Golden Star Is A Sure Short Miner
Feb. 3, 2014 7:57 PM ET | About: GSS, Includes: DUST, GDX, GDXJ, GLD, GLDX, JNUG, NUGT
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
The price of gold is still following an unpredictable pattern as the dumping of the metal continues and the so called support regarding gold prices is nowhere to be seen. Holdings in the SPDR Trust dropped to 805.72 metric tonnes, which is its lowest since January 2009.
"$1,180 an ounce is the major level, so if it breaks below that then it's really just a question of how much further it can drop" said Steven Dooley, the head of research at Forex Capital Trading Pty.
Investors are no longer interested in only retaining the value of their money due to the improving U.S. economy; they also want a piece of this growth. This crave has pulled out most of the investors from the commodity market, leaving the gold prices vulnerable and greatly affecting the gold miners. The future of gold is also not looking bright as the splash damage done by the Fed taper will be felt throughout 2014, as it continues to cut the stimulus.
Jeffrey Currie, the head of commodities research at Goldman Sachs Group Inc. said "Gold is now likely to grind lower throughout 2014". In November 2013, the bank claimed that prices will reach $1,050 by the end of 2014.
Golden Star Resources Ltd. (GSS) is Canadian company engaged in the exploration, production and development of gold. The company has two operating mines situated in Ghana along the Ashanti Gold Belt of West Africa, namely Bogoso/Prestea and Wassa Hwini-Butre and Benso (HBB) mines. In 2012, the total gold production from both mines was 331,278 ounces. As of 31 December 2012, the company has a total of 4.31 million ounces proven and probable reserves. The company also has interests in other gold exploration projects in parts of West Africa and Ghana and manages exploration properties in Brazil and some other parts of South America.
Even though the last quarter proved to be chaotic for the gold industry due to the high volatility of gold prices, Golden Star managed to close the third quarter with a $3.5 million net income. However, the company had a net loss of $117 million YTD. Golden Star's share price declined by almost 79% in 2013, mainly due to fluctuating gold prices and speculations regarding the Fed taper. The company was unable to avoid the industry-wide downfall which created liquidity issues as both income and cash flow went into the negative. The company reported $12.3 million as net cash outflow.
GSS data by YCharts
Golden Star's cost of sales has been increasing due to the high cost environment but its revenues have not reflected the costs. Revenues for the nine months ending 30 September 2013 were $371.8 million, 7% less than last year's revenue; whereas the cost of sales increased to $288.6 million which was 6.8% more than that of 2012. Due to the deteriorating price of gold the company charged an impairment amounting to $196 million. This is the primary reason for the poor bottom-line performance of the company.
The company's all-in cost was $1347/oz. which is higher than the realized value of the gold, i.e. $1329/oz. and the all-in sustaining cost was $1213/oz. for the third quarter. This indicates that even though Golden Star can survive in the short run, it needs to reduce its costs in order to remain profitable in the future. The company has already initiated this by bringing down the all-in cost from $1596/oz. in the second quarter to $1347/oz. However, it still needs to take more cost-reducing steps due to the falling gold prices and if costs are not managed promptly the company might be brought to the verge of a sell-off or merger.
Golden Star's management realizes this and has already taken steps to reduce expenses:
"Mine operating expenses were reduced through re-negotiations of certain supplier contracts, supplier discounts and reducing the number of contractors. Other operating improvements were initiated including transport and delivery efficiencies, and improved purchasing procedures. Maintenance cost savings and fuel cost reductions continue to be achieved through the recent purchase of two new excavators and four new drills. In addition we commenced discussions with the unions to restructure our workforce, which are on-going."
The high mining costs of Golden Star Resources Ltd. are due to a significant amount of waste material being mined along with the ore. The cost of the Wassa mine, at $800/ounce, is almost equivalent to the industry but the Bogoso mine is creating trouble for the company. 575,000 tonnes of ore was extracted from Bogoso along with 5 million tonnes of waste. This has led to an all-in cost of approx. $1500/ounce and with such a high mining cost and the declining gold prices it would be very difficult for Golden Star to continue operating this mine. The company has planned to reduce this waste by further drilling but that won't provide any immediate solution. That being said, the company only has two mines and if it suspends production from one mine in order to survive, the revenue from the remaining mine won't be enough to survive in the harsh market environment.
Dumbest reasoning ever at beginning of article:
"The price of gold is still following an unpredictable pattern as the dumping of the metal continues and the so called support regarding gold prices is nowhere to be seen. Holdings in the SPDR Trust dropped to 805.72 metric tonnes, which is its lowest since January 2009"
Why is GLD's inventory so low? It's been pillaged by the bullion banks to send to East, who is demanding delivery. Right now there are about 86 paper owners for every ounce of physical gold in Comex inventory.