Golden Star Resources Ltd.
Q4 2013 Earnings Call Transcript

Published: 20 Feb 2014

[Operator:]

Good morning, everyone, and thank you for joining us to discuss Golden Star Resources Fourth Quarter and Full Year 2013 Financial Results and Operational Update. The company's financial statements were filed last night and these are available on the company's website at www.gsr.com. On the call today is Sam Coetzer, President and CEO; Jeff Swinoga, Executive Vice President and Chief Financial Officer; Daniel Owiredu, Executive Vice President, Operations, and Chief Operating Officer; Martin Raffield, Senior Vice President in Technical Services; and Angela Parr, Director, Investor Relations and Corporate Affairs. Please note, this call contains forward-looking information. Please refer to the company's statements regarding forward-looking information contained in the company's Management's Discussion and Analysis filed February 19, 2014. Please also note the forward-looking statement and legal disclaimer on the webcast presentation. Just a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Sam Coetzer. Please go ahead, sir.

[Samuel T. Coetzer:]

Thank you, Tim, for the introduction. Good morning, everyone, and thank you for joining us today to discuss Golden Star's fourth quarter 2013 and year-end financial results and Operational Update. Last week, I was in Ghana visiting our – both our sites, Bogoso and Wassa, and I returned with a bit of a flu and a cough. So excuse me if I do cough during this presentation. Presenting with me on the call today is Jeff Swinoga, our CFO; and Daniel Owiredu, our Chief Operating Officer. On the call today, we will review our financial and operational performance for 2013. However, where I really want to focus is on our strategy and how this is driving both our operations as well as our development projects in the near to medium term. Looking back on 2013, I'm pleased we have accomplished all we set out to do. We have achieved a number of milestones that I believe position Golden Star for the future. In the midst of an operational turnaround, we still managed to achieve guidance on both costs and production. The 2013 cost structure is not reflective of the potential of this business. Going forward, we anticipate a reduction in costs. We are now focused on increasing the quality of our operations and our operating margins rather than total production. We have a disciplined approach toward capital spending, and we will leverage our past investments to unlock further value for our shareholders. Today, we'll be talking to you about our 2013 results, and I want to highlight certain milestones we achieved in the year. At Wassa, we have recently established the main pit and grew the mineral reserves and resources significantly. We are now mining the first phase, $1,000 per ounce pit shell within the $1,300 pit shell, which was disclosed in our reserves. At Bogoso in 2013, we continued to invest in the pushbacks at Bogoso to improve the access to ore that would yield better grade production and lower costs in 2014 and 2015. We have almost finished the major pushbacks, and we are looking forward to 2 years of solid low-cost production. We have also commenced and ramped up our Tailings Retreatment operation successfully. Savings and efficiencies were not just limited to the operations. During 2013, we also reduced our G&A overhead, whilst moving the company to Toronto. 2013 was a game-changing year for gold miners, and I'm proud to see how our team has risen to the occasion. We achieved cost savings throughout the business, and our cash cost was at the low end of our guidance. Financing was raised with Ecobank on favorable terms and capital expenditure was reduced. All of these allow us to face future challenges and opportunities with improved financial flexibility. As a reminder to all our core participants, we have 2 producing mines

[Jeffrey A. Swinoga:]

Thank you, Sam, and good morning to all of our analysts and investors on the call today. I will review major items and changes to our revenue, cost, net income, cash flow and CapEx for the fourth quarter and year end 2013. Revenues recorded in the fourth quarter of 2013 were $96 million, down from $118 million in the third quarter, since fewer ounces were sold at a lower realized gold price. For the full year, revenues declined to $468 million from $550 million in 2012. This was due to the 15% drop in realized gold prices from $1,662 an ounce to $1,414 per ounce, since the company's production was essentially unchanged from last year. In line with our guidance for the year, we produced and sold 331,000 ounces of gold in 2013. Of this total, Wassa contributed 186,000 ounces at a 17% increase from 2012. This increase was attributable to a 10% increase in the grade processed and an 8% increase in throughput. For Wassa, the increase in ounces sold helped to offset the impact of the lower realized gold prices. At Bogoso, gold sold in 2013 decreased by 16% to 145,000 ounces. Specifically, refractory gold sales declined by 11% to 134,000 ounces in 2012 to 120,000 ounces in 2013. This decline resulted from the lower ore grade and fewer tonnes processed. Daniel will discuss how limited access to ore from the pushbacks at Bogoso impacted production and how we expect to see this improve in 2014. Non-refractory gold sales were 34% lower at 25,000 ounces for 2013. This decline was driven by the decision to suspend the Pampe operation in the second quarter of last year, which at the time was the primary source of non-refractory ore feed at Bogoso. Daniel will also discuss how our new tailings treatment facility has ramped up to almost replace this production. As a consequence, Bogoso's consolidated 2013 gold revenues were $205 million versus the $287 million generated last year. Now turning to mine operating expense. A critical aspect of our financial strategy in 2013 was our operating cost reductions that we implemented during the second quarter of 2013. This prompt demonstration of our operating team's ability to lower our cost structure resulted in $45 million of savings in 2013 relative to our original operating plan. These savings were achieved through the renegotiation of certain supply contracts and supplier discounts, improvements in our transportation and delivery efficiencies, improved purchasing procedures, and even some fuel cost savings achieved with the purchase of 2 new excavators and 4 new drills. Consolidated all-in sustaining costs per ounce and cash operating costs were stable from 2012 to 2013. We believe that these cost savings we achieved in 2013 are sustainable, and these cost savings helped us to lower the company's cash cost guidance for 2014 to between $950 to $1,000 per ounce. Also, lower expected spending on sustaining capital and G&A costs will allow us to lower our all-in sustaining costs to around $1,150 per ounce for 2014. Now turning to cash costs at Wassa. For 2013, cash costs -- cash operating costs per ounce totaled $881, down 10% from $890 per ounce last year. For the full year of 2013, Wassa's cash operating cost totaled $150 million, approximately $9 million higher than 2012. However, overall cost per ounce decreased from a higher head grade and a lower stripping ratio. During 2014, we expect Wassa's cash operating cost per ounce to increase due to processing the lower grade from the Wassa main pit, as production from the Father Brown pits is expected to cease in the second quarter of 2014. However, this lower grade will partially be offset by the savings achieved on eliminating the haulage cost of the ore from the Father Brown pit. Therefore, for 2014, we are guiding Wassa's cash cost per ounce to be in the range of $900 to $950 per ounce. At Bogoso, mine operating expenses totaled $193 million, which was 7% lower than the $208 million incurred in 2012. Savings were achieved through $7.7 million reduction in contractor cost, $3.5 million decrease in raw materials and consumables and another $3.4 million in reduced electricity usage. However, cash operating costs per ounce for 2013 were $1,361, 15% higher than 2012. The lower head grade processed contributed to less gold ounces sold during 2013, resulting in a higher cash cost per ounce. We expect 2014 production to significantly increase at the Chujah pit, which is at Bogoso, once we've substantially completed the pushbacks in the first quarter of 2014. And accordingly, we expect the stripping ratio to decrease to 2

[Daniel Monney Akwafo Owiredu:]

Thank you, Jeff, and good morning to everybody on the call. Our Wassa mine is demonstrating strong potential. This mine continues to show strong operational results with upside in the deeper areas of the ore body. As you know, we operate a CIL plant at Wassa with a capacity of 2.7 million tonnes per annum. That performed very well in 2013. In 2014, we will mine and process ore at the head grade of 1.7 grams per tonne, with an average strip ratio of 4.5

[Samuel T. Coetzer:]

Thank you, Jeff and Dan. We talked about our financial and operational highlights, and I would now like to turn to the important part of today's call, which is to review our strategy. We are pursuing growth from non-refractory ore sources that would deliver ounces at lower cash cost and with appropriate levels of capital investment. We are leveraging of the existing infrastructure to keep sustaining CapEx levels low and our focus is to grow operating margins rather than total ounces produced. At Wassa, we are pleased to have increased our proven and probable mineral reserves by 34% to 2 million ounces. With further drill results announced in January this year, we now have 10% more tonnes and 22% higher average grade. We recently started a focused campaign of 20,000 meters of in-fill drilling and step-out drilling, 250 meters to the south of the non-ore body. The in-filling is to define the ore body, to underground feasibility levels and the step-out is to determine the extent the ore body. Earlier results confirmed that the ore body is open down plunge and the high grades exist at depth. I want to spend a little bit of time on the next slide to give you a better sense of what we are seeing and have been seeing since 2011. End of 2011, as you will recall, Wassa's life of mine was very short. Made the decision to draw below that and year after year, we have continued to see how this ore body evolves with the drilling that we've done. We've seen the high-grade ore zone trending east, west and down plunge over this period. We then got involved in a concept study undertaken in 2013 to review a potential underground mine at Wassa, to see if we can accelerate cash flow earlier from the deeper mine. The initial findings were positive. The deposit is central to our low-cost mining strategy going forward. All right. Moving forward. Encouraging drill results prompted us to start a PEA of an underground mine at Wassa. We expect this to be completed by mid-2014. Depending on the conclusion of the assessment, the feasibility study should commence in the third quarter of this year. By then, we will have updated our mineral resource estimate for Wassa from the current drilling program, so the study will be well supported. If we elect to build an underground mine at Wassa, we expect this process to take approximately 18 months. So all in all, if this deposit proves to be what we are hoping for, we could be in production with an underground mine by mid-2016. Over the next 2 years, we'll be putting our strategy into action. Although ounces produced in 2014 and 2015 are expected to be lower, margins are forecast to widen dramatically. From a cash cost ounce of $1,000 in '15 and 2013, costs will drop to about $975 an ounce in 2014 and then further to $925 in 2015. It's at this point that I want to talk about the first quarter of 2014. We expect our first quarter to be the lowest quarter of the 2014 year, with production to be about 70,000 ounces. The reason for this is strategic in nature. As Daniel has explained to you, we commenced establishing the new pit at Wassa in January. We've commenced our grade control drilling, we've moved the equipment and have the 3 excavators, we have Pantera drills in there, and we're now established in this pit. We -- at Bogoso, we are now starting to see more tonnes for every waste tonne we've mined and are seeing grades improving on a daily basis. We're also seeing the recovery to improve to what we've seen by the end of 2012 and in the third quarter. We are getting into Chujah, we're getting into Bogo, and we're stabilizing the Wassa into the new pit. In March, we still expect to see the running of 3 pits at better productivity, better consistency, and taking the path forward. That concludes our call for today and thank you, Tim, and our operator, and thank you to everyone joining us for our quarterly and year-end conference call. Our approach to shifting our resources to achieve lower operating cash cost is guiding all our capital decisions, and we are pleased to have ended 2013 with a sound financial position. I'll now return it to Tim for questions.

[Operator:]

[Operator Instructions] And we'll take our first question from Rahul Paul with Canaccord Genuity.

[Rahul Paul:]

You indicated an increase in rehabilitation provisions at [indiscernible] primarily in Bogoso, so if I were assume the gold price stays where it is and you cease production from the refractory operations in 2015, I'm just wondering if you could give me an idea as to how much cash you would need to spend on reclamation over the next 3 years?

[Samuel T. Coetzer:]

Rahul, thank you for that question. Firstly, hope you enjoyed the visit to the sites. So when you do your ARO, obviously there's some accounting rules when we go through that, and some of that has to do assuming a much shorter mine life at Bogoso. You also -- what you do is you – in light of the currency principles, you make an assessment of what that cost would be if you basically do not exist and use contractors to do the ARO for you. So the cost is elevated, but it is the rules for how we have to deal with it. We have the equipment and as we at Bogoso reduce our equipment usage because of what we see in terms of both the 2 pits, we have a plan in terms of how we will do the ARO. Because we will not be suspending the operations in totality, we will continue with operations through the tailings business and looking at increasing the tailings business going forward. So yes, we have a plan, and I don't have that numbers out to my budget in terms of how we plan to do the ARO over a period of time. But the essence is we will do it with the equipment that we have for ourselves. Rahul, I can try to get you that numbers, maybe after the call or tomorrow morning.

[Rahul Paul:]

Sure, sure, that would be helpful. And then just moving on, I guess you indicated that you plan to spend about $12 million this year in the Prestea on the current project. And should I take that as a sign that you're still favorably disposed with that project in the current gold price environment?

[Samuel T. Coetzer:]

You should take that as that I'm still favorably disposed to Prestea Underground. Yes. Obviously, our focus is to increase our balance sheet with our current strategy. When we look at our priority and we've done an option analysis on all the sources available to us with the best returns, and the 2 that stands out, the best would be the Father Brown pushback, depending on what we see in economics and in the gold price movement, and also the Prestea Underground. Now the Prestea Underground obviously will take a high amount of cash required. So what we're doing now is evaluating what is -- what we see in the market moving forward, and if there is appropriate funding available for that project. So we feel that, that project can be a great value to our shareholders and we continue to invest in it and keep it in good stead, especially the infrastructure.

[Rahul Paul:]

So just to clarify, I guess I get the sense that the concerns here really had to do with the balance sheet as opposed to economic returns of the project.

[Samuel T. Coetzer:]

Correct. Our balance sheet would be our first focus and yes, not the project's economics. Yes, and, Rahul, we're just taking a very disciplined approach now with making CapEx -- capital spend work for us before.

[Operator:]

And we'll take our next question from Raj Ray with National Bank Financial.

[Raj Udayan Ray:]

Sam, my first question is continuing on the Father Brown pushback, if you decide to go ahead with it. What's the capital you're looking at, and what's the volume of ounces you expect to get out of it?

[Samuel T. Coetzer:]

Let me answer the first question -- answer your last question, because there's another 70,000 high-grade ounces sitting below that pit at this point in time. Raj, the easiest way to answer that is we expect reduction from contractors to do that before we move forward. That we have a disciplined approach to what we believe the cost should be. We run that pit with different equipment. As you know, we do it with a local contractor and we will be negotiating and see whether we can reduce that cost structure moving that forward. But at this stage, we believe the productivity gains by creating a simple operation at Wassa, a pit with lower G&A around it, 500 meters from the pressure will largely offset spending capital in the range of about $20 million for 2014. The option is open to us and we are in negotiations depending on what we see the requirement or the cost structure going forward.

[Raj Udayan Ray:]

What's the haulage cost impact from bringing ore from Father Brown?

[Samuel T. Coetzer:]

It's about $0.21 per kilometer per tonne, and for the 85 kilometer-strong [ph]. But it has a high-grade portion to it sitting below. So it easily carries that and so yes, it is about $0.21 per tonne per kilometer.

[Raj Udayan Ray:]

Okay. My second question is on the grade profile at Wassa for 2014. Do you expect to maintain 1.7 throughout the year, or there's going to be ups or downs?

[Samuel T. Coetzer:]

No, it has gradually increased as we move forward. And that's why we -- when we did our 1,300 reserve, and I think there's maybe some confusion among -- I'm going to hand it over to Martin as well to explain it. We optimize at 1,300 pit shell by looking at cash or margins, and we face into $1,000 pit shell, which will be for the first 2 years, and then we will move into an $1,100 pit shell for another 2 years after that, and then continue into the bigger pit. But to answer your question, we will start with the lower grades in the first cut and as we go down that, you should plan to expect the grades to come in going forward. I think the grade that I -- if I remember right, for the year is about 1.67, just under 1.7. The strip ratio would be about 4.5. But the kicker here is that, for us, and the way that I look at it, Wassa historically, because it doesn't have a big -- one big pit, historically in the Wassa mine, has mined at about $4 a tonne. And now with what we're seeing and once we establish this pit, we can drop that cost dramatically. We do not guide at the lower cost. We guide it at the cost that we historically see, but with the new equipment, we want to immediately get below $3 a tonne and target $2.80 a tonne. So that is the focus, is making it a very simple operation and start going down the B shoot, start exposing those higher grades, which over the life of Wassa will just continue to improve. Martin, did you want to add anything on that question?

[Martin Raffield:]

Yes. The grade is going to -- does have an increasing profile in the Wassa mine, remembering that Father Brown is finishing at this, in our current decision-making progress, is finishing in the end of Q1. That's the high-grade portion, Wassa is low grade at the moment, increasing towards the end of the year. And I think, Sam, what you're -- the point you're making there about the fact that we're mining in a $1,000 pit shell at the moment is very important, even though our reserve's at $1,300, we're mining in $1,000 shell for the next 2 years, and we don't have to make a decision on major pushbacks at Wassa to go into our $1,300 shell until 2016. So we're looking at good economics on Wassa for the next 2 years.

[Samuel T. Coetzer:]

Raj, it's a bit of a long-winded question, but we just wanted to get that understanding of how we strategically think about it.

[Raj Udayan Ray:]

Okay. And one last question, given the write-down, what sort of deposition expense are we looking at?

[Samuel T. Coetzer:]

Jeff?

[Jeffrey A. Swinoga:]

It's going to be similar to what we saw in the fourth quarter going forward. So if you look at our depreciation expense, that would be very similar.

[Raj Udayan Ray:]

And then with respect to the G&A?

[Jeffrey A. Swinoga:]

G&A, we're hopeful that -- get some more cost savings, and we're squeezing everything we can out of our toothpaste, so I think we're -- hopefully, it's going to be around $20 million to $21 million around there or lower.

[Samuel T. Coetzer:]

It should be a little bit lower because we won't have that cost we had to build the office. Moving forward, obviously, we're just looking at the strategy unfolding and we have a very small team here and we've moved some of our senior executives into the sites, 3 of them are there, to ensure that the mandate is well performed.

[Operator:]

And we'll take our next question from Vitali Mossounov with Scotiabank.

[Vitali Mossounov:]

Just a quick question on the Ecobank loan and financial leases. Could you just confirm that, as of right now, you haven't drawn the remaining $20 million available on that loan? As well, perhaps you could comment on the potential timing of that drawdown, given your recent guidance provided with respect to CapEx in 2014?

[Samuel T. Coetzer:]

No. We have thought around that [ph], Jeff. When will we start drawing down...

[Jeffrey A. Swinoga:]

It depends on a number of factors. It depends in gold prices. We've seen improvement in the gold prices recently. It depends on our revenue and spending of that capital during the year. It is available to us, we could access it depending on what I just mentioned. So again, we have a very close relationship with Ecobank and so, yes, it is available to us.

[Operator:]

And we'll take our next question from Robert Reynolds with Crédit Suisse.

[Robert Reynolds:]

My question is a follow-up on Wassa. And, Sam, I believe you commented that with new equipment there, you're hoping to get the mining cost per tonne down from the current approximate $4 level to around $3 per tonne or below. Just wondering is that improvement factored into the cash operating cost guidance for 2014?

[Samuel T. Coetzer:]

No. We didn't go that low. We -- just with my experience, when you get into a new pit, you don't get big gains in the first quarter of 3 months until you've your claw really settled well. And what -- we have $3.20, $3.30 in there, and what we're looking at is rather different behavior changes. We're now getting into dispatch, looking at how we grow and move the equipment forward, how we open the pit, how we select our crews, how we move certain of the good crews and the good management across a good site. So we believe we can beat [ph] what we're having, but just with my experience, once you settle into a new pit, you still have -- you have a bit of work to do until you settle into it. So we budgeted around about $3.20, $3.30, but hopefully, we can draw that down to the $2.80 and then next year, even try to go lower in terms of what we see in the pit.

[Robert Reynolds:]

Okay. That's helpful. And then you said, as you progress after 2 years, you go into the $1,100 pit shell and then sort of the pit shell gold price that you would move into thereafter would increase up to the $1,300 reserve price. How does that -- is there additional -- significant additional stripping capital to access those additional years? Or how should we think about how the cost changed beyond the next 2 years?

[Samuel T. Coetzer:]

Yes, and that's been the challenge with us because we've seen this very high-grade profile sitting in the bottom of the pit, and, Robert, you're thinking of it 100% correctly. So what we are doing an analysis on now is if the underground [indiscernible], you're going to offset bringing higher grade in, in 18 months, plus the study period, and then offset the pushback. But rather than putting pushback in, you go down with a very similar cost at that point in time, or an offset cost of the pushback, but then accelerate much earlier on higher-grade ounces. So at this stage, looking at the reserve and how we planned it, we have, in 2016, we'll start to making a decision on a pushback into 2013. But our focus is to see if we can go – get in there with a decline and start mining the ounces and accelerate the grade profile. Our concept study has indicated it's possible. We need to do the in-fill drilling. That's what we're doing now. And if that hangs in into -- on a 25-meter spacing, that decision, hopefully by midyear, we can be very clear of what our decision is, and you'll get a clear understanding versus the pushback, versus the underground. But it's looking exciting for us at this stage.

[Robert Reynolds:]

Okay. So the reserve balance at Wassa, those are the ounces being analyzed as part of the preliminary economic assessment for the underground mining potential option there?

[Samuel T. Coetzer:]

Well, there will be a cutoff within the current reserve because if you look at the slide I showed earlier, you see the high grade actually extends up. So we might have a smaller pit on top, then accompany that with an underground mine and then marry, very similar to what we did in terms of bringing 2,500 of high-grade ounces from Father Brown, we will just bring 2,500 tonnes per day from an underground at an elevated grade and supply that with the pit on top. So the challenge is for us how big should the pit be on top, and how big should the mine be underground to marry perfectly. And that's what Martin is working on. Martin, can you add a bit more color on this question?

[Martin Raffield:]

Yes. You're right. We're sort of at a decision point in terms of the $1,300 pit versus the underground. What we're -- as Sam says, what we're trying to do is improve the economics of the project as a whole by bringing the higher-grade deeper material from underground earlier. At the moment in the $1,300 pit in our reserve, that high grade really only comes out in 8 to 10 years' time. So it's far out in the future. The purpose of looking very hard at an underground mine is to bring that cash flow earlier, bring that high grade earlier.

[Robert Reynolds:]

Okay. That's very helpful. And then I just have a question on the cash operating cost guidance again. You indicated that you're in the process of finalizing negotiations on a reduction to the workforce at Bogoso and Wassa. Is that factored into the cash operating cost? And then should we be expecting a onetime cash expense once those negotiations are finalized?

[Samuel T. Coetzer:]

Yes, it is all in our guidance for the next 2 years. At the end of last year, Dan, actually I've got to congratulate him, has been able to reach an agreement with our union and with the government, so we signed the documents. And that process will commence orderly, and in order -- as we see the need to do that under the current environment. So that, yes, will not be a one-slap. I think what we're going to do is do it in a very orderly manner, moving forward, to also offset how we -- it's a balance between our cash cost and also the cash balance that we want to create to take some more of the opportunities.

[Robert Reynolds:]

So sorry, you said we should not expect a significant onetime cash severance, or will there be one?

[Samuel T. Coetzer:]

It will be gradual over a period of a year or 1.5 years, yes.

[Operator:]

And we'll take our next question from Rahul Paul with Canaccord Genuity.

[Rahul Paul:]

Sam, I'm just wondering if you could confirm something that you said, clarify basically something that you said a little while ago. You said Q1 is expected to be the weakest quarter in 2014. Is that just in Bogoso because at Wassa you would still be getting high-grade ounces from Father Brown, right?

[Samuel T. Coetzer:]

It will be the weakest quarter for both. I mean while Bogoso is starting to come up, Wassa, we made the decision to establish the new pit. So the focus with Wassa previously had the bulk of its ounces from various tiny little pits all over the place, Rahul. You've seen the new pit, you were there. So we're now stabilizing and then we will be -- as we cut the new layers, getting into the site, if you want to call it a starter pit in the B chute, we're actually seeing the ore ratio is not as perfect as we want, and generally, you see some dilution. So the grades that usually came from the Wassa pit would have been supplying a certain amount of ounces into the plant. That portion will be lower and that's why -- well, it is lower, I can tell you. January, we established it and the ore that came from there wasn't the ore that we're expecting as we move and stabilizing the new pit.

[Rahul Paul:]

Okay. So Father Brown will not be sufficient to offset that?

[Samuel T. Coetzer:]

No. We have a structure that we mine. And we don't change our structures. It is a very disciplined mine plan approaches, and how we are located, our people and our focus. So we don't turn things on unnecessarily. We follow a plan and yes, maybe it's a month or 2 months or 6 weeks that you pay for it, but long term, your structured approach normally works much better for the longer-term cost.

[Operator:]

And that concludes our Q&A session. I'll turn it back to our presenters for any closing remarks.

[Samuel T. Coetzer:]

Thank you, everybody/ And I think, as I said earlier, 2013 is behind us and we are excited of what the new phase we're entering into. You would have noticed that there's a slight change on the way we brand ourselves, and that's all part of things that we're doing to change the way we think about the company, and the future of this company is bright and it's shining bright for us. Thank you very much. Bye.

[Operator:]

And that concludes today's conference call. We appreciate your participation.