Lake Shore closes $90M financing

Lake Shore Gold (LSG-T, LSG-X) has completed a $90-million public offering to strengthen its balance sheet, which was previously in “bad shape,” Haywood Securities analyst Kerry Smith says.

Before wrapping up the debenture offering on Sept. 7, the mid-tier gold producer knew it would be a financially demanding year, as it develops its Timmins West mine, expands its Bell Creek mill and closes several other financings.

In March, it wrapped up a royalty and equity investment transaction with Franco-Nevada (FNV-T, FNV-N), netting US$50 million. In June, it inked an agreement with Sprott Resource Lending Partners for a US$70-million financing, consisting of a US$35-million gold loan and a US$35-million stand-by line of credit. The agreement closed on July 16, when Lake Shore received the gold-linked note.

At the end of July, it had $58 million in cash and an estimated net debt of $36 million. In mid-August, analyst Smith opined that Lake Shore had enough cash to fund its 2012 initiatives, and wouldn’t need to drawdown the US$35-million stand-by credit this year. But he cautioned that “the balance sheet is still in poor shape,” and that “any drop in the gold price — or operational problems that reduce gold production, or raise cash costs — would be devastating for the company.”

The Timmins, Ont.,-focused miner previously faced operational difficulties and higher costs, which led to slashed capital spending for the year ranging from $170 million to $175 million, in a reduction of $15 million to $20 million. It also pushed back its staged expansion plans at the mill.

The recent upsized debenture offering of $90 million, made through a syndicate of underwriters led by BMO Capital Markets, would help cover any cash shortfalls as it develops its Timmins West mine and increases the mill capacity, so that it can reach full production of 3,000 tonnes a day by 2014.

The latest financing adds flexibility to Lake Shore’s balance sheet, CIBC analyst Cosmos Chiu comments in a Sept. 10 note. He estimates that the gold producer has $94 million in cash, including the financing’s proceeds of $86.4 million.

The company’s manager of investor relations Mark Utting says the proceeds will go towards repaying a US$50-million, three-year loan with UniCredit Bank, and fund corporate activities.

The notes have a 6.25% interest rate and mature on Sept. 30, 2017. The debentures are convertible into shares after Sept. 15, 2015, at a price of $1.40.

The miner says the $90-million deal is more appealing than the undrawn Sprott credit line because of its lower cost and longer term. The line of credit carries a 9.75% interest rate compounded monthly, and other fees.

In a recent presentation, Lake Shore estimates spending $137 million in the second half, including $50 million to retire the fully drawn UniCredit facility, $50 million to develop the Timmins West Mine, $16 million to expand its Bell Creek mill and the rest on exploration and other activities.

It pegs its total sources of cash to year-end at $191 million, excluding the Sprott line of credit (which it doesn’t plan to use), and expects to end the year with $50 million in hand.

On the same day, the company announced it would be looking for a new chief financial officer. Its current vice-president and CFO Mario Stifano will step down in October to head a private company.

For the year, Lake Shore expects to produce 85,000 to 100,000 oz. gold at cash costs of US$825 to US$875 per oz. from its Timmins West and Bell Creek gold mines. It also aims to expand its 2,000-tonne-per-day centralized mill to 2,500 daily tonnes by year-end, and 3,000 tonnes per day by mid-2013.

Lake Shore recently closed at $1.02 a share, in a 52-week range of 74¢ to $2.27.

Chiu has a $2 target on the stock with a “sector perform” rating. In his investment thesis, he writes that the company must deliver on its plans to regain the market’s confidence.

Smith of Haywood has $2.25 target and a “sector outperform” rating on Lake Shore.