Golden Star shines on Global Gold Index (February 22, 2007)

Stronger gold prices this year are lifting many a gold miner, but Golden Star Resources (GSC-T, GSS-X) has been out pacing most.

The mid-tier producer with its main assets in Ghana, has enjoyed a 23% gain so far this year placing it second only to Cumberland Resources (CLG-T) in terms of percentage gains on the TSXs Global Gold Index.

Catherine Gignac, and analyst with Wellington West Capital, cites three key factors to the companys surge: the imminent completion of a sulphide expansion that will take production from higher grade ore; a coming to grips with what was rampant illegal mining in and around the companys premises; and the increased stabilization of a power supply.

In addition, says Golden Star spokesperson Anne Hite, the company is building a new reputation for itself.

A past history of missing deadlines has hampered our progress until now, says Hite.

Those missed deadlines were associated with getting the Wassa open pit mine into production. Golden Star holds a 90% stake in Wassa, which it expects to produce 110,000 oz. of gold in 2007.

But the new energy around the company is centered mostly around its Bogoso/Prestea project, where the start-up of commercial production on high grade sulphides is slated to begin on April 1.

Its a simple catalyst for the share price, because when you want to own this is just prior to when there is an increase in production and an increase in cash flow, Gignac says of the upward swing in the company’s share price in advance of completion of the expansion.

To ensure that the transition from oxide production to sulphide came off without any major glitches, Golden Star brought in the experience of Colin Belshaw as its new vice president of operations and Daniel Owiredu as its vice president Ghana. Owiredu is a mining engineer with 20 years experience who will be taking a hands-on approach with the new sulfide/bio-oxidation circuit at Bogoso.

Golden Star holds a 90% equity interest in Bogoso/Prestea which produced roughly 80,000 oz. of gold in first nine months of 2006 at a cost of US$398 an oz. and an average selling price of US$605.

With the expansion, the company expects production to rise to 280,000 oz. for 2007 at a cash cost of US$330 an oz.

Capital expenditures for the expansion are slated to come in at US$125 million.

The need for the new plant arose when oxide ore at the site was exhausted in 2004 and the plant was not designed to handle the refractory ores that remained, resulting in lower recovery rates in the 60% range. The expansion should allow for more economic recovery of refractory ores, which make up roughly 70% of the ore on site.

In all, Golden Star has 4.15 million oz. of gold in reserves and another 41 million tonnes grading 2.4 grams gold in its resource categories. All of that ore is within trucking distance of its processing plants.

Other issues Golden Star has grappled with and appears to be coming out on top of, are the artisanal mining dilemma and power shortages in Ghana.

Artisanal mining became a key issue for the company when illegal miners set off explosions on Golden Stars property causing the partial collapse of its Bondaye shaft. While no one was injured in the ensuing rock-fall, the damage stopped underground drilling which the shaft was being used for. That meant a delay for a feasibility study on the Prestea underground project.

While Golden Star did not issue a dollar impact for the collapse, Hite says feasibility is now going forward and should be finished by the middle of this year.

On the positive side, from an operational point of view, the incident triggered the government into taking action on the illegal mining issue. On Oct. 31 of last year government troops cleared artisanals off the land, and they have remained away ever since.

Power issues for Golden Star and for other miners with operations in Ghana arose last year when a severe drought depleted a reserve needed to generate hydroelectric power. While the depletion means that Golden Star has been operating on reduced power since August of last year, Hite says the impact of the reduction has been rendered minimal by making cutbacks in other power demand areas of the facility that dont affect production.

Still, reduced power is not a desirable, and to rectify the problem long term, Golden Star has joined forces with Newmont Mining (NMC-T, NEM-N), AngloGold Ashanti (AU-N, AGG-A) and Goldfields (GFI-N, GOF-L), to build a power plant. The plants US$40 million price tag will be shared equally by the four partners, and will supply 100 mega watts of power, first from diesel and later by burning natural gas.

Additionally, on Feb. 22 the company announced its offering 21 million shares for US$3.60 a share to give the company roughly $72 million after underwriting commissions are deducted.

The news sent Golden Star shares up roughly 6% on the day, or 23 to $4.42 on just over 2.2 million shares traded.

The deal is expected to close on March 1 and will bring Golden Stars number of shares outstanding to 229 million.