Technical and infrastructure challenges at Great Basin Gold’s (GBG-T, GBG-N) two principal projects hammered its revenues in the second quarter and the company says it faces a near-term liquidity crisis. A strategic review has been launched and president and chief executive Ferdi Dippenaar has resigned, replaced on an interim basis by chief financial officer Lou Van Vuuren.
Revenue shortfalls — the company lost 5¢ per share on revenues of $32.4 million — were largely caused by delays in on-reef ore development and water management problems at its Burnstone mine in South Africa and delays accessing higher grade stopes at its trial mining project at Hollister in Nevada.
On the list of potential strategic alternatives are asset sales, equity and bank financing, a merger or other business combination, royalty sales or metal streams, and recapitalization. Great Basin Gold is also amplifying cost-reduction programs and is trying to restructure its current term loan facilities to improve near-term cash flow. It is also working with lenders to potentially restructure its current term loan facilities to improve its cash flow, and is trying to raise through a combination of asset sales or new equity, a minimum of $60 million to alleviate liquidity concerns.
The good news is that the company believes the issues at its operations in South Africa and Nevada that lead to its poor second-quarter results “are substantially behind it” and forecast combined production for the rest of 2012 to be in the range of 58,000 and 68,000 gold-equivalent ounces. The board has also concluded that no impairment charge to the carrying value of the Burnstone mine ($653 million) or the Hollister trial mining project ($126 million) is warranted at the moment.
Lower-than-plan mining grades at the company’s Hollister property were among the challenges the company faced. During the second quarter, 23,720 tonnes were trial mined at the operation, yielding 14,857 oz. of gold equivalent, down from 20,459 oz. in the first quarter. Management notes that while the tonnage mined during the second quarter was only “slightly below planned levels,” a lower-than-plan mining grade of 0.63 gold equivalent oz. per tonne resulted in lower than planned recoveries.
“The high-grade nature of the Hollister ore body can lead to quarterly grade fluctuations, which are evident when comparing the average grade of 1.35 gold equivalent oz. per tonne from production in Q2 2011 to the average grade of 0.63 gold equivalent oz. per tonne in Q2 2012,” the company outlined in a news release on Aug. 15.
To deal with decreasing grade trends, the company says it will focus on decreasing the stope width and controlling dilution in the third quarter.
During the first half of the year, Hollister — about 80 km from Elko in the northeastern part of the Carlin Trend — also suffered from the lack of available working stopes and a high turnover rate.
At Great Basin Gold’s Burnstone mine in the South Rand area of the Witwatersrand Goldfields in Mpumalanga province, about 80 km southeast of Johannesburg, technical and structural challenges included constrained development and stoping production levels due to the failure of the service-water handling system to provide for increasing mining areas in May and June.
A temporary solution was put in place by early June and production and development levels in July returned to levels reached at the end of last year. But targeted levels for development and stoping for the quarter were not met and the company says this will have a negative impact on production targets for the rest of 2012. Burnstone produced just 6,392 oz. of gold in the second quarter, down from 6,671 oz. in the first quarter, and far below the 17,790 oz. forecast.
Burnstone recorded cash costs of $2,325 per oz. for the quarter, up from $2,182 per oz. in the first quarter, that were impacted by the low head grade of material delivered to the mill. The company says, however, that the low volumes from the delay in ramp up are “not yet considered meaningful relative to post-ramp-up (steady state) production cost estimates.” Management expects steady state production will be achieved in 2014.
Cutting costs at Burnstone will include reducing off-site supervisory and premises costs as well as improvements in labour and water handling — measures the company estimates could result in aggregate savings of $2.5 million per month after a few months. Great Basin Gold estimates production at Burnstone will reach 30,000 oz. of gold this year and between 90,000 oz. and 100,000 oz. of gold next year.
The 100%-owned mine started production in February 2011 and has an estimated lifespan of 26 years. It has proven and probable reserves of 6.4 million oz. of gold, while measured and indicated resources stand at 12.6 million oz. of gold.
The company attributed its lower corporate revenues in the second quarter (down 44% year-on-year) primarily to a decrease in ounces sold from the company’s Nevada operations. During the second quarter of 2011 its Nevada operations sold a record amount of metal due to exceptionally high-grade material and the settlement for some ounces recovered in the first quarter of that year. In addition, higher cash and non-cash costs contributed to a loss from operations of $20 million, compared with a profit of $7 million in the same quarter in 2011. As of June 30, the company had a working capital deficit of about $23 million.
At presstime in Toronto Great Basin Gold was trading at 23.5¢ per share within a 52-week range of 21¢-$2.35. The company has about 552 million shares outstanding.
Repeat of HRG. That manipulative move was fouled by determined investors and so will be GBG dilution to targeted elites.
GBG is a good investment and will result in substantial gains for investors who can wait for a year or so.
Just read HRG (symbol on Toronto Exchange)- how they wanted to hijack the company at under $0.40 and now it is trading at $1.41.