgrade of the rock winder is now complete and it was success commissioned in January. We have the whole 650 tonnes of ore to surface to test the wasting system and it worked well. So we are now stockpiling ore at Bogoso processing plant in order to run a dispatch. Our team is making excellent progress at the Prestea Underground and we remain on track to blast the first boat in the second quarter to reach commercial production in mid 2017. This slide shows the development work that has taken place on the 24 level to-date. 24 level is approximately 900 meters below surface and in terms of the development advance to-date to the end of 2016 was 350 meters. Obviously our target is the West Reef ore body and we’ve been focusing on cost cut advancement towards it as well as constructing some other infrastructures. The first Alimak raise mining equipment arrived on site in December and it’s now been moved underground. We are also in the process of building the first Alimak nest which is where the Alimak is stored during blasting and you can see here at the bottom of the diagram. We are now in such an exciting time in Prestea Underground’s development and I’m very excited about blasting the first stope in the next quarter. Moving on to Slide 16, although Prestea Underground will be transformational for Golden Star, at present the mineral reserves are fairly limited. However, believe that the 470,000 ounces of mineral reserves we have now are just the tip of the ice berg. The mineral reserves are located in the West Reef, which is the small purple area of the diagram. We were only able to drill out a small area of the ore body due to access issues back in 2004. However, now that we have upgraded the ventilation, pumped out the water, we have started drilling again. We believe there is strong potential to increase the Prestea reserves and I’m looking forward to releasing the drilling results over the coming months. So let’s talk a little bit more about exploration. As we had mentioned previously, we believe there is a strong opportunity to increase our reserves and expand the lives of our operations through exploration. At present only 42% of Wassa’s measured and indicated resources are on the reserve category and 57% of Prestea’s, so we believe there is obviously upside potential here. There is also potential to increase our resources outside of our existing resource area. Our concession area covers more than 1,100 square kilometers, making it one of the largest land packages on Ashanti Gold Belt. Later this quarter, we will be releasing an exploration strategy update, giving you more details on our plans for exploration this year and we will be allocating our budget. I remain excited about further demonstrating the potential of the assets of Golden Star. Now let’s take a look at our financial results and the key financial events of the quarter and at this stage, I’ll hand it over to André, our Chief Financial Officer to tell you more about that. André, over to you.

[André van Niekerk:]

Thanks Sam. It’s important to understand how performance has changed over the last year since we became a non-refractory producer. Firstly, although revenues were down slightly due to the decrease in ounces sold from both Wassa and Prestea, our mine operating margin shows that these ounces were significantly more profitable. In 2015 be made a mine operating loss of $27.6 million, whereas this year our margin has turned positive and we made a $27.5 million gain. We expect to see this margin to continue to grow as we see more production from the Wassa Underground mine and the high-grade Prestea Underground development project comes into production. In 2016 we made adjusted earnings of $11 million compared to an adjusted net loss of $28 million in 2015. At the end of 2016 we had $21.8 million in cash and at the start of January, we received a final $10 million advance payment from Royal Gold. In early February we also completed a bought deal for net proceeds of $24.8 million and we are fully funded to complete the development of Prestea Underground and to make our scheduled debt payments for the year. Our financial position should continue to strengthen as the production expands and our costs reduce further, which underlines Golden Star’s transformation into a low-cost mid-tier producer. Speaking with a theme of transformation, I’d like to recap the transactions we did in 2016 to transform our balance sheet. The first deal we did was back in April and it was a bought deal for $15 million. We used the proceeds to repay some of our accounts payable and therefore improving our working capital. The next transaction was probably the most important and that was a $65 million offering of 7% convertible debentures that matures in 2021. $42 million of this $65 million were exchanged for the existing 5% convertible debentures, which were due on June 1 2017. Refinancing the 5% convertible debenture has significantly improved our financial position, and it means that our debt repayment are now more closely aligned to our expected cash flows. The other part of the same deal was an equity offering for $34.5 million, and the funds from both offerings were used to reduce our debt. First, we further reduced the outstanding balance of the 5% convertible debenture to $14 million, then we used $22 million to settle the remaining balance of the Ecobank loan. The settlement of the Ecobank loan was important since the repayment requirements was over the same period as developing and ramping up of the two underground mines. The equity offering also show a number of high-quality institutional investors taking positions in Golden Star, which contributed to the transformation of our shareholder register. Finally, as I mentioned, we closed the bought deal for net proceeds of $24.8 million earlier this month. This will ensure that our balance sheet remain strong as we complete the development of Prestea Underground and ramp-up production at both mines. Thoughtfully, you can see Golden Star is already starting to look very different from the company we were a year ago. Now, let’s look at our guidance for 2017. Firstly, in terms of production, we expect to produce 255,000 to 280,000 ounces of gold. This is an increase of between 31% and 44% compared to 2016 production. Although it’s important to note that our production will be stronger in the second-half of the year due to the fact that it will be begin accessing the higher-grade larger transverse stopes of the Wassa Underground in the third quarter, we also start mining the high-grade Mampon surface deposit in Q2. So it only really makes a contribution to production in the third quarter. And Prestea Underground is expected to achieve commercial production in mid-2017. Conversely, our cash operating cost will be higher in the first-half of the year and a decrease in the second-half, as we begin processing more of the high-grade ore from underground. So you can expect results for the first and second quarter of 2017 to be similar to Q4 2016 and then the results will strengthen in the second-half of 2017. Now, looking at our 2017 guidance for capital expenditures, we expect to spend $58 million. The majority of that $32 million will be incurred at Prestea Underground, as we complete the refurbishment and development work. This will be spent during the first-half of the year. Our capital expenditure is our first-half weighted and our production is second-half weighted. So with the proceeds from the bought deal, we will now be able to maintain an adequate cushion and strong financial position throughout the year. Once we reach the second-half of the year with a construction of Prestea Underground completed as the Mampon deposit being mined, we expect to see our capital expenditures decrease substantially. I’ll hand it back to Sam to talking through our production profile for the next five years.

[Sam Coetzer:]

Great. Thanks André. André has touched on 2017, but let’s look at how Golden Start will be expanding our production reducing our costs further into the future. Between 2016 and 2019, we expect our production to have increased by 60%. Now, all-in sustaining costs will be around $900 an ounce on average, positioning as a low-cost producer from 2017 onwards. This job was compiled from the Wassa and Prestea feasibility study, so it does not take into account the upside potential, I believe, we have at both of our assets. I’m optimistic that we will be able to further increase our production and increase the lives of these mines beyond the current five years. Now, let’s look at our milestones we have already passed and that we can expect to see for the remainder of the first-half of this year. The great thing about the position we’re in at the moment is that, yes, I mean, you could believe, it is always something new to talk about. At the start of the year we announced commercial production at Wassa Underground and in the next few weeks we’ll be releasing our resource and reserve update. Also in this quarter we will be releasing our exploration strategy update, which I mentioned earlier in the presentation. We also expect to begin mining in the B Shoot of Wassa Underground, which will take us into the higher grade areas. Beyond that in the second quarter, we will begin mining our high-grade Mampon deposit, which will generate strong cash flow for us in 2017. And then late in that quarter, we will blast the first stopes at Prestea Underground, quickly ramping up the commercial production in mid 2017, which is the milestone that we’re all waiting for. So in summary, Golden Star is transforming into a lower cost non-refractory producer. We’ve achieved our 2016 guidance on all metrics, at the same time, is developing two underground projects. We have a solid near-term growth with our 2017 production expected to be at least 30% higher than our 2016 productions. The development of our two underground mines is fully funded and when they are both operating at nameplate capacity, we will see our production expand further and our costs continue to reduce. We also have exploration upside potential and experienced management team with a track record of discovery and project delivery. Finally, regardless of our strong share price performance over the past year, I believe we remain undervalued compared to our peers. So there’s an attractive entry point for investors to buy the entire story. I thank you very much for listening and we’ll open the line for a few questions. So, over to you Lindsey.

[Operator:]

[Operator Instructions] Our first question comes from the line of Andrew Breichmanas with BMO Capital Markets. Your line is open.

[Andrew Breichmanas:]

Thanks and hi Sam and André.

[Sam Coetzer:]

How are you, Andrew?

[André van Niekerk:]

Hi, Andrew.

[Andrew Breichmanas:]

I was just wondering if you could maybe provide a bit more detail on the current state of operations at the Wassa Underground. It seems like everything’s on track to access the B Shoot which should obviously be a significant milestone, but before that, is it too early to talk about how development rates, unit costs and grades are reconciling to plan?

[Sam Coetzer:]

Okay, well, it’s never too early, we track our performance of the underground teams, especially to underground mines very carefully, Andrew. So we’ve been achieving the right average rate we want to achieve in the underground and Wassa is about between 10 and 14 meters a day which is what we’ve been looking at from the day that we started. Now with the focus on that, not all meters at Wassa is equal, the focus priority meters are always the ones that go for the B Shoot and all the rest are the ones that will open the F Shoot. We looked at a cost of about $5,000 a meter, we’ve been slightly below that since the start of – inception of the mine. And as you know, we were in pre-commercial production. As I indicated in the third quarter last year, the F Shoot was in a moderate grade area. What we did see, we had to do much more delineations clearly than what we need to do in the B. Shoot just because of the shape of the F Shoot. Now what the F Shoot has done for us, Andrew, has allowed the team to develop really strongly in the underground practices. So although it has – it’s been between two and three gram material that come out of those stopes, it will be very close to surface. So they have contributed to the start of the mine going forward. Now our cost per tonne that we will probably be better tracking it once we see the stopes at the B Shoot coming out which we believe will be in the $48 a tonne to about $52 a tonne. We’re currently seeing a lower cost than that, but I don’t want to give those lower cost, because the F Shoot is much shallower than what the B Shoot would be, their haulage distances are longer. You also need to use more ventilation et cetera. So I will continue to work with the guidance that we gave in terms of the feasibility study. But it has always been our target to get to the B Shoot. And the F Shoot has done its purpose. I firmly believe you don’t switch on an underground mine. You develop it. You develop your people. You develop a sense of how all breaks et cetera, et cetera. So I hope that gives you a sense Andrew of what – what’s happening underground with Wassa.

[Andrew Breichmanas:]

Yes, sounds good. Thanks.

[Operator:]

Our next question comes from the line of Raj Ray with National Bank Financial. Your line is now open.

[Raj Ray:]

Thanks, operator. Good morning, Sam, André and Katharine, just a few questions.

[Sam Coetzer:]

How are you, Raj?

[Katharine Sutton:]

Hi.

[Raj Ray:]

Hey, how are you? A few questions from me. First off, Sam, in Q4 the grades that you got from Wassa Underground was around 2.27. Are you seeing that grade come up, as you get into the commercial production?

[Sam Coetzer:]

What I do see is, we are now entering into the B Shoot receive some B Shoot development that B Shoot grades are higher. The F Shoot remains between 2 and 3 gram material. And what we do see is that the structure is a bit more – smaller the stopes that you have a more dilution in your drilling pattern than what I would have hoped to see, which is probably not as consistent as what we expect in the B Shoot, whereas we’ve done much more delineation drilling on the B Shoot on the zones I just much completely defined. So, yes, I would say, between 2 and 3 gram material not dramatically higher. But what I do see is that the contribution because of the amount of the productivity that we have now in the underground teams the contribution that was predicted to be in the low 1,000 tonnes a day that has been significantly higher. So we’ve seen in the first quarter much more higher-grade than the pit reporting to the Board.

[Raj Ray:]

Okay. Thank you. The next question is on the Prestea mill refurbishment, if I remember currently, before you did the equity financing, there was – you’re looking at potential to push that back towards the latter half of the year. Is that still the plan, or are you going to wait and see how much more additional ounces you get from Mampon and Prestea Open Pit before you do anything with the mill?

[Sam Coetzer:]

Very good question, how do I say. The change is good that I can increase production at the Prestea Pit, which obviously would then not go for the complete plant modification towards the end of the year. However, there is a part of the plant modification that needs to be done that we are very well advanced on. And that’s the gravity circuit we know, especially now that we started intersecting the Prestea Underground ore and we bring into surface the gravity circuit need to be completed. So that we will complete. And then as we continue to see the potential of extending production from the Prestea Pit will allow us to push some of the capital out to the end of the year. I’m not in a position to make that a categoric statement hopefully in the next month, I can update the market and say that we feel confident that Prestea will again extend.

[Raj Ray:]

Okay. Thank you. One last question on the exploration. I know you said you’re going to come out with the exploration strategy later in this quarter. But now that you have additional flexibility with the specter balance sheet. So do you think that €2.4 million that you had originally allocated for exploration that’s going to go up, or are you going to maintain it the same?

[Sam Coetzer:]

Yes, with the support that we saw from the bought deal that we have €2.4 million. To me it’s not just referring dollars added is where and how we’re going to do it. And the reason why we’re waiting it’s not that we don’t have money. What we’re doing at Prestea Underground is way I want to see the uplift. The team is planting all the old stuff. Remember, that mine has been in it for over 100 years. So we’re looking at assay samples of all the old stopes and obviously the gaps between them that’s never been mined that we’re targeting – we will be targeting the best area. So for me it’s not releasing a dollar value, but indicating where we want to add the exploration dollar going forward, and we nearly complete with that exercise. And I hope that in next week, we’ll have a clear understanding of what needs to happen at Prestea Underground. We will be meeting with the Board in Florida next week, and that’s when we make the final decision on the way we want to spend. However, I do – I can give you an indication that it is time now for us to look filling the capacity that we have in our infrastructure with even higher-grade ore. And that we have completed most of the milestones of building mines that we will restart exploration as a critical phase of the company.

[Raj Ray:]

Well, thanks, Sam. That’s great. That’s it for me now.

[Sam Coetzer:]

Thanks, Raj.

[Raj Ray:]

Thank you.

[Operator:]

[Operator Instructions] And there are no further questions in queue at this time. I’ll turn the car back over to Sam Coetzer for closing comments.

[Sam Coetzer:]

Okay. Thanks everyone for listening and I hope to see some of you in the next week at the conference down in Florida. Bye.

[Operator:]

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