Golden Star Resources Ltd.
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

[Operator:]

Good morning, everyone, and thank you for joining us to discuss Golden Star Resources First Quarter 2015 Financial Results and the Company’s Financing Agreement announced this morning. The financial statements were filed this morning and these are available on the SEDAR as well as the company’s website at www.gsr.com. Please note the forward-looking statement and legal disclaimer on the webcast presentation. I will now turn the call over to Sam Coetzer, President and CEO of Golden Star, who will be presenting these results. Please go ahead.

[Sam Coetzer:]

Thank you operator. Good morning everyone and thank you for joining us on the call today. As you can imagine with our announcements this morning we have an excited management team online. I said to my team [indiscernible] yesterday, we now have had a golden start to the Golden Star’s future. Firstly, today I will be talking about our first quarter results and secondly about our financing arrangement and our future. Result of the first quarter should be viewed in the context of the company’s who’s operations are preparing for dramatic change. And one time we focused on the start of -- which is in a lower grade area to ensure that we are ready to start the construction of our exploration deep line later this quarter. Mining for the remainder of the year will now be in the higher grade issues. As our Bogoso mine we have new forward with that permitting our Prestea surface operations and we continue rehabilitating Prestea underground. We also completed mining in our Bogoso north pit and are in the process of rationalization of our labor force there. We now have a clear past forward and with our financing in place we are set to deliver a new future for the company. Let me now take you through our presentation. Joining me today are my colleagues Daniel Owiredu, Chief Operating Officer and the Board Member he joins us from the office here. Also with me André van Niekerk, our CFO; Bruce Higson-Smith, Senior Vice President of Corporate Development and these two gentlemen has been integral involved in arranging the financing that we announced today. So I thank them personally. Also with us Angela Parr, Vice President of Investor Relations, I am sure many of you her by now. As I said I’ll focus in this quarter and the last quarter where almost setting operations for the full year. At Wassa we focused on mining to startup pit to ensure that we are ready for construction of the exploration deep line. At Bogoso we completed mining in our Bogoso North pit and we’ll now focus on Chujah pit to the third quarter. Previously tailings retreatment which would be part of our future have benefited from our investment in new equipment last year. Load shading continues in Ghana either with careful scheduling of maintenance we’ve been able to lower this impact on our operations. The first quarter was focused on setting operations up for the full year. I believe this practice is really standard in our industry. As the result production was lower than what we expect for the remainder of the next three quarters. With this lower revenue in cost flat from the prior year our earnings will negatively impacted. We have maintained our cost of sales at the same low end level for three quarters now. With an increase in funds to mine and process in the second quarter 2015 onwards this cost will increase somewhat, however with improved grades and improved mining efficiencies we expect to see reduction in our unit cost as we indicated in our guidance. Looking at our 2014 results you can see that there is seasonal influence on cost stance. The first quarter generally safety operation up for the rest of the year and we are seeing this over the last three years. Presently we are starting this year off on the much lower base. Looking ahead expect unit cost to decline as the Wassa’s grade will increase. Wassa’s maintenance cost and strip will continue to be decline as all as our fuel cost associated with power generation are expected to reduce going forward. Looking at our flagship operations at Wassa mine, we mined lower grade started in the first quarter for the construction of the exploration deep line which was serve as the main egress when we are in production. At first place I can probably add that we have now seen some of the equipment arrived on side of the power generation, [indiscernible] for the underground mine fans, also receive will [indiscernible] jumbo and some of their graders. The smarter pit to remind is the small area of the mine pit but was start of our mining plan and in this area mining was constraint resulting lower equipment efficiency in the first quarter. Mining in the remainder of the year will be in the higher grade this year. Overall let us talk to reduce the few tons mined and process. I'm pleased with their ability to manage the low shipping, but use of fuel impacted our cost negatively. We expect the unit cost to decline over the remainder of the year to bring us in line with guidance. Turning to our second operating asset of Bogoso. Mining tons were ahead of processing tons, as we continue to increase the size of the stock pile in advance of the rainy season. This amount us to reduce the mining workforce sooner and avoid mining in the worst of the rainy season. But unfortunately processing operations were impacted, but fluctuating power voltages in our main power line into Bogoso. We look forward to when we start processing the non-refectory oil from Prestea, which is far less sensitive to this fluctuations. At Bogoso also expenses reduce quarter-on-quarter and we expect as we reduce further, as striping and maintenance reduced in the second quarter and third quarter of 2015. We have reduced our workforce by 15% over the last year and expect another 30% reduction going forward. Okay let me move forward to the financing discussion. I'm particularly pleased to be able to announce this financing today. Over the last two years, we've involved from a process to secure financing as the appropriate cost of capital with minimal dilution to our shareholders. The arrangement we announced today season advance payment from Royal Gold of a $130 million in exchange for [100,000 to 200,000] ounces offset 20% of spot. Then year-over-year previous at 30% of stock, which we can repurchase our stock. In addition, we have a full year $20 million secured loan from a Royal Gold. The interest from that all loan is least to gold price and as 1,200 this is 7.5%. This compares favorably to our existing Ecobank loan, which we've will now be retiring. Let me talk about the risk in rushing off with this transaction and it's very clear to management and to the board. The transaction follows the strong partnership with Royal Gold, a respected industry participant with whom we have aligned interest. We secured financing and reasonable returns, which lowers our real cost of capital. A clear performance of strategy to transition this company to a low cost number of factory ounces into the future. The limited capital investment requires for these projects reduces execution risk and time to production. With a now include liquidity, we can once more investment in resource development at Wassa and Prestea, where we’ve seen a lot of success to date. This financing is what we believe is fit for our purpose and it's timely. We have been disciplining our approach and early raise capital that we can use to grow our business or reduce our cost of capital. All things been equal to financing fully funds our projects and reduces the groups leverage. After using the remaining capital to bring Prestea sales of operations into production and improve our working capital very little funds [ounce] per control. The governments filed came out again, as I said in the beginning. From the start of 2015 our life of mine plan shows the cash operating cost has now been forested at $754 per ounce, a cost which tracks steadily downwards to 2019. Currently it shows in previous cost the [indiscernible] which will be against of the results development, as we will be having more ounces through our mine plan. With that favorable land package and our results development success in the part, I'm confident that we will continue seeing this success. In last few years, you heard me saying before that we are endured with extensive infrastructure. Our strategy has always been to leverage this infrastructure. Looking at our projects relative to our peers, you can see that our development CapEx per ounce compares favorably, as we are able to drill at Prestea and expand these reserve. The CapEx pay outs will decline, as the infrastructure we will have in place can support even for a large operation. Talking about our attractive cost position with low initial capital. Which now can see demonstrates our favorable position relative to our West African peers. On a consolidated basis our cash cost were marginally above the mid-point but our outstanding CapEx to development is the lowest. But it’s not being demonstrated on this timeline to development and our favorite period which also compares extremely favorable. With the $37 million spent on drilling at Wassa between 2011 and 2014 we increased our mineral reserves at Wassa more than four full. This was after depletion from mining for four years. From our last prepared hole we have the further six kilometers a long strike to the edge of our mine license area. Wassa ore body is open at depths and along strike. Furthermore we have identified the number of parallel and adjacent structures to the B chute that could expand the wide of the ore body in the area where our infrastructure will be. We’ll barely talking about our timeline to delivery many of critical milestones fulfilling our development projects have now been achieved. On the permitting side the first phase permits are now in place to about full underground mining premise of both operations are expected later this year. With the bulk of [Prestea] reconstruction equipment on route to Wassa we expect to start construction in July this year, around the same time that we will fall the feasibility study on our Prestea underground mine. When these critical milestones are met we anticipate that both projects will do reproduction during 2016 with production from Prestea Surface pits expected earlier. [indiscernible] for this company. In the conclusion I would like to reiterate to our investors that we are committed to our long term strategy of transforming Golden Stars. Today’s announcement not only detailed how we will achieve the strategy but our expected industry leader has validated our plans through extensive due diligence. The remainder of 2015 will be a busy and challenging one for our management fee and we’re willing to take on that challenge and I’m looking forward and reporting back to you our progress in July and onwards as we reshape Golden Star. At this stage I’d invite questions. Thank you. Operator?

[Operator:]

Thank you. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Rahul Paul from Canaccord Genuity. Please go ahead.

[Rahul Paul:]

Hi, everyone. Congratulations on the positive news. One question Sam on the financing goals, can you talk a little bit about the due diligence done by Royal Gold before agreeing to the transaction, I mean did they send the team down on site? I’m keen to hear as to what the due diligence was like particularly to see underground.

[Sam Coetzer:]

First I can say that, Rahul, it was an extensive due diligence. Due diligence actually means when we flew some of our consultants also our third party specialist that we had in review and some our employees -- our exploration employees to Denver where there was an extensive review of Wassa to see underground. After that we had a full team fly with our team to our operations where all license we’re looked in ranging from social license, legal, areas there is focus, our permits, our mine plans, our cost structures and various other options -- various areas of review. I’m going to hand it to Bruce Higson-Smith that ran the due diligence and maybe give you a bit more clarity of the detail that we focused on, Bruce?

[Bruce Higson-Smith:]

Thanks Sam. Hi, Rahul. It went extremely well, the site visit, the whole due diligence process was seamless both in Denver and in Ghana that just strictly went superbly in Ghana and the team that Royal Gold put there were a team of professionals, multi-tasking all the time. There were geologist, mining engineers, metallurgist all of them was at least 25-30 years’ experience. It was one of the intense due diligence process is I have been through and I think it went very, very well and I think results show that. And we went underground at Prestea and they were very impressed with what we've done over the last 10 years on care and maintenance and fixing up the shafts and they're very impressed with Martin Rafael's plans on what we we're going to be doing there in the future, so they endorsed that and they were very-very excited about the water development and water underground development that we've already kicked off. So, I think it was intense but [Technical Difficulty] went very-very well.

[Rahul Paul:]

Okay. Thanks very much. That's fairly good to hear, and congratulations again on accomplishing this. That's all that I had.

[Bruce Higson-Smith:]

Thanks Rahul.

[Operator:]

Thank you. Your next question comes from Lawson Winder of Bank of America Merrill Lynch. Please go ahead.

[Lawson Winder:]

Hello. And, thank you very much for taking the call. Just a few questions on the financing to begin with. The allotment of the predetermined -- $130 million streaming funds, the allotment. Is it predetermine between Wassa and Prestea, undergrounded in any way or is it completely at your discretion.

[Bruce Higson-Smith:]

I will hand it to André because he was into building the negotiation. André why don't you just shoot a few things.

[André Van Niekerk:]

Thanks and hi Lawson. We have complete flexibility on how the ounces can be delivered. It gives us the opportunity to provide our system operations with lower production over from higher-to-higher production and then scale it up, bring the other mines kind of get in line. So, it's very flexible and it's exactly what we negotiated to provide us some flexibilities something slows down in one operation and speeds up in another.

[Lawson Winder:]

Okay. That's good to know. My question was more about the like an earmarking of $130 million, like a part of it is set for Wassa only and part of it for Prestea underground only?

[André Van Niekerk:]

No, there is -- I mean of course there is development schedule, we want to make sure that both projects get developed. So, basically the split is that, we will be giving the proceeds to pay off the Ecobank one facility which is currently sitting at about $38 million. And then secondly to develop both projects, there is not a specific amount set aside for each, however both will be tracked and as you probably saw in the press release, we get an initial $55 million on the stream and then there will be five quarterly payments of 15 and that will depend on the progress being made on each of the projects.

[Sam Coetzer:]

But to answer your question as well -- the ounces can be produced, there is no specific amount on the specific project to deliver into the ounces.

[Lawson Winder:]

Yes. Excuse me for interrupting. What are we getting at is. If you decided to delay for whatever reason the production of Prestea underground, would the full funds then still be available for Wassa?

[André Van Niekerk:]

No. Probably not.

[Lawson Winder:]

Okay. That's great and then the other question was on the Ecobank II loan. Do you have an idea when you might first draw that down?

[Bruce Higson-Smith:]

We got some flexibility to draw down that within one year from signing the agreement, so that gives us an opportunity until September. So, we are keeping that available, we haven’t set exact time, when we go drill down on it, but it's available so we'll probably use some of that prior to the deadline of course.

[Lawson Winder:]

Right. Yes, that's make sense. And forgive me if it was mentioned in the release, but have you provided timing on when you expect closure of the agreement with Royal Gold and then the first payment?

[Bruce Higson-Smith:]

I guess the agreement, the transaction is closed, we got few conditions pressured under we need to meet in order for funding. And these are basically filing a registration on securities documents, so we expect that funding should be available at the latest early in June, it will depends on how quickly we can get this started government of Ghana of course, but we expect it early June.

[Lawson Winder:]

Okay. That's great and if you don’t mind actually I had one more question just on the ownership of Prestea underground. So, correct me if I'm wrong, but I mean effectively, you have 81% legal interest, and the Government of Ghana basically has 10% direct interest in the Prestea underground mine. And then another 10% interest in Golden Star Bogoso Prestea Limited, right? So, my understanding basically with the questions going is -- so the 10% that they owned in the Bogoso Prestea Limited that's completely shield for or any sort of necessary dividend payments as a result of money owed from past transactions, however the 10% direct interest that they have on the Prestea underground, would there be any dividends due on that and then when will they be paid?

[Bruce Higson-Smith:]

I think Lawson, there is some confusion. Basically the ownership of Prestea Underground is exactly the same as the ownership of our Bogoso service leases, which means that the government has a 10% ownership in this proper lease. There was some time back when Prestea Underground was still owned by joint venture between Golden Star and another entity that held it previously, that was the arrangement. But since Golden Star got full ownership of the Prestea Underground mining lease, an incorporate JV was dissolved and the ownership is exactly the same as the service leases which means there is only a 90% ownership for Golden Star and 10% ownership for the Government of Ghana.

[Lawson Winder:]

Okay, that’s great. I really appreciate you’re clarifying. I was definitely a little bit confused as it hits out.

[Bruce Higson-Smith:]

No problem.

[Lawson Winder:]

On that 10% interest that the Government of Ghana hold, is that then shielded from the requirement to pay any dividend for some time?

[Bruce Higson-Smith:]

Of course dividends will be payable as and when we repay their funds back to the head office at inner company loans and financing has been repaid. So we don’t expect to see any dividends in the near future.

[Lawson Winder:]

Okay, that’s great. Thank you so much for your patience and taking my question.

[Sam Coetzer:]

No problem, Lawson. Good question.

[Operator:]

Thank you. Your next question comes from Raj Ray from National Bank Financial. Please go ahead.

[Raj Ray:]

Thank you. Sam, congrats on the transaction, I just had one question. I know the feasibility study in Prestea is due in July but can you give some idea about how you’re going to treat the ore from Prestea? Is it going to be a non refractory mill or are you going to make some changes to the refractory processing?

[Sam Coetzer:]

Raj, as you know we currently have a non-refractory plant which is about 14 kilometers from that mine and there are progressing operation. And as we indicated, we're only closing our refractory plant by the end of this year and progressing at Bogoso will continue through the non-refractory plant. So what we have basically three potential parts that we are looking at putting through that plant, the one is the current running of tailing. So that is -- it’s running through the plant as we it today. We’re also looking at the Prestea underground high grade to go through that plant. But what we’re going to do is we’re going to put a front end that has very strong gravity circuit to it, because of the high grade of the Prestea underground. So there will be an addition being added to that plant, that will allow us to take the high grade into the non-refractory plant that is currently at Bogoso. We are focusing on bringing into Prestea service operations into production as well, hopefully by the end of this year. And that will also be added to that plant probably commencing by the end of this year, early next year. So no additional plant required for Prestea underground, it's within howling distance, it's only 14 kilometers. We have our hole there and that has always being our focus is to leverage off the infrastructure that we have. Does that answer it?

[Raj Ray:]

Yes, that does answer it. So the tailings facility will still be running even if you add these two streams to the processing fund, is it that so?

[Sam Coetzer:]

Yes. What we will do is obviously margin will deflate, so if you get to capacity we will replace a tailings ton, if there is a better margin from Prestea. Obviously, the first that will get priority once it comes on stream will leave the high grade from the Prestea underground after that we will then look at bringing in the off sites from the Prestea surface pits and then we still have the tailings that can go into their plants. So we will be looking at wish fund to replace. We have very little capital invested in the tailings. It's running really well, it's running at about $8 a ton and that includes the processing. So it’s a margin gain for us starting next year. Just to reiterate Bogoso will next year be a process facility only with two plants available running only one plant.

[Raj Ray:]

Thanks. That’s it from me.

[Sam Coetzer:]

Okay. Thank you, Raj.

[Operator:]

Thank you. [Operator Instructions] Thank you. Your next question comes from Trevor Turnbull from Scotia Bank. Please go ahead.

[Trevor Turnbull:]

Congratulations Sam and Bruce and everyone. It looks like a good deal to get things moving on these projects, I just had a follow up question I guess a bit on the due diligence, kind of looking at the amount of gold that we model coming off the properties. It doesn’t seem like it quite reaches the amount of gold specified in the press release with respect to how much that Royal Gold is expecting and I think part of that might have been you mentioned the Prestea surface material could be something you also are planning on doing. Can you just talk a little bit about what Royal as assumptions were in terms of how they are looking at this? Are they factoring in a bit of upside to the latest numbers on Wassa and Prestea?

[Sam Coetzer:]

Yes. Well Trevor good question and you got it right. Once you go into a CA you can talk a bit, job up sides, you can share was we having our PEA which we could not file into our reserves based on only drilling, more drilling to bring it into a different category, but we have very key understanding of how Wassa is going to develop going forward. And so there is a path forward of what we see what Wassa could become, so what you picked up is right, in our current reserves is really tighter than the life of mine plan, there is not the ounces that makes up for it but the tail or what we can see going forward moving both in Prestea underground, also in terms of what we see at Wassa potentially coming out why with additional drilling that will be achieved. Bruce can you add something to that.

[Bruce Higson-Smith:]

No I think you said it, but just a delay to that point a little bit Trevor -- Royal were not only looking at reserves, they were looking at the upside potential and actually spent quite a lot of time both in Denver and when they were on site in Ghana, asking a lot of questions on okay well what can this be? Looking for instance up dip of West Reef fund 15 level. Where there is an area of mineralization, which isn't parts of the resource and will not be part of the reserve when the feasibility study comes out. And also further down plunge on the northern side of West Reef as and very interested in all those areas that need drilling and extrapolating for themselves, extrapolating into those areas and coming up with a significantly different number to what you would see in the current resource and what will be the reserve at West Reef and similarly at Wassa. When they are looking at the Wassa stuff and then seeing what isn't included in the resource and the reserve at Wassa underground and then looking at the step out holes that we drilled over the last couple of years and saying well none of that is -- all of that is in third material or not even a third material and that's not part of your resource and so they've done a lot of extrapolation that way. So, I think they see a lot of upside, where perhaps other people are restricted from seeing upside.

[Trevor Turnbull:]

Yes. I think that I think the takeaway is -- I mean we know that you at Golden Star have seen upside in your own projects, but certainly encouraging to see someone -- a third party who is interested in financing at essentially not just see that up side, but enact on through this loan or through this transaction. That's all I had. Actually one last question, I did have one last question that was on the four year $20 million loan tie to the gold price, is the interest rate on the capped at all in case gold explodes to the upside?

[Bruce Higson-Smith:]

Yes. The interest rate is calculated at 11.5%.

[Trevor Turnbull:]

Okay. Thank you very much guys.

[Bruce Higson-Smith:]

Thank you, Trevor.

[Operator:]

Thank you. There are no further questions. You may proceed.

[Sam Coetzer:]

All right. Thank you everybody for joining us. As I said in the beginning that we believe this is, excuse the puns but our golden start to the race to the race of our -- for the future of the company. Thank you for joining us and we have our AGM later today and I hope I see some of you there. Thanks.

[Operator:]

Ladies and gentlemen, that concludes today's conference call. We thank you for participating and we ask that you please disconnect your lines.