Lake Shore closes $90M financing

Lake Shore Gold (LSG-T) has completed a $90-million public offering to strengthen its balance sheet, which was in “bad shape” even after closing several other financings this year, says Haywood Securities’ analyst Kerry Smith.

Before wrapping up the debenture offering on Sept. 7, the mid-tier gold producer signed a royalty and equity investment transaction with Franco-Nevada (FNV-T, FNV-N), netting US$50 million in March. In mid-June, it inked an agreement with Sprott Resources Lending Partners for a US$70-million financing, consisting of a US$35-million gold loan and a US$35-million standby line of credit. The agreement closed on July 16, 2012, on which date Lake Shore received the gold-linked note.

At the end of July, it had roughly $58 million in cash and an estimated net debt of $36 million.

In mid-August, analyst Smith opined Lake Shore has enough cash to fund its 2012 initiatives and won’t need to draw down the US$35-million standby credit this year. But, he cautioned “the balance sheet is still in poor shape, and any drop in the gold price and/or operational problems that reduce gold production or raise cash costs will be devastating for the company.”

The Timmins, Ont.,-focused miner previously faced operational difficulties and higher costs that hurt its bottom line. As a result it slashed capital spending for the year from $170 million to $175 million. That’s a reduction of $15 million to $20 million. In addition, it pushed back expansion plans at its Bell Creek mill.  

However, the recent upsized debenture offering of $90 million, made through a syndicate of underwriters led by BMO Capital Markets, should help cover any potential deficit in the near term. 

It provides flexibility to Lake Shore’s balance sheet, CIBC’s analyst Cosmos Chiu comments in a Sept. 10 note. He estimates the gold producer has $94 million in cash, including the financing’s proceeds of $86.4 million. The company says the proceeds will go towards repaying the US$50-million three-year loan with UniCredit Bank and to fund general corporate activities.

The notes carry a 6.25% interest rate to 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 standby line of credit 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 Sept. 11 presentation, Lake Shore estimates spending a total of $137 million in the second half of the year, 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 $226.4 million, including the recent financing and the Sprott line of credit.

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

For the year, Lake Shore is guiding production of 85,000 to 100,000 oz. gold at cash costs of US$825 to US$875 per oz. from its two gold mines: Timmins West and Bell Creek. It also aims to expand its 2,000-tonne-per-day centralized mill to 2,500 daily tonnes by year-end and then to 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 and rates it as a “sector performer.” In his investment thesis, he writes the company will have to deliver on its plans to regain the market’s confidence.

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