TD Maintains LSG at buy but cuts target to $3.00TD maintaining a buy on LSG but cutting the target to 3.00.......
Lake Shore Gold Corp.
(LSG-T) C$2.16
Daniel Earle Shey Ylonen, CFA (Associate)
Action Notes July 22, 2011
Equity Research 46 of 49
Weak Results in Q2 with Long-Term Implications
Event
Pre-market Tuesday, Lake Shore reported Q2/11 gold production of 17,421
oz, which fell significantly short of our forecast of 21,183 oz and Q1/11
production of 22,328 oz. The drop was reportedly caused by development and
backfill delays that resulted in a change in mining sequence, with less tonnes
being mined at a lower grade and the supplementary processing of low-grade
stockpiles. The company also reported that some of the mineralized zones at
its Timmins Mine are turning out to be broader and lower grade than
previously understood, and cut its production guidance for 2011 to a range of
85,000-100,000 oz from its prior estimate of 125,000 oz.
Impact – NEGATIVE
Production shortfalls, delays, cost overruns and so on are not unusual when a
mine is ramping up toward design levels of production, as Lake Shore’s
Timmins operations are. However, the disclosure that mined zones may be
broader and lower grade than reflected in the 2007 reserve estimate (which
incorporated an assumed gold price of US$600/oz) suggests to us that grades
delivered to the mill in the current gold price environment are likely to remain
well below reserve levels.
The somewhat offsetting positives are that 1) we expect a revised reserve to
include more tonnes from upgrading inferred resources and the inclusion of
blocks that fell below the 3 g/t cut-off used previously and 2) the company
may be able to benefit from lower unit mining costs that typically come with
mining broader zones, although we do not give it the credit for this possibility.
We now model a mineable inventory of 1.0mm oz at a grade of 5.5 g/t, which
compares with the reserve estimate of 0.8mm oz grading 7.6 g/t.
The lower grades we now model for the Timmins Mine result in lower levels
of production and higher cash costs in our model (see our revised production
forecasts in Exhibit 1), and our NAV5% estimate falls to $2.82/share from
$3.45 at LT US$1000/oz gold. We cut our target multiple to 1.1x (from 1.4x)
to reflect our view that confidence in the company and its operations will be
very low for the foreseeable future, and our target falls to $3.00/share from
$5.00. Given the dramatic pullback in the stock, which leaves it trading at the
bottom of the range of valuations for its producing peers in our coverage
universe, we maintain our BUY recommendation.
Gold & Precious Minerals
Recommendation: BUY
Unchanged
Risk: HIGH
12-Month Target Price: C$3.00?
Prior: C$5.00
12-Month Total Return: 38.9%
Market Data (C$)
Current Price $2.16
52-Wk Range $2.16-$4.42
Mkt Cap (f.d.)($mm) $877.0
Dividend per Share
.00
Dividend Yield 0.0%
Avg. Daily Trading Vol. (3mths) 1,150,811
Financial Data (C$)
Fiscal Y-E December
Shares O/S (f.d.)(mm) 406.0
Float Shares (mm) 379.0
Net Debt/Tot Cap 0.0%
Cash ($mm) $60.0
NAVPS (current)(f.d.) $2.82
Resources (mm oz) 3.0
Estimates (C$)
Year 2009A 2010A 2011E 2012E
EPS (f.d.) 0.01 (0.02) 0.01 0.13
EPS (f.d.)(old) -- -- 0.11 0.25
CFPS (f.d.) (0.03) (0.02) 0.06 0.21
CFPS (f.d.)(old) -- -- 0.19 0.36
EPS (f.d.) Quarterly Estimates (C$)
Year 2009A 2010A 2011E 2012E
Q1 (0.01) (0.01) 0.01 --
Q2 (0.01) (0.01) (0.01) --
Q3 (0.01) (0.01) 0.00 --
Q4 0.04 0.01 0.01 --
Valuations
Year 2009A 2010A 2011E 2012E
P/E (f.d.) 216.0x nmf 216.0x 16.6x
P/CFPS (f.d.) nmf nmf 36.0x 10.3x
Supplemental Data
Year 2009A 2010A 2011E 2012E
Gold Prd (koz) 7.7 43 90 135
Op Cst (US$oz) n/m n/m 684 595
Gold (US$/oz) 973 1,227 1400 1400
F/X (US$/C$) 0.88 0.97 1.03 1.00
All figures in C$, unless otherwise specified.
Details
Q2/11 Operating Results Were Bad
• Lake Shore reported Q2/11 gold production of 17,421 oz versus our forecast of 21,183 oz and Q1/11
production of 22,328 oz. The drop in output reflected both development and backfill delays that resulted
in a change in mining sequence favoring lower-grade ounces and the milling of low-grade stockpiles
from the Bell Creek Mine.
• Ore processed in the quarter totaled 162,974 tonnes at a grade of 3.55 g/t for total recovered gold of
17,615 oz. Average mill throughput of 1,790 tpd was in line with our forecasts and trended higher
through the quarter reaching an average of 1,950 tpd in June, consistent with the lower-end of the
company’s targeted range (2,000-2,100 tpd) for Q2/11.
• The average grade was significantly below our estimate of 4.49 g/t and the targeted grade in the
company’s internal mining plan (~5.9 g/t) for this quarter. Lake Shore attributed the unexpected decrease
to mine sequencing issues that shifted planned mining in the high-grade UM1 Zone into the second-half
of the year.
• Operating costs were not disclosed but are expected to be much higher than Q1/11 (US$586/oz) based on
the lower grades and production levels achieved in the quarter.
FY11 Production Guidance Cut to 85,000-100,000 oz (from 125,000 oz)
• While mining and processing rates are expected to improve in H2/11, the company now anticipates less
mining in the UM1 zone (deferring the planned mining of ~130,000 tonnes of ore to early-2012) and
lower grades in other zones planned for 2011, which necessitated the cut to FY11 guidance.
• Management suggested that the previous guidance did not provide sufficient allowance for grade
distribution and work processes. The revised forecast, according to the company, should provide
additional time to gain a better understanding of stope dimensions in broader parts of the Timmins ore
body and improve grade and ground control.
Exhibit 1. Our Revised Estimates
2011E 2012E 2013E 2011E 2012E 2013E
New 90 135 215 $684 $595 $543
Old 123 176 277 $521 $444 $431
2011E 2012E 2013E 2011E 2012E 2013E NAV($/sh)
New
.01
.13
.16
.06
.21
.24 $2.82
Old
.11
.25
.30
.19
.36
.39 $3.45
Cash Costs (US$/oz)
CFPS ($/sh)
Gold Production (koz)
EPS ($/sh)
Source: TD Newcrest estimates.
Lowered Guidance Suggests Possible Drawdown on US$50mm Credit Facility
• As of Q2/11, Lake Shore holds an estimated $60mm in its treasury and maintains access to an undrawn
US$50mm credit facility. We estimate the company has sufficient liquidity to fund its FY11 planned
expenditures, completing the year with a projected cash balance of $24mm. However, we project the
company will drawdown on the credit facility to help fund estimated capital expenditures of $153mm in
FY12. Despite current operational challenges, we believe the company has the ability to expand the
facility to meet additional capital spending requirements.
Outlook
We expect the following events over our 12-month target price horizon:
• Results from drilling at Timmins Mine, Thunder Creek, Bell Creek, and 144 Properties – Ongoing
• Construction Decision (Bell Creek Mill Expansion) – Imminent
• Release of Q2/11 Financial Results – August 9
• Thunder Creek Initial Resource Estimate – Q4/11
Valuation
We calculate that Lake Shore is currently trading at 0.76x our NAV5%. This is a significant discount to its
peer group of gold companies in our coverage universe, which currently trade at an average of 1.25x NAV5%.
What we view as the company’s closest peer, San Gold, trades at an estimated 1.23x NAV5%.
Exhibit 2. P/NAV Peer Comparison – Bottom of the Pack
0.76
0.82
0.90
0.99
1.23 1.26 1.29
1.36
1.42
1.59
1.66 1.70
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
LSG IMZ JAG NGX SGR IMG CG AGI MFL GAM NGD OSK
Source: TD Newcrest estimates.
Justification of Target Price
We generate our target price from the application of a 1.1x multiple (1.4x prior) to our corporate NAV5%,
calculated using a long-term gold price of US$1000/oz and U.S./Canadian dollar exchange rate of
.90. We
have reduced our target multiple to reflect our view that confidence in the company and its operations will be
very low for the foreseeable future.
Key Risks to Target Price
Gold price; foreign exchange rates; forecast risk relating to resources, their size, grade, amenability to mining
and potential for conversion to reserves, ore recovery factors, as well as the operating parameters for projects;
capital and operating costs; the costs of consumables, labor, and other inputs; the cost and availability of
financing; changes to the governing fiscal and legislative regimes; the timing of key developments; market
conditions; permitting risks; environmental risks and risks related to indigenous people, opposition to mining
and security issues; as well as staffing and key personnel retention risks.
Investment Conclusion
We are cutting our 12-month target price to $3.00/share (from $5.00) and maintaining our BUY
recommendation following the release of Q2/11 operational results.