At last, a little blue sky for Gammon

Stung by a string of bad news over the last year from a third-quarter loss of US$44.8 million, startup problems at two gold operations in Mexico and allegations about stock-option manipulation and inaccurate production statements, Gammon Gold (GAM-T, GRS-X) enjoyed a happier moment recently when it declared cash flow turned positive in the first quarter — the first time in the company’s history.

Net cash flow of US$600,000 in the first quarter was a US$15.6- million improvement over the fourth quarter of 2007, demonstrating that Gammon “is successfully advancing its turnaround strategy” the company said in a news release.

The Nova Scotia-based mid-tier gold and silver producer also reported surplus cash at the end of March (US$7.2 million in reserves), which allowed it to make an unplanned US$1.5-million debt repayment on its revolving line of credit loan earlier this month.

Coupled with a previous unscheduled debt repayment of US$2.1 million in late February, Gammon has plunked down US$3.6 million in unplanned debt repayments so far this year. That means its US$60-million line of credit is now drawn down to US$31.3 million.

Cash costs in the first quarter also came in at the low end of the 2008 full-year cash cost guidance — significant because production in the first quarter of 2008 is estimated to be the lowest production quarter this year.

Total cash costs of US$489 per gold-equivalent oz. translated into a 25% improvement over the previous quarter’s cash cost results and were 19-23% lower (US$100 per gold-equivalent oz.) than the company’s original first-quarter cost guidance of US$580-600 per gold-equivalent oz.

Gammon also achieved a 20% increase in total production (including both its Ocampo and El Cubo projects in Mexico), over its fourth-quarter results in 2007.

The company churned out 33,099 oz. gold and 1.3 million oz. silver in the three months ended March 31, (or 57,946 gold-equivalent oz.) at a cash cost of US$489 per gold-equivalent oz., a decrease of 25% over the fourth quarter of 2007.

During the first quarter, the company sold a total of 31,455 oz. gold and 1.2 million oz. silver — or 55,099 gold-equivalent oz. — and realized an average gold price of US$928 per oz. and an average silver price of US$17.69 per oz.

At Gammon’s flagship Ocampo project in Mexico’s Chihuahua state, production in the first quarter gained 11% over the previous quarter.

Both excavators at Ocampo have been refurbished and returned to operations. In March the heap leach posted an average crushing and stacking rate of 8,774 tonnes per day, the second best single month ever, and a 43% improvement over December.

Significant improvements were also made at the El Cubo project in Guanajuato state, where first-quarter production jumped 27% over the fourth quarter.

The news sent Gammon gold shares up US5 to US$8.08 before coming down toUS$7.90, with nearly 800,000 shares changing hands.

Gammon is currently trading at about US$8.08 but its shares have traded within a 52-week window of US$5.80-20.90.