Lake Shore Gold: Why This Gold Miner Can Deliver More UpsideDon't think this has been posted yet.
https://seekingalpha.com/article/3316715-lake-shore-gold-why-this-gold-miner-can-deliver-more-upside
Summary
- LSG has turned in a robust financial performance in the past year, recording growth in its revenue and margin by taking advantage of steady gold pricing in Canada.
- LSG's growth has been aided by strong growth in production on account of higher grades and lower costs, and the trend looks set to continue.
- LSG is ramping up infrastructure development at its mines, and its recent discovery of a high grade gold deposit near the Timmins West mine will act as a growth driver.
- The Timmins West mine's grades have improved at a robust pace in the past couple of years, and the recent discovery could lead to further improvement in grades.
- LSG has a strong balance sheet and it has been able to cut its debt-equity ratio of late, indicating that it has a conservative capital structure.
Lake Shore Gold (NYSEMKT:LSG) has turned in a terrific performance on the stock market in 2015. In fact, Lake Gold shares have appreciated almost 45% this year, driven by strength in gold prices in Canada that have led to a positive impact on the company's financial performance. Additionally, Lake Shore Gold's balance sheet is in good shape and does not carry high leverage like several senior gold producers. The following chart shows us why Lake Shore shares have shot up remarkably this year:
LSG Revenue (NYSE:TTM) data by YCharts
A look at the growth drivers
Thus, Lake Shore is one of those very few gold companies that have done well in a difficult time for the gold industry, and this is clearly seen in the last-reported results. In the previous quarter, Lake Shore's revenue rose 29% year-over-year to $79.1 million, while adjusted net earnings tripled to $0.03 per share as compared to $0.01 in the same period last year.
Apart from steady gold prices in Canada, Lake Shore's performance in the previous quarter was driven by record production of 53,000 ounces, an increase of 19% year-over-year. In fact, most of its key metrics, including ore grades and all-in sustaining costs, improved last quarter. This can be clearly understood from the table below.
Source
Hence, Lake Gold has been able to record an impressive improvement in its cost base, driven by an improvement in recovery rates and ore grades. This has helped the company improve its financial performance rapidly of late. Now, looking ahead, it is likely that Lake Shore will be able to improve its financial performance further as it is looking to increase production and reduce costs at the same time.
Improving grades and production ramp up will drive growth
In order to sustain its recent momentum, Lake Shore will continue to develop its mines in order to ramp up production and lower costs. As a result, the company is progressing swiftly with the development of the '144 GAP' area located approximately 500 meters southwest of its Timmins Mine. It has been around six months since Lake Shore originally discovered this mine and the progress made till now is encouraging. A few months ago, Lake Shore had announced that it is expanding its drilling operations at the 144 GAP, and interestingly, it made its second discovery at the mine in less than a year.
According to CEO Tony Makuch, "The success we are having drilling along the TC-144 Trend is very exciting as it continues to identify areas for potential future resource growth within Timmins West Complex." In fact, this area represents only a small portion of the entire six kilometers of the Thunder Creek 144 Trends, which is expected to contain multiple gold deposits and has the potential to establish Timmins West as a major gold mining centre.
Additionally, recent tests and feasibility studies indicate that the ore in this area is of a robust grade, which should further decrease Lake Shore's all-in sustaining cost. This is not surprising, as Timmins West has seen a consistent increase in ore grades in the past couple of years. For instance, in 2013, the grade was 4.6 grams per ton, which increased to 4.7 g/t in 2014. Remarkably, at the end of the first quarter, the grade at the mine was 5.7 g/t, and it is likely that this metric will continue improving on account of the recent discovery.
Moreover, the Timmins West mine has probable reserves of 509,700 ounces of gold, along with indicated and inferred resources of 694,600 ounces and 259,700 ounces, respectively.
Strong fundamentals
More importantly, Lake Shore gold does not carry high leverage on its balance sheet. The company has a low debt-equity ratio when compared to bigger players such as Barrick Gold (NYSE:ABX), as its debt is just $83 million. Additionally, Lake Shore's current ratio is strong at 2.55, indicating strong liquidity. In fact, the company has been able to cut its debt-equity ratio in the past few months as shown below:
LSG Debt to Equity Ratio (Quarterly) data by YCharts
At the same time, the company has been able to turn its EBIT into positive from negative, and this has led to an improvement in its interest coverage ratio as well. Additionally, the company's cash flow from operations has started improving as well of late. These improvements can be attributed to Lake Shore's conservative capital structure as the company does not have to bear high interest expenses due to a low level of leverage.
Conclusion
All in all, Lake Shore Gold looks like a good investment from several angles. The company has a strong balance sheet and a robust asset base, which has allowed it to improve grades, augment production, and reduce costs. Thus, in my opinion, investors should continue holding Lake Shore shares in their portfolios as it is capable of doing even better in the long run.