LAKE SHORE GOLD CORP 6.25 PCT DEBS T.LSG.DB

RE: TD Maintains LSG at buy but cuts target to $3.

[knowsnothing613]

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.


What will happen to the model when they have to lower the head grade to <4g/t for the reserve?

	Three Months Ended June 30, 2011	Six Months Ended June 30, 2011
Gold Sales    Timmins Mine Bell Creek Thunder Creek Total Gold Sales	8,778 5,797 4,413 --------- 18,988	35,371 13,158 4,413 --------- 52,942
Gold Poured	17,421	43,321
Gold Recovered    Timmins Mine Bell Creek Thunder Creek Total Gold Recovered	9,627 5,666 2,323 --------- 17,615	20,578 14,301 5,064 --------- 39,942
Grade    Timmins Mine Bell Creek Thunder creek Average Grade	3.36 3.60 3.82 -------- 3.55	3.92 4.72 3.78 -------- 4.16
Mill Throughput	162,974	311,358
Tonnes Per Day	1,790	1,720

The head grade has been getting worse over the last 6 months. 

I'm curious to see what the operating costs will be.  I have a suspicion it will be $800-1000/oz.  And if that's the case, we may go under $2.00.