Edited Transcript of GSC.TO earnings conference call or presentation 19-Feb-20 3:00pm GMT

Then on sustainability, which is mentioned on Slide 4, that for us, as with many of our peers in the industry, is of an increasing focus. We’ve made the head of sustainability position, senior position on the executive committee. And we’ve got a strong starting base, a good reputation in Ghana, but it will continue to be an increasing area of focus for the business as we go forward, and one which is going to help the sustainability of the business itself to deliver the long-term value, particularly at Wassa.

Moving on to Slide 5 on our 2019 performance versus the guidance that we revised shortly after I joined middle of the year. Everyone’s seen the production performance numbers, which were out last month. As you can see, they are broadly — costs are in roughly the middle of most ranges. The 1 exception where we put in some additional investment over the second half of the year was on our group capital spend, and predominantly, that additional spend was at Wassa where as I said, we identified the need for some catch-up spend on both the development rates and definition drilling to ensure — so we exited the year in a position where we can continue to ramp up the volumes and have much better visibility and higher confidence levels in what we’re guiding going forward. And that’s the position we start 2020 in. We also brought some of that infrastructure spend forward in terms of the paste plants and the electrical upgrade, which came into late in Q4 rather than 2020, just to make sure with some of those long lead items, we got ahead of ourselves. So really about positioning ourselves to extract the value from Wassa, we’ve pushed out capital a little bit at the end of 2019.

In terms of 2020, on Slide 6, I think for us the objectives there to summarize at Wassa, obviously, to continue with the volume improvements that we’ve seen at that site to make sure the infrastructure’s in place, and critically increase the understanding of the orebody. So we can continue to refine the longer-term plans, but also have a higher degree of confidence in those plants.

At Prestea, we’re looking to improve the underground delivery as we go through the year, given we’ll see a significantly lower amount of open pit ounces in 2020 versus ’19. So that will mean that we will need to ramp up the tonnes from underground and better quality tonnes in terms of higher grade, less dilution. The second level on 17 level is being set up for long-haul open stoping. We should, in the next couple of months, start to see some of the early development ore and then stoping tonnes later in the year, but that will give us greater flexibility at the asset and help us to eliminate the cash burn that we’ve seen as we go through 2020 into 2021.

Exploration, the focus at Wassa really is trying to identify additional tonnes that are nearer to surface so that we can find more lateral material. We’re doing some of the footwall drilling that Peter and the team have just kicked off, which will help us to push volumes more quickly if we can identify additional structures.

At Prestea, there will be later in the year some extensional drilling just to push out from 17 level to the north. And then regionally, we’ll start to test some of those earlier targets for additional material around Wassa.

At a corporate level, all of that sets us up longer term to be able to deliver higher levels of free cash flow out of the business to grow the production profile both with step back up at Prestea and increasing output from Wassa, and then to improve the structure of the business with the changes we’ve made and the confidence in delivery of the 2 assets and returns from them.

So with that, I’ll hand over to Graham, who’s going to go through both Wassa and Prestea in a little bit more detail. Graham?

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Graham Crew, Golden Star Resources Ltd. – Executive VP & COO [4]

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Thanks, Andrew. So just moving on to Slide 8. Positive quarter for Wassa and year, but positive quarter for Wassa, as Andrew mentioned. Step up from the same quarter in 2018. But importantly, I think, improved grade quarter-on-quarter. So people would remember that we had our challenges in quarter 2 and quarter 3.

Fourth quarter, we were back into the central part of the orebody in 595 and 620 Levels. And so moving out of those lower-grade areas that we’d experienced. So that certainly helped the mine. The production rate continued, averaged over 4,000 tonnes a day. So again, that’s a significant step-up, 2018 to 2019. And the team on site showed that they can sustain those sort of production rates. The plant — as we know, the plant has got plenty of capacity, so any incremental tonnes that we can bring out of Wassa can be processed.

So yes, as I said, good grade improvements over the quarter, slight increase in production year-on-year, but an important move forward for Wassa.

Moving on to Slide 9. And just looking at how that comes out in the cost. Andrew touched on the unit cost. The unit cost continued to be very impressive at Wassa and the cash operating cost per ounce as a result, very much the same between quarter comparisons Q4 2018 to 2019.

One area that we also touched on was just on the capital expenditure, increased from 2018 to 2019, largely due to the paste plant electrical and pump station upgrades, which were all important long-term investments for Wassa. The paste plant in particular will help us unlock and improve that mining recovery over the long term, which is supported by the electrical upgrade.

In terms of the full year 2019, the cost per ounce came down a little bit and the cash operating costs in line with the unit cost was very, very strong, $630 an ounce. All-in sustaining cost increased slightly over 2018, but when you take into account the capital investment, a very strong performance from the team at Wassa.

Moving on to Prestea on Slide 12. Obviously, we’ve still got our challenges at Prestea. The 11,300 ounces produced in Q4 was in line with Q4 2018, but with increased grade from underground. So we did start to see a little bit of improvement from some of the initiatives that we’ve taken. Couple of important ones, reducing the Alimak size, reducing the height where we can by reducing the hydraulic radius or the span of the stopes and also separating with some development. We’ve now got in place where we’re able to separate some of the waste from the ore instead of diluting the ore stream through to the plant.

Few problems in the quarter, late in the quarter, I guess, it just demonstrates the challenges with the configuration of Prestea as we currently have it, sort of down to 1 stope. That stope locks up and affects the production for the quarter. So this shows the importance of the work that we’re doing on 17 level to bring in another mining method at another area that we can mine from.

FY ’19, Andrew touched on the decreasing open pit. We are still looking at oxide open pit opportunities around Prestea/Bogoso. They’re smaller scale, but we’re still looking at those to supplement production where we can a little bit, but it significantly reduced in the FY ’20 plan. And as is mentioned there on the slide, the underground production decreased year-on-year, mainly due to the geotechnical issues and the issues we’ve had with Alimak stoping. So again, just highlighting the importance of improvement work that we’re doing.

Moving on to Slide 13. Fairly well — those operating results fairly well reflected in the costs. Yes, we’re still talking about a fairly high cost operation and the full year 2019 all-in sustaining cost at $1,937, up from $1,558 in 2018. So still work to be done at Prestea on the costs.

Slide 14. So just focusing on what we are doing to improve the operations at Prestea. Andrew touched on the independent review that CSA undertook for us midyear. We turned that into an overall project and a series of sub projects that we’re doing to increase the flexibility of the mine plan. So a couple of things that I mentioned, reducing the Alimak stope height from 160 meters down to something more manageable, below sort of 120 meters. That has a few benefits, makes the Alimak cycle time faster, not as much trouble time involved and reduces the hydraulic radius of the stopes, as I mentioned.

So we saw some signs of improvement with the South 12 stope and how that performed over Q4. So that gives us some confidence that the changes that we’re making to the Alimak areas will definitely add to the flexibility of the mine plan. 17 level, that’s progressing well. We’re into the development. We’ve set up the ventilation and started on the main decline from 17 to 21 level. Again, as Andrew touched on, we’ll start bringing in some development ore as we open up the levels. And importantly, second half of 2020, we’ll be into some long-haul open stoping over a couple of levels, which will give us some flexibility. So then, we’ll have 3 or 4 mine plan areas open at a time where we can stope from rather than be down to 1. The other significant improvement over the quarter is having up the north block on 24 level Alimak. We’ve got that development set up now. So we’re now developing stopes north and south on 24 level. So quite a bit of work going on at Prestea to improve the sustainability of that operation, mainly through reducing the mining execution risk in — geotechnically, reducing dilution through that and improving the stope cycle time. So it’s a lot of work going on, but the team is heavily involved, the site team, driving these improvements. And we’re starting to see some of the benefits flow through on a week-to-week basis.

With that, I’ll hand over to André to talk about the financial results.

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Pieter André van Niekerk, Golden Star Resources Ltd. – Executive Officer [5]

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Thank you, Graham. Good morning, everyone. I’m on Slide 16. Gold revenues for Q4 totaled approximately $66 million from gold sales of 53,400 ounces. Included in the revenue for the quarter and the full year is a $9.3 million noncash cumulative adjustment to revenue relating to the accounting treatment of the extension of reserves and resources under IFRS 15. Now that’s a mouthful, and for further details on that, please refer to the MD&A for an explanation on that. But excluding this negative $9.3 million adjustment, revenue for the quarter totaled 50 — $75 million for the quarter. This represents a 31% increase compared to the fourth quarter of 2018. And this is as a result of a 19% increase in the average realized gold price and a 10% increase in gold sales. The consolidated mine operating margin improved dramatically for both the quarter and the full year of 2019.

Q4 2019 swung from a mine operating margin loss of $8.9 million (sic) [$8.1 million] to a mine operating margin in — of $8.4 million. For the year, the mine operating margin improved $15 million to 40 — from $15 million to $49 million for 2019. Both operations saw significant improvement in margin. However, in 2019, Prestea still incurred a mine operating loss, which is offset by the significant contribution at Wassa.

The loss before tax increased to $15 million for 2019, that’s up from $12 million in 2018. The $57 million impairment of the Prestea underground property was the primary reason for the increase in the loss before tax.

I’ll discuss the impairment further in the following slides. At Wassa, we saw a 56% increase in income before tax to approximately $68 million. Corporate and other expenses were $9 million higher than in 2018, mainly due to relocation and severance costs related to the relocation of the company’s headquarters to the U.K.

Income tax increased to $27 million, up from $12 million in 2018 due to Wassa now generating taxable income on a consistent basis. In total, net loss attributable to Golden Star shareholders was $67 million or $0.62 per share compared to a net loss of $18 million or $0.21 per share last year.

On an adjusted basis, the EPS improved to $0.16 per share in 2019, up from a loss of $0.02 per share in 2018. The improvement in the adjusted EPS is due to the improved mine operating margin at both of our operations in 2019.

Now moving on to Slide 17. Looking at the impairment in more detail. During the fourth quarter, management, as part of the budgeting process, reviewed the expected cash flows from Prestea based on both the internal analysis and the results of the CSA report. The fair value for the purpose of the impairment test was done using the value in use model through which the value of Prestea was determined by a discounted cash flow analysis of the indicative life-of-mine model. The life-of-mine model was developed for impairment testing purposes and its management’s best, but conservative estimate of the recoverable value of Prestea’s assets.

The impairment has concluded that Prestea’s value is lower than its previous carrying value, resulting in an impairment charge of $57 million. Prestea’s asset value is now balanced by the liabilities and working capital for a net carrying value of 0.

Moving on to Slide 18. Looking at the cash flow waterfall chart for the year. The Wassa operations contributed approximately $94 million during 2019, while Prestea used $15 million.

G&A, excluding share-based compensation, was $16 million, and the company also made $7 million of interest payments during the year. Working capital used $14 million, consisting primarily of a $5 million investment in inventories, an increase of $3 million in accounts receivable, and a decrease in liabilities of $6.4 million related to the settlement of the PSU liability.

As a result, the net cash flow provided by operations totaled $23 million. During the year, we spent $73 million on capital, of which $60 million was incurred at our Wassa operation. Some of the major items include $11 million on capitalized development costs, $8.7 million on mobile equipment, $8.5 million on other underground development expenditures like the electrical and ventilation upgrade. And we also spent $7 million on the construction of the paste fill plant in 2019, and then finally we spent $60.5 million on exploration at Wassa.

At Prestea, we incurred total capital of $13 million, of which $10 million was incurred on the underground development.

During the fourth quarter, we closed the $60 million credit facility with Macquarie and repaid the remaining balance of the Ecobank loans and settled the outstanding balance of the vendor agreement. As a result, net cash provided by financing activities totaled $1.4 million, which resulted in Golden Star ending with a year-end cash balance of approximately $54 million.

I will now hand it over to Peter Spora to tell us more about the exploration activities.

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Peter Spora, Golden Star Resources Ltd. – EVP of Growth & Exploration [6]

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Thank you, André. Good afternoon, good morning, everyone. Full year results for exploration. 2019 saw a $20.5 million spent on exploration, of which $17.3 million of it was capitalized and the majority of that — the spend was focused on Wassa, on the Wassa extensions, satellite opportunities of Wassa and other opportunities around the Wassa exploration properties. Additional exploration drilling was spent at Prestea focused on, as Graham said earlier, looking at infill drilling around our Alimak stopes and in the — planning to focus on the 17 level.

Flipping back into Wassa. The drilling there was 62,000 meters of surface drilling. It was focused on infill and step-out on the Wassa extensions to the south of the existing and current mining area and area of focus. That drilling has shown that the system is — now extends over a 2-kilometer strike length. That’s shown in the slide on Slide 20. It extends also to depth of 1.3 kilometers. And that extension to 2 kilometers are shown by the last section 18500 on the image in the presentation, which whole BSDD19-400 intersected 19 meters at 5.5 grams on the southern-most drill fence.

Infill drilling undertaken during the year has demonstrated the continuity of the mineralized envelopes and grades of the main B Shoot mineralization that we’ve been following down plunge to the south. The majority of the drilling in 2019 was focused in a 1 kilometer window between sections 19500 and 18500. The main difference that we’ve seen with the deeper drilling has been that the zones somewhat more discrete, but they still range in thickness anywhere between 15 to 70 meters in true thickness, when we look at them.

The geological interpretation for this area is evolving now for the southern area, as we’ve done infill drilling from — closing it from 200-meter spaced drilling into 50- and 100-meter spaced drill sections in this area. We’re currently in the process of doing a resource update on the total long-range plan for Wassa, and we expect to release that prior to the end of March this year.

Looking at the drill results and the results from the work to date, we do not expect to see a major change in the resource based on infill drilling. It’s predominantly confirmed what we had seen in broader-spaced drilling from 2018. We do expect to see overall multiple zones of mineralization. And at the same time, we have identified what looks to be some footwall zones to the main B Shoot, which we will be testing, as Andrew said, throughout 2020.

So in 2020, our focus will shift from surface drilling, which we’ve now completed, and we don’t intend to continue further surface drilling on the southern extensions in the short to medium term. Instead, we’ll be focused in these areas, drilling from underground as the mining and development extends to the south.

At the same time, we’ll be targeting the footwall zone to underground drill platforms this year. We’ve currently started the drill program in Q1, targeting 3 drill fences from underground, 200-meter space centers targeting 500 meters into the footwall, looking for repeat of the B-Shoot zone.

The repetitions we’re looking at, we’ve identified in the deeper drilling to the south in the footwall zone, and we’re following and targeting those up plunge to where we expect them today like where there were some previously mined open pits. So that’s the main target for the 2020 drilling.

Now if we change over to Slide 21. On terms of Wassa, we’ve also started to look more regionally at the opportunities around Wassa. The inset box on the left-hand side of Slide 20 shows the geochemical footprint of the Wassa system beside the Wassa main label. To date, we’ve tested about 2 kilometers of that soil anomaly, which extends over 6 kilometers and there’s a general paucity of drilling as we continue to the south, which we’ll be identifying targets from as we go forward. And likewise, the SAK & Ballyebo projects, which looks like a parallel trend, we’ll be also working those targets up for future drilling.

If we look at the broader land package, you can see on the geological mapping in the center of the slide, the Wassa mining license, which sits in the upper right-hand corner is connected to our other regional exploration targets by an 85-kilometer haul road, which has been used in the past for hauling open pit ore from Father Brown to the bottom in the — sorry, to the south, 85 kilometers away to the Benso and Subriso pits, which sit about 35 to 40 kilometers away from Wassa. There’s — the work that we did in Q4 of 2019 identified at least 25 targets for follow-up work on this land package based on soil geochem, auger and RAB core drilling results from historical work, which have not been followed up since 2012, 2014.

So the plan in 2020 is to test the specifics of these targets. One such target is the Manso North target, which is highlighted on the map there. It’s a 5-kilometer long soil anomaly, greater than 100 parts per billion up to 2.5 grams per tonne gold in auger sampling and with rock chips up to 10 grams per tonne, which was identified in 2006, which hasn’t had any further follow-up work. These are the sorts of targets we expect to come out of this land package as we do more systematic exploration and targeting.

The budget for 2020 is $6.2 million, of which $5 million is going to be spent on Wassa and Wassa brownfield exploration target and $1.2 million on the Prestea northern extensions and exploration targets. And that’s it for me.

So at this point, I’ll hand over now back to Andrew to do the wrap-up.

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Andrew Wray, Golden Star Resources Ltd. – President, CEO & Director [7]

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Thank you very much, Peter. So just finishing on Slide 22. As you can see there, we’re talking about a new focus and discipline. And with that, we mean putting in place the proper structure, systems, processes in the business so that we can define higher confidence level, plans for our assets. And then it’s the discipline around mining those plans to deliver value from them. That way we’ll unlock the potential in the assets. And we see significant potential in our asset base. And then ultimately, that gives us the platform from which we can identify growth opportunities for this business.

So with that, I’ll hand back to the operator, and we’ll take Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Heiko Ihle from H.C. Wainwright.

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Marcus Walter Giannini, H.C. Wainwright & Co, LLC, Research Division – Associate [2]

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This is Marcus Giannini calling in for Heiko. With the 2019 CapEx about $20 million above guidance, in the release it stated that this was an acceleration of spend, but then it also has additional exploration expenditure at Wassa, focused on infill drilling and some expansionary step-out drilling of the southern extension of the Wassa orebody. Can you break down how much of this will actually come off the 2020 CapEx and also potential items that may make your figure change in either direction, especially given that your release states that the 2020 CapEx budget remains at elevated levels to fund the introduction of a new mining level and method at Prestea?

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Andrew Wray, Golden Star Resources Ltd. – President, CEO & Director [3]

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Marcus, it’s Andrew. So I think you said the CapEx is $20 million, it’s $12 million over guidance, but it was over guidance. In terms of impact on 2020, and the 2020 guidance is unchanged, so those numbers don’t shift. Really, the bulk of what we did was both to catch up in terms of — I said that definition and development work at Wassa, we did do a little bit of extra work there in terms of getting a better understanding as we’re pulling together the long-term plans with some of that infill drilling and moving some of the material into higher confidence levels. But at the same time, with the paste plant, for example, which is a big project, a little bit of that spend fell in the back end of 2019 versus 2020. The overall spend on the project doesn’t shift. We just wanted to try and make sure that we are ahead of the schedule as we can be. Particularly relevant now giving potential delays to some of the elements of that project that are coming out of China in terms of logistics. Likewise, on the electrical upgrade, just trying to make sure that’s in place sooner rather than later, so we can take up the extended volume.

So that was really — as I joined in the middle of the year and identified certainly that we were behind in terms of some of those elements at Wassa, which it was pretty clear had the potential to cost us, which it did in Q2 and Q3. So we made sure we were caught up. Remember as well that the volumes at Wassa in 2019 was significantly ahead of plan for the full year. So we were 10% to 15% ahead of where we plan to be, which meant, as a result, mathematically, you’ve got to do more definition drilling. You’ve got to do more development. So that’s a chunk of it. And setting ourselves up now for 2020, where, again, we’re pushing volumes further. So that’s really what’s behind it. The 2020 capital guidance, as you say, versus where we’d expect longer term to normalize is a little bit elevated. As you pointed out, we’re bringing in a new level at Prestea. So clearly, there’s all the equipment spend that needs to go in place as well as the development work that’s going on there. And at Wassa, as I mentioned, there’s a lot of infrastructure spend, which sets the mine up for the longer term. So CapEx numbers will come down after 2020, but that’s really what’s going on in 2019 and ’20. So did that answer your question, Marcus?

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Marcus Walter Giannini, H.C. Wainwright & Co, LLC, Research Division – Associate [4]

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Yes. No, that was great. And I just had 1 more question. You’re expecting favorable all-in sustaining cost for Wassa of $930 to $990, though, even at the low end of this, it’s a bit higher than the $922 you reported for 2019. Can you just go through the items to which you’re attributing this cost creep and how much these individual items each impact the all-in sustaining?

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Andrew Wray, Golden Star Resources Ltd. – President, CEO & Director [5]

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Remember that number as well does include the G&A allocation to Wassa. So just in terms of looking at what the operating level is, we do that on a proportionate basis per ounces produced. But versus 2019, labor costs, probably a big element, if not the single biggest element in that in the sense that we’ll see labor inflation in real terms of 4% to 5% for the year. We can take you through the ins and outs because there will be lots of ins and outs. But if you stripped out that labor element, and remembering, labor is 30% to 40% of costs on an operating basis. So a 5% increase, then 2% increase in the overall cost base. And that’s pretty much what we’re talking about. So, let’s say, Michael will follow up with you to take you through all of the ins and outs of that. But I think that probably is the main one. We put a little bit in the paste plant coming in, in Q4, it’s $6 a tonne, but it’s really only Q4. So it’s not huge for the full year. But I think those are probably where you’ll see the delta.

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Operator [6]

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(Operator Instructions) There are no further questions. I will now turn the call back to Andrew Wray for closing remarks.

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Andrew Wray, Golden Star Resources Ltd. – President, CEO & Director [7]

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Thank you very much. Everybody knows where we are, and I think you’ve got Michael’s contact details. So as you digest the results and the release, please let us know if there’s anything further. But thank you very much, everybody, for participating.

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Operator [8]

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This concludes today’s conference call. Thank you for your participation. You may now disconnect.