Golden Star Resources Ltd.
Q3 2014 Earnings Call Transcript

Published: 8 Nov 2014

[Operator:]

Good morning, everyone and thank you for joining us to discuss Golden Star Resources’ Third Quarter 2014 Financial Results and Operational Update. Today’s conference is being recorded. The financial statements were filed yesterday afternoon and these are available on the company’s website at www.gsr.com. The formal presentation is expected to last about 20 minutes, and there will be an opportunity to ask questions thereafter. Now, I will turn the call over to Mr. Sam Coetzer, President and CEO. Please go ahead, sir.

[Sam Coetzer:]

Thank you. Good morning, everyone, and thank you for joining us today to discuss our third quarter results. We’ll run through the presentation and then, I will welcome any questions for either me or for the team present. Today, I would like to start by touching on two important topics

[Daniel Owiredu:]

Thank you, Sam. I’ve worked alongside this board [indiscernible] for the last four years and I’m amazed at the talent and wisdom that this board brings today on our operations. I’m very, very delighted to join the board, and I believe with a strong board and a very strong management team that we have, we are pleased to move this company forward. Thank you.

[Sam Coetzer:]

Thank you, Dan, and again welcome. Before we review the quarterly results in detail, I would like to go over how we are executing on our strategy. Over the last few years, we set about to transform Golden Star to a low-cost producer by leveraging off our existing assets. Major cost reductions continue to be achieved at our operations. Higher cost refractory operations at Bogoso will be closed at the end of next year after we harvest the last of the higher grade, better recovery and lower cost ounces. Next week, we will release a PEA on Prestea, which I expect will demonstrate that this is a mine that can operate at low cash cost. Combined with the PEA for Wassa, we will have the path mapped out to low-cost production for the group. From 2016 onwards, the life of mine cash operating cost across the group, are expected to be below $750 an ounce. Therefore, I believe we are delivering on our stated strategy, and even in lower gold price environment we can continue to do so. Turning to the quarter’s performance, we saw just over 61,000 ounces of gold in the third quarter, in line with the second quarter of this year. Overall, our grade work mine was higher, with 27% higher grade of Bogoso refractory operations in the quarter. This we expect to continue. The tonnes moved was lower as intermittent grid power at both Wassa and Bogoso was a big issue in July. But new power lines are now installed, which will allow more stable grid power. Wassa PEA delivered strong results and now with the project funding secured, we have made the decision to move forward with this and commence construction on an exploration decline. We continue to optimize our existing businesses by seeking our cost savings and efficiency improvements, which have contributed to 6% lower expenses in the quarter. The gold price achieved in the quarter was in line with the second quarter. And although our revenue was flat, costs were once again dramatically reduced. Mine operating expenses reduced 6% to $70 million. But more importantly, our cost per ounce reduced by12% to $1,052 an ounce. The result is that the group is approaching profitability with adjusted net loss reduced to $1 million from a loss of $8 million in the second quarter. During the quarter, our expenses and costs have been reduced by 6% and 10% respectively. This is now our third sequential quarter of lower costs and demonstrates our commitment to growing the margins in this business. These total cost levels are expected to be maintained over the next 12 months. These savings were achieved through a consolidated effort throughout our operations. A number of different focus areas are yielding the cost reductions. The real improvement in this quarter was at a cash cost per ounce level, with a combination of lower total costs and higher grades reduced costs by 12%. In 2015, cash cost per ounce at Wassa will not be different from significantly improved grades and Bogoso’s contribution should result in overall group cash cost per ounce declining. In 2016 and beyond, cash costs are expected to trend down to below $750 an ounce, once we have Wassa Underground coming into production. Should we move the Prestea Underground forward, this trend could even be enhanced. Wassa, having our largest life of mine of our three mines, posts a large continuous deposit with free milling gold. We are currently mining in one large pit, the Wassa Main pit, and processing in a CIL plant with 2.7 million tonnes per annum capacity. The infrastructure at Wassa is well-organized with good access to site. The plant is adjacent to the main pit and power is supplied by the national grid. The plant is well-equipped with a four-stage crusher and two mills to process fresh rock as we go deeper at this mine. Wassa is well-positioned to become a solid producer for Golden Star in the future. Let me review the Wassa performance. We mined fewer tonnes of ore and waste at Wassa in the third quarter, after mining at Father Brown was completed in the second quarter. During July, power supply was interrupted due to the upgrade and the commissioning of a new power line to start. This resulted in less mill uptime and fewer tonnes more. Good thing is, the new line is, however, now more reliable and carries more load, so it will allow for more stable future production. With the exclusion of ore from Father Brown, process grade was lower in the quarter. You will note, however, in our recent PEA that our mine plant shows grade for Wassa increasing in 2015 and obviously, beyond that as we move underground. As indicated in previous calls, the initial benches in the open pit are lower in grade than the average reserve grade and the deeper benches will be of higher grade. Mine operating expenses at Wassa reduced 16% to $25 million as we eliminated high-cost contract mining and the long-haul distances from Farther Brown. Overall, our expenses reduced by $9 million since the beginning of the year. This is really as a result of improved mining efficiencies in a single large pit with a more appropriately-sized mobile fleet. Full-year cash operating cost is expected to be $925 to $1,000 an ounce. However, this will reduce from 2015, 2016 as grade increases at depth. At this stage, I would like to remind you of our announcement on the PEA for Wassa. The study indicates pre-production CapEx of $41 million to develop an underground operation at this mine. Operating cash flow plus $35 million in facilities is expected to fund this project. The additional facility, which was secured during the quarter, is very flexible and allows for early repayment. Bulk of the expenditure will be in 2015, starting in the second quarter. Wassa’s mine cash operating cost of below $700 an ounce, and a life of mine all-in sustaining cost of below $800 an ounce. The underground mine will have a reduced exposure to weather and to fuel price fluctuations. First production from the Wassa Underground is expected early in 2016 with a 10-year life of mine thereafter. The development of an underground operation in Wassa is in line with our group strategy. Bringing the high-grade material into the mine plant sooner, improves the overall economics of this project and shifts Wassa into a lower cost mining sooner. With a low capital requirement, to achieve this, we can assure that the all-in sustaining cost delivers solid margins. Wassa is now a mine that can survive and thrive in the current gold price environment. Let me review Bogoso. Although we’ll have 2 million ounces of mineral reserves at a good grade, a significant portion of this is in refractory deposits, which are costly to purchase. We are expecting to update our reserves and resources in the new year. We are mining out our two refractory pits, the Bogoso North and the Chujah pits, and these will be complete end of 2015. The real value of Bogoso is in its infrastructure. As we have two permanent and operational plants that can treat ore from tailings from Prestea, and potentially other third-party sources. As I stated here before, the push-backs are now complete. We now have full access to the high-grade and the high-recovery ore. However, July was a difficult month with the dewatering of the pits hampering mining and an extended power outage limiting our processing capacity. This is now behind us. Production in August and September was very strong. And we have been building up a large stockpile to ensure continuous production until the end of 2015. Higher grade processed combined with lower total costs reduced the cost per ounce. Bogoso is now operating at its lowest cash cost per ounce in four years. Mine operating margin is now positive. And our current gold price, we expect this to widen further in the last quarter of this year. We are in the process of reducing risk at Bogoso by bringing down the headcount, entering into payment plans with suppliers and identifying ways to decrease our rehabilitation liabilities. While the year has presented us with a number of operational challenges, we have continued to deliver on our key milestones. Wassa and Bogoso mines are now operating efficiently. And we are in the right zones and in the right pits. Cost savings have been sustained over the year. A clear development path for Wassa has been defined with the release of our PEA. And as financing for this project was secured in the quarter, we are well-positioned to start construction early next year. I expect we will release the findings of our Prestea PEA next week, and all indications are that these are positive. As we look out to 2015, we move to a construction and development stage and I’m confident that we’d be able to deliver through this phase as well. I would now like to take any questions you might have for me or for my team. Thank you, operator.

[Operator:]

Thank you. [Operator Instructions] We’ll take our first question from Raj Ray with National Bank Financial.

[Raj U. Ray:]

Thank you. Sam, you just talked about cost reduction at Bogoso. How much more cost reduction do you foresee? Because if I look at the current quarter, the cash operating costs were $1,041, we include another $50 or just $60 in royalties, you’re getting to $1,100. That does not leave a lot of margin at current gold prices. So, also, I like to ask what’s your forecast for sustaining capital at Bogoso, over the next one year.

[Sam Coetzer:]

Right. So, I think I understand your question, Raj. You’re asking what is the forecast going forward, in terms of – yeah, this quarter was, you’re right, at $1,040 range. That was including a really slow July. What we saw in August and September was really impressive. And we’re trending through that same. So we’re expecting our cost structure to drop even more in the next year. We will soon be, probably at the end of the year, give the guidance for next year, but the costs will be further down from the ones that you saw in this quarter. And as we didn’t have the full ability with the July, that was a slow month, but it will continue to trend down to below $1,000 an ounce.

[Raj U. Ray:]

Thank you. And my second question is on Prestea. In the MD&A, you did mention that you will be looking to finance Prestea with additional financing from outside. What does that do to your development timeline expectation for Prestea in the [indiscernible]?

[Sam Coetzer:]

Well, we have a very disciplined approach like we had with Wassa as well. Once the study is complete, at that point in time, we would look at what is the appropriate financing structure for that particular mine. You will see once we come out with the PEA. There are still things when you look at financing any operation that it is, also the ability to move the cash by the way that you construct it. So once we see the PEA, we will be coming out once you see the detail of how we prepare or what we expect and how to finance that project going forward.

[Raj U. Ray:]

Okay. Thank you. That’s all from me.

[Sam Coetzer:]

Yes. So I would suggest that we should be out next week on that, and hope to give some clarity on what we want to do at that stage.

[Raj U. Ray:]

Okay. That’s cool. Thank you.

[Sam Coetzer:]

Thanks, Raj.

[Operator:]

We’ll go next to Anita Soni with Credit Suisse.

[Anita Soni:]

Hi. Good morning. I just want to understand Wassa, what’s happening with the grades and the cost mixture. I’m not quite sure I understood your commentary with respect to cost structure and grades that you would be expecting there, for 2015.

[Sam Coetzer:]

Yeah. Good question, Anita. If you look at the ore body closely, you would see that our first few benches, the first three, four benches is below our reserve grade. And the center of gravity of the reserve is deeper down the mine. So, and the grade continues to increase as we go down the pit. Now, the fourth quarter and the third quarter will be in very similar grade profile, like what you saw in this particular period. And then after the first quarter next year, the grade will start increasing and move closer to the reserve grade in the open pit. What we indicated by 2016, we will have the first of the higher grade underground, which is closer to the 4.85 gram a tonne starting to replace of the lower grade of the current open pit that we are mining. And that replacement has been described in our PEA of how the grade will increase over the period going forward. So the PEA has some more detail. But, Martin, did you want to indicate a bit more on the grade profile at Wassa?

[Martin Raffield:]

No, you’re right, Sam. As we go down deeper, we are heading towards the high-grade material that we’re going to be mining from underground. So the pit, certainly towards the bottom of the pits where we’re increasing that grade profile.

[Anita Soni:]

Sure. And then, I think you said something about the costs that B/P was expected to decline next year. Obviously, you’ve done all the stripping this year. But, Wassa, were the costs supposed to be flat. Is that what you said or...?

[Sam Coetzer:]

Yeah. For most of 2015, we expect cost to be flat to what it would be this year. And then after that, it will have a dramatic reduction in 2016 onwards.

[Anita Soni:]

And what’s the key driver, if your grades are getting better at Wassa over the course of the year in 2015. Are the unit – is there a longer haul distances, longer strip ratio or something like that that’s impacting the overall cost structure?

[Sam Coetzer:]

No. There is nothing further that’s impacting it. It is basically the grade in the first quarter would be lower, and then it will start increasing. So, over the period, it would be very similar to what you see now, but the last quarter should bring that down again.

[Anita Soni:]

All right. Okay. Thank you very much.

[Sam Coetzer:]

Yeah. Okay. Thanks, Anita.

[Operator:]

It appears there are no further questions in the queue at this time. I’d like to turn the call back to Mr. Sam Coetzer for any additional or closing remarks.

[Sam Coetzer:]

Thank you, everybody, for joining us on this call. And we are always available to take more questions, and there is a dial-in number in the company that you can look at and we’re looking forward to talk to you again soon. Thank you. Thank you.

[Operator:]

That does conclude today’s conference. Thank you for your participation. You may now disconnect.