Cash Cost Reconciliation While scanning the boards, I came across Lachlan Star and decided to take a closer look since it currently produces gold and has expansion potential given the updated resource announcement. As I sifted through the most recent financial statements, I noticed that management had been reporting cash costs in the $700-900+/oz range but the cash flows from operations were barely positive. With gold at $1650+, I thought it was very odd that cash inflows were minimal. To make a long story short, I found out that the company is not clearly identifying total cash costs which would include stripping costs of $500-650/oz! Why is LSA not simply presenting a total cash cost figure like many other producers? In my books, this is a red flag when it comes to presentation and disclosure. I think the company is attempting to look more attractive on a potential cash flow basis, but this can be misleading for investors doing a back of a napkin calculation. For those of you reading presentations of cash costs, please be sure to reconcile these figures with the statement of cash flows as cash items should be traceable. For now I am just going to follow the company on my watchlist, but won't be taking a position unless there is a significant pullback.
Lots of credit should go to Ron Stewart and Joe Fazzini of Dundee Securities for creating an excellent research report which helped to answer my underlying concerns of LSA.
https://www.lachlanstar.com.au/images/Dundee_Lachlan_Star_Report_Feb_17_copy1.pdf
Cash Cost Reconciliation
LSA report C1 cash costs of which exclude waste expensed and include
inventory adjustments that relate to gold in inventory that has been
mined, placed and not produced, or alternatively gold that was produced
but placed during an earlier period. Dundee reports cash costs including
expensed waste and can only adjust for capitalized waste when that
information is disclosed. Similarly, Dundee's model is a simple cash
model that does not include inventory adjustments since it is impossible
for us to determine the total material that may or may not be considered
inventory in any given period. As a consequence our model is a simple
cash model based on reported gold production. Furthermore, we do not
distinguish between ore tonnes mined and ore tonnes placed since the
total inventory difference is perhaps only a couple of days of production.
As a consequence our modeled cash costs do not reconcile perfectly
with LSA reported costs.
Exhibit 1 presents a reconciliation of LSA's reported cash operating
costs versus Dundee modeled costs along with the adjustments required
to reconcile to LSA's reported cash operating costs. LSA does not
report total costs inclusive of royalties.
Regardless, based on the reported per tonne operating costs and strip
ratio, the CMD is currently considered to be a high cost operation. This
is due primarily to the high waste to ore ratio which, as we've mentioned
above, is expected to decrease along with the relatively high processing
cost. About 50% of the latter is related to energy costs for the 3rd stage
of crushing which could be eliminated for at least a portion of the feed.
Finally, on a unit of ore moved, G&A costs should also decrease as the
total ore tonnes moved increases. Hence, we see good opportunity for
LSA to reduce cash costs going forward.
Exhibit 1: Reconciliation of Reported C1 Cash Costs
Parameter Units Jun-11 Sep-11 Dec-11
Ore Tonnes Mined 000's t 544.335 671.441 949.491
Waste Mined 000's t 3,553.839 2,163.339 3,271.021
Strip Ratio waste: ore 6.53 3.22 3.45
Ore Stacked 000's t 544.34 641.59 967.15
Gold Grade g/t AU 0.61 0.63 0.54
Ounces Stacked 000's oz 10.60 12.96 16.84
Gold Recovery % 0.96 0.80 0.67
Ounces Produced 000's oz 10.13 10.33 11.33
Mining Cost US$/tonne 1.89 2.30 2.23
Stripping Cost US$/tonne 12.34 7.42 7.68
Total Mining Cost US$/tonne 14.23 9.72 9.91
Processing Cost US$/tonne 9.36 8.41 6.91
G&A US$/tonne 2.18 1.69 1.45
Total Cost Per Tonne US$/tonne 25.77 19.82 18.27
Ore Mining Cost US
00's 1,029 1,544 2,117
Waste Mining Cost US
00's 6,717 4,976 7,294
Processing Cost US
00's 5,095 5,396 6,683
G&A US
00's 1,187 1,084 1,402
Cash Cost US
00's 14,027 13,000 17,497
Cash Cost US$/oz 1,384 1,258 1,545
Less Stripping US$/oz (663) (482) (644)
Inventory Adjustment US$/oz 137 198 (101)
Other
1 US$/oz (17) (22) (1)
C1 Cash Costs US$/oz 841 953 799
Dundee Model
Cash Costs US$/oz 1,373 1,210 1,547
Variance US$/oz
(11) (48) 2
Total Cash Costs US$/oz 1,480 1,288 1,606
1. capitalized stripping adjustment and other minor accounting adjustments not
disclosed
Source: Company reports, Dundee Securities
Upside: A