Golden Star Resources Ltd.
Q3 2021 Earnings Call Transcript

Published: 2 Nov 2021

[Operator:]

Good morning, ladies and gentlemen and welcome to the Golden Star Resources Third Quarter 2021 Results Conference Call. At this time, all lines are in a listen-only mode and following the presentation, we will conduct a question-and-answer session. This call is being recorded on Tuesday, November 2, 2021. I would now like to turn the conference over to Mr. Michael Stoner. Please go ahead.

[Michael Stoner:]

Thank you very much Kelsey and thank you everyone for joining us for our Q3, 2021 results call where we will obviously also address the transaction that we announced yesterday morning. On Slide 2, I'd like to point you to the disclaimer, particularly on forward-looking statements. The presentation is available on our website and we'll leave you to read that in your own time. On the call, I'm joined by Andrew Wray, our CEO; Graham Crew, our COO; Paul Thompson, our CFO; and then Mitch Wasel, who is our VP Exploration. And with that I will hand over to Andrew to kick off the call. Thank you.

[Andrew Wray:]

Thank you very much, Michael and hello to everybody. I’ll start on Slide 4 where very briefly there is a reminder of what and where we are as a business together there with the current and future plans for Wassa. Moving on and as Michael mentioned on Slide 5 there before we get into the Q3 overview and results. We should really talk about yesterday's announcement where we announced the Chifeng Gold is acquiring Golden Star in all cash offer at USD3.91 per share, which equates to value for the business of approximately USD470 million. Chifeng for those that are not familiar is and establish gold mining operator listed in Shanghai market cap of USD4.3 billion. They currently operate five assets for those in China and then this upon mining allows there quite a few years ago from MMG. There is no financing condition on this transaction, just to note and make that clear. In terms of the timeline, you can see there, we're expecting January, so probably mid-January, we expect at this point in time, in terms of the likely closing of the transaction. Once we've got through various approvals, shareholder approvals, regulatory approvals, and other conditions met. In terms of those approvals, beyond the shareholder approvals, I think the key ones really to mention are in Ghana. There will be the no objection approval sought from the Minister, in order for that - the transaction to proceed. And then the three separate regulatory approvals that Chifeng are already working on in China, which are the standard ones for a deal of this nature. We'll come back to that I'm sure when we get to Q&A, but that just gives you an overview of the transaction itself, you can see what that value equates to in terms of the various premier to different points in time. And as I said, we're happy to take questions on that once we've gone through the Q3 results. Moving on to Slide 6 on those results there, I think overall, pretty solid quarter, the business no real surprises, the results fairly much in line with our expectations. Graham will talk a little bit more about the operations and the key focus areas there. And, Paul, what that means in terms of financials and the balance sheet. But the key feature really, I think, the above and beyond the underground rut of mine. It's the continued processing of the low grade stockpiles, which we use to offset some of the lower volumes in terms of underground material. We continue to invest in terms of our capital program in the business for that future growth from Wassa and some good. In mine exploration results that Mitch will talk a little bit about later on, and then further optimization of the balance sheet during the quarter and then on the Paste Fill restart and commissioning Graham will give a little bit of detail around how that process is progressing. Moving on to Slide 7 in terms of health and safety I think the real focus there continues to be managing COVID. And we've certainly seen a noticeable uptick over Q3 in cases and case rates, both where we are in the western region and Ghana as well as a country as a whole. But the screening protocols we've got in place have helped us to capture most of that, and also minimize the impact on operations. We’ve spoken a little bit previously about some of the expat jumbo operators which as it says here we addressed in the second quarter by bringing in more operators more Ghanian operators, so we get around that problem in terms of some of the travel inconveniences and barriers. And we've seen continued progress on development rates during the quarter, which is encouraging. And then just one final one from me before I hand over to Graham in terms of the outlook, I think they're the messages really with those, and just the fourth quarter to come very much on track to deliver on guidance for the full year. So with that, I'll hand over to Graham to give it more detail on the operation.

[Graham Crew:]

Thanks, Andrew. So moving over to Slide 10 just a little bit more information on the Paste backfill system commissioning, everyone’s aware now that we suspended that, back in Q1. We've been going on doing test work with a group called MineFill Services in Australia in collaboration with University of Mines and Technology in Ghana. But this - the testing work has gone well. We have - we moved on to filling our second test, though using the maximum cement percentage, which is 10% that was completed during October. And we've got a set of 28 day test results, which show that it's meeting the design criteria at - slightly higher percent of cement content. And we're continuing the key thing really process if there's any degradation after 56. We've also identified some alternative binder mixes that are available in country and we're moving on to now during this quarter, we're moving on to another test work using an alternative slag based on a binder with a higher percentage of slag based binder within it. So that's showing really good results at a lab level. So looking forward to running that through the plant and then we should be full production for 2022. Now moving on to the quarter as Andrew touched on ore tonnes we're down a little bit with restricted as we mentioned, when we talked about the revised plan for the second half, a little bit restricted on available mining areas. So you know that averaging around 3,700 tonnes per day, a little bit of a great benefit late in the quarter, we did some work on pillar recovery back up in Panel 1 that help us to grade late in the quarter. So that was pleasing results to see there, development as Andrew said, continued improvement. What we've seen there still more work to do to build our development inventory and increase flexibility. But with that, and obviously the Paste fill coming on, things are looking in a better position for 2022 and the total production there that you can see. On the cost side, obviously the reduced volumes have had an impact on the unit costs, processing costs supported by the low grade stockpiles, as Andrew mentioned. And you can see that the flow on effect of the low ounces answers and the continued operating spend but importantly, the capital investment continuing moving on to doing work on the ventilation system and smaller capital investments over the quarter. So all in all increasing cost trend there, but on the back of some slightly lower production than we had in the original plan we are continuing to invest. Just in terms of the upper mine drilling, we've put out a release on this, this is some of the - some of the area that we are planning to bring into the reserves. We've been doing some infill drilling in those areas, and that's highlighted some higher grade parts of that area of the ore body that we previously hadn’t identified so, that's looking really positive for the upper mine area as we as we move through that drilling program. And with that, I'll hand over to Paul to talk about the financial results.

[Paul Thomson:]

Thank you, Graham. If we go to Slide 15, please so Q3, 2021 has been a solid quarter for Golden Star, so just to put things into context when comparing to Q3, 2020. That that quarter last year can be considered as more of an exceptional quarter due to primarily two factors. So the gold price in that quarter was essentially all time high. So we -during that quarter we actually realized a spot price average of 1,961 with an average total cost there incorporation of the stream of 1,813. The other thing to note is that the underground mining rate was very high we almost had 5,000 tonnes per day. So looking at Q3 this year so, in accordance with the 2021 restated guidance that we issued in June 2021. We always expect the debt in production in this quarter. I'm pleased to say that our site team has worked really hard to actually deliver production with a significant contribution being made from the stockpiles. Turning to the financial performance, so despite slightly lower gold ounces sold, so we sold 38.4 thousands ounces, Q3 was a reasonable quarter from financial perspective. With respect to the macro environment and the strong gold price, the business realized an average spot price of 1,753 per ounce or 1,676 of course, the impact of the lower gold stream. So this then resulted in revenues of $64.3 million. The main operating profit was $19.5 million of note as Graham alluded to, the cost of sales have increased by 18%, due to a combination of factors. So that's higher drilling costs, processing low, more low grade materials from the stockpiles, and the cost pressures being expect being an experienced sorry, in the broader industry. So these primarily relate to labor, fuel and consumables. So we’ve seen higher drilling costs due to the rescheduling of the mine plant during the quarter. And that relates to grade control drilling. If returned to the depreciation, this is increased in comparison to the prior year, quarter due to completion of a number of capital projects in 2020 and 2021. This obviously has an impact in earnings but not in the cash flow. The gain in the fair value of the derivative financial instruments was point $0.7 million. So this relates to the gain in the quarter and hedge positions, which again is a non-cash item. Turning to the adjusted EBITDA that was $21.2 million so there's a number of adjustments to EBITDA, which were included in the other expenses category, and these relate to two items primarily. So firstly, there's a non-cash allowance recognized and the deferred consideration for the Prestea disposal of $13.3 million in an aggregate that's $32.9 million for 2021 year-to-date. Secondly, there was a charge of $1.1 million in respect of corporate development costs. So turning to the adjusted net income attributable shareholders, that was $0.2 million or $0.00 per share, rounded obviously this is a function of the following factors. So with lower revenues due to the lower sales ounces, which was driven by the lower production ounces and then there's obviously the lower realized price in comparison to Q3, 2020. In terms of those record prices achieved, it was increased cost of sales for the direct mining costs I mentioned for the low grade stockpile cost, which is non-cash. And then we've got the increased depreciation due to the higher depreciation and higher depreciable asset base. Then we had the FTR settlement as I mentioned, in terms of the $13.3 million derecognition loss. Turning to Slide 16, in terms of the balance sheet, I'm pleased to report that we've continued to reposition the balance sheet to provide a stronger, more robust base for the business. So there were two key notable events during the quarter. Firstly with the convertible debenture, repayment, and settlement and cash of $51.5 million and secondly, we had the drawdown of the revolver credit facility from Macquarie. So this takes the total amount drawn on the RCF to $90 million. For these two actions, we've actually lowered the overall cost of capital, and we pushed out the principal repayment profile toward the cash position at the end of the quarter being $50.5 million. The net debt position was $31.9 million. And this is all being done whilst investing million of total CapEx during the quarter. Just with reference to the hedge program, we've got the hedge program in place which delivers 12.5000 ounces per quarter to the end of Q1, 2024 with a floor price of 1,600 and a ceiling is probably circa 2,150 on average, which provides a sensible window for the business going forward. Turning to the next slide on the net cash flow bridge, cash management during the quarter was a key consideration for the business particularly with the repayment of the convertible debenture. So we started the quarter with $72.7 million in preparation for the convertible debenture repayment, and we ended the quarter with a healthy cash balance of $50.5 million. The key things to know on the cash flow bridge for the quarter as follows

[Mitch Wasel:]

Thanks, Paul. Slide 19, just as a brief overview of where we were focusing our exploration efforts in 2021. The majority of the focus was up at the Wassa mining lease where we continue to test both up and down-dip of the current reserves. The guidance we have is about $14 million. Actually the forecast is probably going to come in a little bit under that we should be somewhere between $11 million and $12 million for the year. So let's proceed now over on to Slide number 20. Slide 20 is a longitudinal section of the Wassa deposits that shows the ISO shell which is in red there, which is a 1.5 gram per tonne. The dotted lines to see both up-dip and down-dip are the areas of focus for 2021 drilling. We've had success in both locations. One hole it was drilled in 2020, late 2020, where we intersected 18 meters at 3.5 or 3.6 grams per tonne, we've actually gone in there with the underground drill rigs and drilled 50 meters to the north and 125 meters to the south on that one and actually have it drilled off to a density that we'll be able to include into the reserves after year end. The up-dip has been quite successful as well. We've drilled many area of the zone that’s roughly 125 meters along strike now, with some new results coming in there. We duplicate the results from the previous hole which was 20 meters at 6.9 and 50 meters to the south, we intersected 19 meters at 4.6. To the north of that particular hole, we intersected several other zones that are looking interesting as well that will follow-up within 2020 with that drilling now. Progressing over to Slide number 21 just shows some of the near mine exploration targets outside of the Wassa main deposit itself. You'll see up in the top right hand side in your mine stuff at Mid-East and Dead Man Hill ME and DMH during that we did there we drilled four holes up there intersected mineralization, where we anticipated the zones are there. I did not intersect any high grade mineralization that we were looking for full closures up there. One interesting section we did do is a last fence you see on that self-action pin on the sack drilling it's on the lower left hand corner there. The last fence we drove which is shown on the section off to the right hand side there intersected mineralization, about 120 meters down-dip was the last known mineralization there at about 8.3 meters at 4.2 grams per tonne. Essentially, the exploration programs are wrapping up for the year, we are going to be concentrating on the upper mine drilling that that Graham pointed out there. And that's going to be the main focus for the remaining part of the year. On that I'll hand back over to Andrew just to give you a brief on the forecast on the MEPA, back to you, Andrew.

[Andrew Wray:]

Thanks very much, Mitch. So just finishing on Slide 22, where you can see there the focus areas for the business, together with the longer term targets, and as I mentioned at the outset, some progress over quarter three. And the only other thing I finished on was not withstanding the news yesterday, everyone remained very focused on delivering to plan and the target for the year and beyond. With that, I'll hand back to Kelsey and we can go to Q&A.

[Operator:]

Thank you. Your first question does come from Bryce Adams from CIBC Capital. Please go ahead.

[Bryce Adams:]

Good morning and good afternoon. Thanks for taking my question. Firstly, the deal price announced yesterday at the premium to recent trading, but it's also a decent discount to the PA filed earlier in the year. So what was your approach to balancing these two factors? And why pursue a sale when there's a lot of value in the PA that could be realized?

[Andrew Wray:]

Hi, Bryce, this is Andrew. Let me - I'll take that question. In terms of the price, and the deal price, I think it's the same equation that you look at with any level of interest in terms of trying to assess the tradeoff between the long-term delivery the risked long-term delivery versus what is on the table today. As you say, PA does have potential to deliver a lot of value, although, we're conscious - that's a few years out. There's a fair bit of investment that needs to go in order to deliver that. And as you can see, at the moment, we're reinvesting all the capital out of the business back into the business. So there's a certain reliance on gold prices holding out where they are. So, with that balance in mind, and the price offered both current trading as well as some of the recent average levels, we've been trading at, we felt that offered a good opportunity to take to shareholders.

[Bryce Adams:]

Okay, I understood. Secondly, the spread between current trading levels and the deal price is still wide. Now, it's fairly wide as you progress towards closing the transaction. What do you see is the key risks here and do they, somewhat explain the spread in the marketplace?

[Andrew Wray:]

Yes, the spread I think last night, and I seem where we're trading today was about 6%. I think of the offer price. And, as you say, that's probably linked to views around some of the approvals required. As I mentioned, there's no financing condition. So I don't think there's an issue there. It's probably looking to see how things progress in terms of the approvals in China where there is three main approvals required, which are fairly standard ones. And then the no objection, approval in Ghana that typically comes at the end of the process, and obviously shareholder votes as well. So, as we go through, I think people get a bit more comfortable. Potentially, it trades closer to the deal price. But there is other people more expert than I am - I mean all I would say is that, the dialogue we've had with Chifeng through the process is that they've had positive feedback when they've approached the regulators in China to move ahead with the transaction. And for deals of this nature, which for Chifeng, it's fairly middle of the fairway transaction. There's not a lot of history of those being rejected by the Chinese regulatory process. And in Ghana, we've made sure that we've had a good level of dialogue throughout with the authorities there. So that they're comfortable with what is happening, what is planned, and what they need to do as part of their process. So I think, we've positioned ourselves as well as we can, in that respect. And then the shareholder votes are planned probably later in December. So I think, from my perspective, that's what I can say the market will take its own view of where it needs to trade, but we don't see a lot of risk in that.

[Bryce Adams:]

Okay, thanks. You mentioned no financing conditions. But can you go through the language in the press release around the potential for a co-buyer - co buyer acquiring 38% of the Golden Star shares. What's driving that - and I don't know if you can talk to it, but what's the probability that Chifeng go with a partner or go it alone?

[Graham Crew:]

So the partner you're referring to is a fund of a bank, so CIIT Fund part of Industrial Bank. So it's a major Chinese bank. And the way I would look at that is it's effectively bank funding. And there is some advantages to that, particularly in terms of timing and approvals. Given on the Shanghai exchange, they have a series of tests, which are bit like the class tests in the U.K., which trigger certain processes if you go above certain ratios. So with funding it this way, it enables them to stay below some of those ratios so there's, benefits there. But it also means that they keep additional cash availability, both for further investment into the business, as well as other opportunities they may be looking at given, I think, you know, there's some fairly ambitious growth plans on the side of Chifeng, but from our perspective. The key was to ensure that announcement, this was fully funded by the cash resources that you Chifeng themselves have. And then, you know, if they decide that it makes more sense to finance ultimately that way through the planned bringing on board of the fund, then structurally, that's very easy to do, and potentially gives them a bit more flexibility and firepower.

[Bryce Adams:]

Okay. So just from my understanding, then their preference would be to go without the partner, but it might be advantageous for the regulatory approvals.

[Graham Crew:]

No and I don't think I can really speak to, you know, for them in terms of what their preferences are, they've highlighted to us that they may decide to go this direction, I think they've got the flexibility to go both routes, whatever really suits them. From our perspective, it doesn't really change anything in terms of the transaction. I think from memory you also look at the way that Shandong structured the acquisition of Cardinal I think they did something very similar by bringing in this sort of financing partner. So it's a sort of fairly well trodden path for Chinese listed companies.

[Bryce Adams:]

Okay, thanks for that. Graham, my apologies, there are no questions from me this time around, but thanks, everyone. Cheers.

[Graham Crew:]

Thanks Bryce let it be one for us.

[Operator:]

Your next question does come from . Please go ahead.

[Unidentified Analyst:]

Good day Andrew and everyone.

[Andrew Wray:]

Hey, Dan.

[Unidentified Analyst:]

Thank you. Couple of questions one, I was going to ask you first-off on the no objection permit. Andrew, when would you expect that one?

[Andrew Wray:]

That typically Dan comes right at the end of the process. So, once I would have thought most of the other conditions are fulfilled. And I guess we just got to be conscious of when that actually falls calendar wise. So late December, early January, it might be difficult to get hold of the right people. So we would expect that probably more to be towards the second week of January as we get to the very end of the process in closing.

[Unidentified Analyst:]

Okay, thank you. Andrew, can you give us a bit of history of your of dealing with Chifeng and of this - of the acquisition? And what is the - what do you - I know it's not for your decision or your call, but how is the transition this in terms of employees and management et cetera have been talked about between the two companies?

[Andrew Wray:]

Yes, by all means, we've been talking for probably about six months almost exactly I think since we first had an approach. And over that time, obviously got to know each other a little bit better got to understand what the capacity and capability of Chifeng are. They've had a team in country for quite some time, as I think everybody knows they were previously looking at Bibiani and they kept a presence in Ghana and on the ground so they've developed some relationships in country as well, which I think is important. You know, through that process key for us, was understanding capability to take the operation on, their views and level of interest in the PA plan and delivering the PA plan given. We know that's important to other stakeholders in country. And our CSR programs and the way that we engage and do business there, and I think they've been very impressed by what they see and keen to take those on. And then to transition, which is really the phase we're in now of, ensuring that our employees be they in Ghana or the U.K., are fairly treated through that process. And I think, if I'm honest, most of the impact obviously comes in London, given that they don't need a head office in London. In Ghana the message is very much they're keen to push the development of an investment in Wassa and they're going to need people to be able to do that. So a real focus there on the team and on the skills in place. And they'll have people at site from end of this week or probably next week at some stage in order to then, you know, get that more day to day familiarity and build those relationships as we go through the next two months so that, we achieve as smooth a handover as we can.

[Unidentified Analyst:]

Okay. So they want people at site right through the closing the plan.

[Andrew Wray:]

Yes.

[Unidentified Analyst:]

Okay great. Andrew, thank you very much all the best.

[Andrew Wray:]

You’re welcome. Thank you.

[Operator:]

There are no further questions at this time, you may please proceed.

[Andrew Wray:]

Okay. Thank you very much. If there is anything, then you've got all of our contact details and be more than happy to follow-up on any of those points and to see how things progress. So appreciate the time today. And thank you very much again to everybody.

[Operator:]

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