RE: Bashers Giverbullets asked: "somebody throw some numbers on the table here and show us how LSG is in a financial death spiral! "
Well, I'm not going to say that LSG is in a death spiral. But from an investment perspective, the likelihood that LSG will ever earn profits for its shareholders looks dimmer and dimmer every quarter, especially if the gold price remains below $1,500 for any length of time.
Let's look at the 2012 financial numbers. LSG produced 85,782 ounces of gold and sold those ounces at an average price of $1,666/ ounce. The sale of gold generated $133M and production costs were $80MM, meaning that the gross revenue from operations was $53MM. But after we subtracted depletion, depreciation, exploration expenses, and general & admin costs, that profit disappeared and became a loss of $17.5 MM ($0.04/share) from its ordinary operations -- or a loss of $317MM ($0.77/share) if you include the capital impairment charge.
This year LSG is committed to produce 120K to 135K ounces, being about a 50% increase over 2012. So, we'll assume that they produce 127,500 ounces (the midpoint in the guidance range). First we have to subtract the 2.25% royalty that LSG has to pay to Franco Nevada, so that leaves us about 125,000 ounces. Then we subtract the roughly 11,000 ounces that have to be paid to Sprott, which takes us down to 114,000 ounces remaining. If the average gold price for 2013 is (say) $1500, then the gross revenue from those 114K ounces will be $171MM. But then we have production costs, which will also be 50% higher than 2012, so those costs will rise to $120MM.
So, in 2013 LSG is projected to end up with about $51MM of gross revenue from operations (similar to 2012). Then once again we have to subtract depletion, depreciation, exploration expenses, and general & admin costs, and that will leave LSG with another loss in 2013. And bear in mind that the Sprott deal says that not only does LSG have to pay them 924 ounces per month, but if the gold price is lower than $1610 then LSG has to make an extra payment each month to Sprott to cover the shortfall.
From what I can see, the only thing that could turn LSG into a profitable company is a much higher gold price, or a big improvement in the grade.
The worst case scenario -- which really could potentially lead to a death spiral -- would be if the 2013 revenue is insufficient for the capital spending that LSG has budgetted in 2013. Take a look at the "Outlook" section of the MDA published with the Q42012 financial statements -- LSG is budgetting that it will have enough cash to complete its expansion project, but that projection is based on a gold price of $1650. That means to me that if the gold price stays at $1500 for a while, then LSG will once again be starved of cash, at which point Tony will have to take on even more debt or sell another royalty stream -- and doing that really could end up being the kiss of death.
Good luck to all.