Summary
- Lake Shore Gold reported record 2014 production but Q4 production was down Q/Q and Y/Y.
- This is actually worse than my thesis that the company's performance had plateaued.
- Investors are still pricing in growth and further exploration success. I see additional downside and a great buying opportunity ahead.
Lake Shore Gold (NYSEMKT:LSG) just reported its fourth quarter and full year production results. The company's full year results were very strong with production coming in at 186,000 oz. vs. 135,000 oz. in 2013. However, the fourth quarter was a disappointment with production coming in at 43,200 oz. vs. 46,600 oz. in Q3 and 51,700 oz. in Q4 of 2013. The company was able to increase mill throughput while keeping its recovery percentage at nearly 97%. The problem was ore grade. Q4's ore grade came in at just 4.2 gpt. vs. 4.6 gpt. in the third quarter and 5.2 gpt. in the fourth quarter of last year.
Investors will recall in October that I warned that Lake Shore Gold's performance had likely peaked in terms of efficiency and total production. The company had simply become so efficient that it couldn't realistically improve its efficiency any further. It also lacks near-term growth given that its Timmins West and Bell Creek Mines have likely reached peak capacity while its Fenn Gib project is years away from production.
The falling ore grade was the surprise in this quarter and the reason why production continued its decline. While the company hasn't reported itsfinancials yet, I suspect that costs will be affected by the falling ore grade and margins will be further compressed given the fall in gold prices.
Don't get me wrong, this is a great company. But no company can generate growth in a straight line. I expect we will see the company grow its production again in the future, and I want to own this stock. But given weakness in the gold market and the onslaught of bullish sentiment of late, I think we can see further downside from here. I think $0.45/share is a solid entry point for long-term investors.