Zeev's Turnips Patch-No Politics (ZEEV)

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*** Gold related post (GSS) ***


Beaten Down Golden Star Tries to Reclaim Its Footing

By Ben Abelson
25 Apr 2005 at 08:15 AM EDT

NEW YORK (ResourceInvestor.com) -- Sixteen months ago, Colorado-based Golden Star Resources [AMEX:GSS/TSX:GSC] was the posterchild of upstart success for the junior gold industry.

In December 2003, the company’s U.S. shares hit a multi-year high of $8.64, up more than 300% in just six months. Amidst what from all appearances was the start of a fantastic bull-run in precious metals, Golden Star had emerged from West African to become a beacon of intermediate gold producer potential – with an experienced management team and a solid plan to grow production to the 400,000 ounce range by 2007.

A year-and-a half later, after an operationally disastrous 2004, a failed hostile acquisition, and declining stock prices industry wide, Golden Star’s shares are languishing just above a recent multi-year low of $2.52. Analysts are negative to neutral on the company, technicians decry the stock’s apparently bottomless chart, and even normally upbeat company executives are cautiously focused on a coming “operational turnaround.”

But with all of the bearishness factored into Golden Star’s shares, the question for typically contrarian-minded precious metals investors then becomes – is a 2005 comeback in the works for the company and its shares?

Thanks to the startup of the company’s Ghanian Wassa mine, group production for the coming year is set to rise to the 250,000 ounce range, while costs should remain under control in the $250 range. Yet while the company’s long-awaited growth has begun to be realized, serious questions remain on when – and if - the true potential of Golden Star will be achieved.

Foremost on Golden Star’s agenda is a successful year of operations at the recently opened Wassa. Thanks to a series of exasperating construction delays from the mine’s contractor, production was delayed from the fourth quarter of last year until this March. While the mine is set to churn out some 100,000-plus ounces for 2005, cash costs will remain fairly high – in the $280 to $300 per ounce range. The company is optimistic that costs will drop by $80 per ounce in 2006 to average following the mine’s full ramp-up and a connection to the national electric grid.

Golden Star must also ensure an increase in cost-effective production at its Bogoso/Prestea mine. Thanks to a heavy rainy season, “scheduling issues,” and a lower gold recovery rate, production slumped by nearly 30,000 ounces to 147,000 ounces, and operating cash costs climbed by over $70 an ounce to $250. While production is expected to be more or less flat in 2005, the company has placed high hopes on its plan implement a relatively new oxidation process to double production by 2007 – and in the process become cash-flow positive. But for a company with more than its share of operational missteps mining an economically cyclical product, a lot can happen in two years.

Other intangibles in Golden Star’s future are its continued exploration in historically gold-rich West Africa and select regions of South America, and the company’s acquisition of a 9.5% stake in Australia’s Moto Goldmines, currently exploring for gold in the volatile Democratic Republic of Congo.

Golden Star’s management has gone to great lengths to reassure existing shareholders while attempting to rekindle investor interest. CEO Peter Bradford spent the bulk of the introductory letter to the company’s recent annual report apologizing to shareholders and addressing specific operational issues. And, the company has placated investors by swearing off frivolous takeover attempts such as 2004’s long-shot bid for West African rival IAMGold – which wound up costing Golden Star $4.1 million in related expenses and considerably more in evaporated market capitalisation.

In addition, Bradford has won fans by swearing off shareholder dilution in the near term. Golden Star is expected to be able to finance the bulk of its 2005 capital costs through operational cash flow and a recent $50 million convertible bond issuance. Most of this money is expected to finance Bogoso’s expansion.

But for all of the company’s hopes of an operational turnaround – Golden Star’s success, like those of every unhedged gold miner, will rest on the shoulders of gold bullion itself. For better or worse, Golden Star is among the miners most leveraged to the price of the gold, with recent company estimates showing a $10 change in the price of gold affecting pre-tax earnings by some $2 million. It’s a sizeable amount when one considers that Golden Star only managed $2.6 million in net income last year.

Resource Investor attempted to contact both Bradford and CFO Allan Marter for this story. As of press time, neither was able to respond.

http://www.resourceinvestor.com/pebble.asp?relid=9401