Golden Star shines on Global Gold Index (March 05, 2007)

Stronger gold prices this year are lifting many a gold miner, but Golden Star Resources (GSC-T, GSS-X) has been outpacing 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, CLG-X) in terms of percentage gains on the TSX’s Global Gold Index.

Catherine Gignac, a mining analyst with Wellington West Capital, cites three key factors to Golden Star’s surge: the imminent completion of a sulphide expansion that will take production from higher grade ore; coming to grips with what had been rampant illegal mining in and around the company’s premises; and a more stable power supply.

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

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

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. 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.

“It’s 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 for Ghana. Owiredu is a mining engineer with 20 years’ experience who will be taking a hands-on approach with Bogoso’s new sulphide and bio-oxidation circuit.

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

With the expansion, the company expects production to rise to 280,000 oz. gold this year at a cash cost of US$330 per oz.

Capital costs for the expansion are slated to ring in at US$125 million.

The need for the new plant arose when oxide ore at the site was exhausted in 2004; the plant was not designed to handle the refractory ores that remained, resulting in recovery rates plummeting to 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. gold in reserves and another 41 million tonnes grading 2.4 grams gold in the resource category. All of that ore is within trucking distance of its processing plants.

Artisanal mining became a key issue when illegal miners set off explosions on Golden Star’s property, causing the partial collapse of its Bondaye shaft. While no one was injured in the ensuing rock-fall, the damage stopped underground drilling in the shaft and delayed a feasibility study on the Prestea underground project.

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

On the positive side, from an operational point of view, the incident prompted the government to take action on illegal mining: on Oct. 31 of last year, government troops cleared artisanals off the land, and they have stayed away ever since.

Power issues for Golden Star and other miners in Ghana arose last year when a severe drought depleted a water reservoir needed to generate hydroelectric power. While the depletion means that Golden Star has been operating on reduced power since last August, Hite says the impact has been minimized by making power-demand cutbacks in other areas of the facility that don’t affect production.

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

Additionally, in late February, the company announced it’s offering 21 million shares for US$3.60 per share, giving the company roughly US$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, expected to close on March 1, would bring Golden Star’s number of outstanding shares to 229 million.