Golden Star Resources Ltd.
Q4 2014 Earnings Call Transcript

Published: 19 Feb 2015

[Operator:]

Good morning, everyone, and thank you for joining us to discuss Golden Star Resources Fourth Quarter 2014 and Full Year Financial Results and Operational Update. The financial statements were filed this morning and these are available on the company’s website at www.gsr.com. Please also 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:]

Good morning and welcome, everyone, to the call. Joining me today are my colleagues in Toronto and in our Accra offices. André van Niekerk, our CFO, who has been in this role almost a year now; Angela Parr, Vice President of Investor Relations, who I’m sure many of you will know; and then Martin Raffield, who is in Ghana, our Head of Technical Services, who is instrumental in bringing our development projects into production. I will be presenting on the financial and operational results and then I would encourage you to direct any questions you may have to myself or any of my colleagues. 2014 was a year of progressing our strategy. Strategic focus is on widening margins by mining only profitable ounces. To this end, we intend to replace low margin refractory ounces at Bogoso with very high margin ounces from Prestea from 2016 onwards. As you would know, Golden Star is rich in the infrastructure, and our strategy is to leverage of these historic investments to enhance returns to our investors. The internal rate of return on both development projects in excess of 70% is achievable because of our planned use of existing infrastructure. We set out to lower our costs and we did so consistently throughout the year and across the organization. I believe these can be sustained going forward. Our disciplined focused on return on capital has demanded tough choices from management in this fast changing gold market. I believe the investments we have made as well as those we elected not to pursue have set us up well for 2015 and beyond. Turning to our fourth quarter operational performance, I would like to highlight our marked improvement in production. This 18% increase in production was achieved through mining and processing improved grades at both operations. In addition to this, we have successfully concluded the year with a significant amount of ore on our stockpile, which will de-risk production in 2015. Our development projects were progressed during the quarter. The Prestea PEA released; I will talk more on that later. I’m particularly pleased with the cooperation received from our partners in government. The swift action on the part of the Minerals Commission and the EPA allowed us to receive the permit to commence the exploration decline at Wassa, which we’ll be doing soon. Looking ahead to 2015, we have reduced our future obligations by lowering headcount, specifically at Bogoso, where 19% of reduction was achieved in 2014. Our fourth quarter financial performance was strong and it marked a return to profitability for the group. Despite the lowest realized gold prices for the year, revenue for the quarter increased with more ounces produced, while mine operating expenses remained at previous levels. The result was a 13% reduction in cash operating cost per ounce. For the quarter, we delivered an adjusted net income to shareholders of $9 million or $0.03 per share. For the full year, our results were more dramatically impacted by the 11% reduction in gold price. Although mine operating expenses reduced by 12% or $41 million, having already reduced in 2013 by 5% over the prior year. This was not sufficient to take the operating margins into positive territory. Despite this, the result was an improvement in our profitability, as adjusted net losses contract to $12 million from $21 million in 2013. Now to one of my favorite slides, in these challenging times, cost control is the one area you can make meaningful difference to the business in the short-term. Our team has been very successful in this regard. We have been relentless in our pursuit of lower cost, and have achieved as much in every quarter this year. Key drivers of these lower costs are reductions in stripping, contractor mining cost and shorter haulage distances. However, behavioral changes across the organization also contributed to lower cost as maintenance practices and reagent consumption improved, and enhances efficiencies allowed for headcount reductions. For the full year, both our operating expenses and cost of sales were notably lower than in 2013. As an organization focused on widening margins, it’s also critical to comment on cost per ounce. You will see that our cash operating cost per ounce declined quarter-on-quarter throughout the year. Although full year cash cost per ounce were negatively impacted by grade, reduced capital expenditures led to our all-in sustaining cost being 6% lower than 2013. Looking ahead to 2015, we expect both all-in sustaining and cash operating cost to reduce by between 12% and 16% from 2014 levels. Turning towards the fourth quarter operational performance, we see a big improvement on the prior quarter. This improvement was driven by a number of issues. More ore mined as the weather conditions improved, increase in tons processed, this power issues that affected the operations in the third quarter did not occur. Grade increased by 10% as was expected at greater depth and recoveries improved as the grade improved. Overall, very solid quarter for Wassa and with the increased stripping, the main pit is now at a level from which the exploration decline for the underground mine can be constructed. Wassa’s financial performance over the year was variable as all sources changed quarter-to-quarter. All mined and processed in the first half of the year included higher cost but high grade material from Father Brown pit. In the second half of the year, only lower grade low cost ore from Wassa main pit was mined and processed. The third quarter’s cost balance were negatively impacted by the commissioning of a new power line. However, the fourth quarter costs were back in line with what can be expected from Wassa mine and totally moving to the higher grade underground mining. 2015 will be a transformational year for Wassa. In the open pit, grades will continue to increase gradually throughout the year, which will improve the financial performance of existing operations over the year. Provided to this is the potential impact of load shedding in the early part of the year, which we hope to manage as well as we did in the last quarter or in December 2014. As we construct the underground mine, we expect to invest $27 million in Wassa during 2015, which will be funded with the second Ecobank facility that we have in place. The fourth quarter was a strong one for Bogoso operations. With good access to ore, improved weather and no material impact from load shedding experience, ore processed in the quarter increased by 19%. Combined with the improved grade, this resulted in a 25% increase in refractory gold produced and sold. Tailings retreatment performed very satisfactorily in the quarter and we expect similar performance throughout 2015. In the fourth quarter of 2014, Bogoso began to deliver the returns that warranted the investment made in betterment stripping over the last 18 months and increase in the ounces produced drove the revenue higher while expenses and cost was static from the prior quarter. The result was an increased mine operating margin. Cash operating cost were the lowest in four years at $926 per ounce, driven largely by the improved production and the lower stripping ratio. Bogoso enters its final year of refractory ore production with a de-risk operation and potential to deliver meaningful cash flow. We currently have a large stockpile on the [indiscernible] and anticipate that mining will be largely complete by the time the rainy season is upon us. Grade is expected to remain that about 2.5 gram a ton yielding approximately 135,000 ounces for the year. The further 17,000 ounces are forecast to be contributed from the tailings retreatment. As you know, it’s our intention to place the refractory operations on care maintenance from the fourth quarter this year and being to replace this production with low cost ounces from Prestea thereafter. Turning from past performance to future potential, I would like to discuss the development of Wassa and Prestea mines. These development projects are brownfield in nature and I believe have a low risk profile. They provide an opportunity to leverage of our existing mining, processing and support infrastructure. Result of this leverage to the incremental capital to bring these projects into production is relatively low and our timeline until first goal is fairly short. $40 million [ph] in CapEx, we are able to reduce out cost and operating risk and extend our mine life significantly by the end of 2016. The returns we expect these two projects to deliver are impressive. We are forecast to produce gold at cash operating cost per ounce of approximately $920 in 2015. These projects will transform Golden Star to producing gold at below $700 an ounce from 2016 onwards. The relatively low CapEx associated with these projects will also result in an all-in sustaining cost of below $750 per ounce from 2016 and into the future. With the internal rate of return on both projects in excess of 70%, we believe it is fair to say these mines have the potential to offer investors superior risk adjusted returns and substantially enhance the company’s net present value. I’d like to take this opportunity to provide you more detail on how the two PEAs released in late 2014 envision our production profile changing. From 2016 onwards, production from Bogoso will be from tailings only. Wassa’s production will increase up to 2018, we have – the open pit mining is currently modeled to start declining and mining will only take place from underground sources thereafter. On that assumption that we are successfully raising capital to develop Prestea in the near-term, we should see meaningful production from this mine in 2016 and for four years thereafter. We are confident that the additional ore sources will be identified and developed to increase production in the later years of the mine life. We are now reviewing further options presented and they are Prestea open pits, extension of further ground and Prestea mining beyond the West Reef. Needless to say, they are all non-refractory ore. Many of the critical milestones to fulfilling on our development projects have been achieved. On the permitting side, the first phase permits are now in place. But full underground mining permits for both operations are expected later this year. Funding was successfully raised in 2014, which should provide adequately for Wassa’s development. But discussions are still underway to secure financing for Prestea. We are confident that a financing solution for the company can be found in the near-term. With the bulk of the necessary construction equipment en route to the Wassa mine, we expect to start the construction in the second quarter this year, around the same time that we will file the feasibility study on Wassa, which is currently underway. Our understanding of the potential of the Prestea mine will be enhanced when the feasibility study on this project, also currently underway, is filed in the second quarter. These critical milestones are met and we anticipate that both projects will be in production from 2016 onwards. In conclusion, I would like to reiterate to our investors that we are committed to our long-term strategy of transforming this company. We are endowed with significant mineral resources and valuable mining infrastructure. It now remains to leverage this fortunate position to deliver meaningful returns to our investors, which we intend to do over the course of the next two years. At this stage, that I will hand it back to Joanne to take any questions.

[Operator:]

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

[Rahul Paul:]

Hi, everyone. Good to see cash cost go below – go to where they went in Q4, hope it stays that way. Question on the electricity situation in Ghana, did you take them into account when you set your guidance? What I’m trying to get at is what could cause production this year to fall below guidance.

[Sam Coetzer:]

Yeah, Rahul, good question. When we review our budgets, we have production profile and put our capital and now the human resources to that. During our budget process, we put a certain availability and utilization adjustment to our production profile or to our planned processing facility. For this particular period, we did the same for the first three months of the year, especially at Wassa, because Wassa we feel will be impacted more than Bogoso as we’ve reached an agreement with the local power company that we will be putting power back into the gird through our Wassa power facility in order to ensure that BIOX or the refractory business that has the high grade continue to run. In January, we didn’t see an adverse impact. In February, there had been, but I think it is less than 8% of the impact, which would be very similar to what we experienced in December of last year at Wassa. What we do is, when you’re doing your budget availability, you normally schedule your plants maintenance with the times that there is required shut downs. So between us and other mining companies with the Chamber of Mines, we’re tying to establish a protocol and which times is the required load shedding takes place that we do our plants maintenance on relining or any other work that we need to do in the plant at that time. However, on top of that, I expect maybe to see in the range of about 5% to 8% impact from a throughput perspective. However, once the problem is solved, Wassa has the ability to then in the second quarter going forward to make up for that. So that’s the best I can answer it, Rahul.

[Rahul Paul:]

Okay. So it’s not something that you’re concerned about at this stage that could cause you to come back the middle of the year and maybe look at guidance again?

[Sam Coetzer:]

What we’d do is we manage it very carefully. To say I’m not concerned about it, it means that we’re not managing it.

[Rahul Paul:]

Okay.

[Sam Coetzer:]

So we have a team that’s in very close contact with VRA. And so we managed that impact of the downtime through the Dan’s office, our COO, and we get additional heads-up, if you want to call it, if there is any short-term impact from load shedding that we can replace it. I’m not overly concerned because the great profile at Wassa will continue to improve as we move forward. And we have stabilized the production profile sufficiently that we could be ahead in terms of managing grade in times that we see load shedding being reduced. So no, I do not see that it will adversely impact on Wassa.

[Rahul Paul:]

Okay.

[Sam Coetzer:]

At this stage we’re probably seeing an 8% lower and that is expected to be reduced from end of March, going forward.

[Rahul Paul:]

Okay. And just on that again, I mean, once you shut down or put the refractory plant on care and maintenance, I guess your overall power requirement should come down significantly, should have not?

[Sam Coetzer:]

Yeah, you got it right, Rahul. Two years ago in 2013, we made a conscious effort to reduce the risk of power and fuel on the company to stabilize and get more consistent. Moving away from the refractory business, as I always said, I think I’ve said at back in 2013, adds about $200 an ounce, generally from a power perspective compared to a non-refractory business to run the BIOX component. And moving away from the refractory business reduces the risk and dependency on power for the company moving forward and will have stabilized our product more easy going forward. And you should not have any impacts, what happened on the BIOX, if you are down you see this slow reaction in the bacteria and that takes – normally it could take three to four to five weeks to get back. Now that is what we do not see as a business line for this company going forward. Especially that we have sufficient infrastructure in other plants to move forward into that, that’s great.

[Rahul Paul:]

Okay. Thanks, Sam. And then last question, looking at the write down that you took in Q4, have you written down all of the refractory ounces aside from the pits that you’re mining right now?

[Sam Coetzer:]

Yeah, I think we will get more clarity as we’re written more than just ounces down, so André, why don’t you just give them a sense of that?

[André Van Niekerk:]

Yeah. Hi, Rahul. We basically look at our net book value we have in our books and did a net present value calculation of the value in use, basically discounted cash flow of what we expect from the refractory operation. And we were basically depleted the refractory plant over their remaining ounces in Bogoso North and Chujah pits. So, yes, in a sense, we did write-down any other refractory ounces as well.

[Rahul Paul:]

Okay. Thanks for that. That’s all that I had.

[Sam Coetzer:]

Okay. Thank you, Rahul.

[Operator:]

Thank you. Your next question comes from Howard Flinker of Flinker and Company. Please go head.

[Howard Flinker:]

How are you, Sam?

[Sam Coetzer:]

Hi, Howard.

[Howard Flinker:]

Is your reduction in costs in the – cash costs in the fourth quarter related in anyway to the drop in oil or you’re not seeing that?

[Sam Coetzer:]

Yeah, good question. Howard, it is a combination, that is one area, combination; we are seeing a reduction in fuel cost. It’s been trending down – is that from September, Angela? You did a study on that – from September and it keeps on trending down. So it’s not only the fuel cost per liter, but also the amount of waste tonnes that we move moving forward. But there is also other reductions as we enhance our productivity. We’ve just seen the – there’s been a reduction in our headcount of 18% at Bogoso.

[Howard Flinker:]

I saw that.

[Sam Coetzer:]

Yeah, we’ve also seen a dramatic reduction over the last two years in our G&A all over the company. So the company is preparing itself to become more leaner once we move into being a non-refractory business. So our focus is now stabilizing a new cost structure one that we can manage very efficiently and reduce the dependency on the two high cost items, which is fuel and power, going forward.

[Howard Flinker:]

The next question is, is the natural gas supply to the power plants of Ghana are stable? Is it coming from, let’s say, the [indiscernible], which has plenty of natural gas or is it an intermittent?

[Sam Coetzer:]

The power into Ghana – Ghana has basically three components of generating power. The first is, the hydro-electrical dam, the second is gas from Nigeria, and the third is heavy fuels burning. And obviously the biggest impact currently is the low level of water in the dam. And it is fully – people like Trevor Turnbull has been with the company for a while would have seen these low levels back in 2006 are cyclical. It’s having a very similar profile to 2006. And then as the dam fills-up, they would be able to start two of the generators that they’re short now to run. Then Nigeria, as I’m being told, gas supply from Nigeria is improving on a monthly basis that’s coming in. There is a new agreement between the government of Ghana and Nigeria. There is an improvement on that. And then, lastly, the government is looking at bringing in two additional barges that will set in Takoradi and to add more megawatts into the system. Now all this should start happening from March onwards and we will see an improvement in that area.

[Howard Flinker:]

What will the barges do?

[Sam Coetzer:]

The barges will put another 1,000 megawatts into the system, which will be a temporary solution, so in order for load shedding to be minimized going forward. You get these barges and they just add more power into the system.

[Howard Flinker:]

Do they connect to oil or gas? Is that it?

[André Van Niekerk:]

Yeah.

[Sam Coetzer:]

Yeah.

[Howard Flinker:]

Okay. And finally, how long will the $39 million last?

[Sam Coetzer:]

We are focused on delivering the Wassa with that and doing whatever is needed moving forward. We are currently, as I indicated, we are looking at financing the company to reduce our cost of capital going forward, but $39 million is sufficient with the production that we see to develop the Wassa mine, going forward.

[Howard Flinker:]

Sufficient for how long?

[Sam Coetzer:]

I mean, we will be getting better. We see enough cash to do what we need to do.

[Howard Flinker:]

Okay. And then you’re saying that after that you will be generating free cash, is that correct?

[Sam Coetzer:]

Yeah, from 2016 onwards, the company will be transformed into a much lower cost producer.

[Howard Flinker:]

Okay, thank you.

[Sam Coetzer:]

It will be a very quick spending. As we said, Wassa will be developing very soon and that is one year that we’d be ore and the say with Prestea underground, we will move that forward as well.

[Operator:]

Thank you. Your next question comes from Andrew Breichmanas of BMO Capital Markets. Please go ahead.

[Andrew Breichmanas:]

Thanks. Good morning all.

[Sam Coetzer:]

Good morning, Andrew.

[Andrew Breichmanas:]

Two question. First, the CapEx set at Bogoso in 2014 was obviously a lot lower than you had initially budgeted and it remains low this year. I just wanted to make sure has those expenditures been deferred or eliminated as a result of the new strategy there?

[Sam Coetzer:]

So really – firstly, let me just talk about a good question for Bogoso. We saw savings of just under $2 million from the stripping. The stripping was the betterment stripping we predicted, $7.4 million, and we came in under $6 million on that. The other one is the Prestea underground, as we made a change to look at it – the PEA of more handheld, we didn’t develop the pervious thinking. So we didn’t spend $5 million on that, that portion for Prestea underground and then as the clarity settled in, in terms of how Wassa and Prestea can be developed, we opted not to spend any further money, any refractory sources that we thought we might keep an option value open for the future which would be on Dumasi and other places. So that was the reduction, Andrew.

[Andrew Breichmanas:]

So specifically for those Prestea underground costs, are those the types of costs that could increase the capital required to develop the project or is that really separate?

[Sam Coetzer:]

No, it’s separate. If you remember end of 2013, we still had a feasibility of a mechanized mine and we would have had to place a shaft on surface, we have to move schools et cetera to do that. And so certain of those costs would not be required, some have been deferred into the future as we have a different ventilation system requirement now with a different mining concept going forward.

[Andrew Breichmanas:]

Okay. Thanks. And so my second question is just on your reserves and resources. Usually I think an update would have been out by now. When can we expect to see that and do you have a sense of the parameters that you’ll be using when you calculate your reserves for this pit?

[Sam Coetzer:]

So, yeah, Andrew, the reason why they are a little bit delayed is we want to complete the feasibility study at Wassa because then only we can bring it into reserves, expect that to be completed by the end of the quarter, so number one. Number two, we also looking at the completion of the Prestea underground to bring that into the reserves, moving forward. Then in terms of your question, we’re taking a 1,200 gold price for establishing our reserves moving forward. We obviously have had more information coming from the Wassa underground with drilling that wasn’t in the previous. We’re taking a view on any of the refractory ore based on we are not planning to stop that. So we would probably not bring any other refractory ore into the reserve at this point in time. But most of those have oxide caps or some of them have oxide caps. So we do – there will be some of the oxide caps that will be used in the non-refractory plant and that is what we are working on. So instead of rushing it out, we wanted to make sure that we have a clear picture for ourselves in terms of financing and any other issues that we wanted to make sure we have it.

[Andrew Breichmanas:]

Okay. Thanks very much.

[Operator:]

Thank you. [Operator Instructions] There are no further questions at this time. You may proceed.

[Sam Coetzer:]

Okay. I just want to thank everybody for joining in the call. We’ve got our signs now firmly fixed on transforming the company going forward and I would be – for those of you, when we go to the next conferences, we will be talking more about that going forward. Thanks a lot. Bye.

[Operator:]

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