Further woes for Queenstake in Q2 (August 11, 2005)

Vancouver – Plagued by continued operational problems, Queenstake Resources (QRL-T) posted a second quarter loss of US$5.6 million or one cent per share, mirroring the loss in the same quarter of last year.

The northeastern Nevada producer reported decreased gold output of 54,156 oz. in its latest quarter, versus 61,247 oz. in the prior year’s corresponding period.

Underground mining at the Jerritt Canyon complex was impacted by labour shortages and flooding-rock stability issues. Heavy Spring runoff and rainfall flooded large sections of the Smith mine and contributed to a stope failure in Zone 6 at the SSX mine. Resultantly, underground development and expansion efforts have been hampered.

Ore mined in the latest second quarter, 234,625 tonnes, fell about 18% short of the production levels from Q2-2004. Although average grades remained essentially the same at 7.1 grams gold per tonne, recovery rates dropped to 87.3% from 91%.

Acknowledging lacklustre performance, Queenstake president and CEO Dorian (Dusty) Nicol commented “Jerritt Canyon continued to underperform through the first half of 2005, principally due to continuing shortfalls in underground development. During the first quarter we deferred development in order to conserve capital, and in the second quarter we had the unforeseen weather related issues exacerbated by the shortage of underground miners.”

Having no forward sales contracts, the company sells all its gold at spot prices. A higher realized gold price of US$427 per oz., versus US$395 per oz. in last year’s second quarter, was not enough to offset the Jerritt Canyon production shortfalls. Lower production levels inflated cash operating costs in Q2 to US$372 per oz., up 10% from last year.

Queenstake VP of Finance and CFO Eric Edwards reviewed capital requirements, “During the quarter, US$4.1 million was invested in Jerritt Canyon, principally for underground mine development, diamond drilling and equipment purchases and rebuilds. Our expected capital expenditures for the second half of 2005 will be about US$10-11 million with about half of that going toward underground development.”

A new operating plan

Continued poor performance has prompted the company to table a number of initiatives to bring Jerritt Canyon costs in line. Dusty Nicol reviewed “Our attempts to ramp up mining rates to match mill capacity over the past few years have been disappointing, as the mine simply has not been able to keep up development with anticipated production rates. The central cause for lagging production always comes back to the mine development shortfall. As a consequence of the delayed mine development, we are implementing a revised operating plan to align mill throughput with current underground production capacity. We will process higher grade ore, averaging 0.25 oz. gold per ton, but at a reduced throughput rate of 2,500 to 2,700 tons per day, allowing for more selective mining.”

Queenstake is focusing on higher margin ounces with an eye on boosting cash flow. Cutbacks on the previously planned US$2.5-million district exploration program will be re-allocated towards increasing underground development footage. Emphasis is now on shorter term reserve replacement.

Feeding the hungry beast

Citing a two-year inability to deliver enough ore from the underground mines to feed the 3,800-tonne-per-day twin roaster mill, the company will scale back to using a single roaster by cycling their usage. Energy savings of up to $180,000 per month are estimated in energy cost savings, in the mill.

The drop in mill through-put will lessen the demands on underground mining, further decreasing costs.

Queenstake has also engaged contract miners to advance ongoing underground development. Connection of the SSX and Steer workings, essentially unifying the operations, is on track for completion by September. Commercial production from the Mahala and Steer deposits remain on schedule for the second half of 2005.

Projected gold output for 2005 now stands at about 200,000 oz.

The company continues to take its lumps on the market. Following the quarterly loss announcement, shares of Queenstake slid to a new low of 20 per share before closing at 22, off 10% on almost 6 million shares of volume in TSX trading.