Summary
- Lake Shore Gold expects to produce at least 180,000 ounces of gold at low unit costs in 2015.
- The ability to produce positive cash flow has allowed the company to deleverage the balance sheet.
- The collapse in the Canadian dollar could have a material positive impact on financial results.
- We estimate the company will generate 6% more revenue in 2015 when compared to 2014.
Lake Shore Gold (NYSEMKT:LSG) is a Canadian-based gold producer with mining and exploration activities at the Timmins Gold Camp in northern Ontario, Canada. It operates the Timmins West and Bell Creek mines, while exploring the adjacent 144 Gap target on the TC-144 Trend for resource growth and expansion. The two gold mines have continuously generated positive cash flow for the company, allowing it to deleverage the balance sheet, ramp up exploration programs and search for accretive acquisitions.
Strong, low-cost production this year has so far increased cash and bullion to $82 million from $61 million at the end of 2014. Management expects that number to balloon to approximately $100 million by year-end as long as the Canadian dollar gold price consolidates around the $1,500 price level. The ability of making cash has open value-adding avenues, one being growth by acquisition. Lake Shore Gold has proposed a takeover bid for Temex Resources, a junior gold exploration company that owns gold-silver properties adjacent to Bell Creek.
Lake Shore Gold reports financials in Canadian dollars, therefore all amounts in this article are in Canadian dollar unless stated otherwise.
Cash is king in the current bearish gold market
A majority of gold miners are struggling to squeeze out cash from its mining operations with gold prices trading at fresh multi-year lows. That is not the case at Lake Shore Gold, mainly owing to the low-cost structures at Timmins West and Bell Creek mines mitigating financial risk from low gold prices. It has successfully increased its cash and bullion position from $75 million in March to $82 million early this month, helping de-leverage and de-risk the balance sheet.
Using internally made cash, Lake Shore Gold made the final payment of $3 million on its senior secured debt (gold linked note) with Sprott. The debt facility was worth $70 million, first arranged in the summer of 2012 as part of the project financing required to expand the milling capacity at the Bell Creek Mill. The Bell Creek Mill processes ore from both Timmins West and Bell Creek mines. Since the expansion, total production has been on a steady rise, raising revenue and most importantly cash flows and profits.
The early debt repayment signals solid financial management, as it will save the company over $1 million a month in debt repayment and service costs moving forward. Lake Shore Gold has been making free cash flow over the course of 1.5 years, and we expect that to continue for the next 6 months. The company's goal is to make approximately $100 million after accounting for capital spending and other expenses at year-end. Its operational performance for 1H15 has been good and on track to outperform current guidance estimates.
Lake Shore Gold produced 95,600 ounces of gold during 1H15 at an all-in sustaining cost of US$810 per ounce (see figure 1). Total gold production has fallen short by 1,300 ounces of gold from last year's result, largely due to lower gold grades as part of mine sequencing. Lake Shore Gold sold 98,500 ounces of gold during 1H15, and based on a C$1,488 gold price, that yields roughly $146.5 million in total revenue, up 7.2% over the same time period a year ago.
Based on these production results, the management team thought it was appropriate to adjust previous guidance estimates to reflect the good performance at both of its gold mines. It now expects production for this year to reach at least 180,000 ounces of gold from 170,000 to 180,000 ounces of gold, previously.
Figure 1: Production and gold sale (oz ounces) results with respective gold grades (g/t).
In terms of unit costs, Lake Shore Gold now targets all-in sustaining costs less than US$950 per ounce, compared to previous guidance estimates of US$950 to US$1,000. We think the collapse of the Canadian dollar will have a material positive impact on the company's cost structure, including gold revenues as the Canadian gold price rises on currency weakness.
The Canadian dollar has lost significant value over the past year, dropping 17% and currently trading at post-recession lows. The reason being is the slowdown in Canada's economic growth because of the heavy drop in oil prices. This triggered the Bank of Canada to cut interest rates from 1.00% to 0.75%, and again to 0.50% earlier this week to stimulate the economy and increase investment.
In estimating 2015 revenues, we assume the company to make $125.7 million in revenue using an estimated gold price of C$1,450 during 2H15. If the company matches the gold sales (in ounces) performance from 2H14, the company could finish the year with record revenues, again. We calculate yearly revenues of $272.2 million, up 6% from 2014. The gold price could escalate on weakness of the Canadian economy, and with the possibility of better production results, our estimates could see further upside. Figure 2 shows our calculations and estimates.
Figure 2: Our revenue estimates for Lake Shore Gold.
Shifting our focus back onto cash flows, as mentioned above, Lake Shore Gold's low-cost production is a key driver to its continued success in generating cash over the past year. We think the company will produce strong cash flow at year-end assuming the company meets its updated guidance. Using an exchange rate of US$1.00: C$1.25 we estimate cash flows of roughly $56.2 million. Figure 3 shows our calculations. Our cash flow estimate is conservative, as low oil prices and the devaluing Canadian dollar will have a material positive impact on all-in sustaining costs, therefore increasing operating margins and cash flows.
Figure 3: Net cash flow estimates.
We hold our bullish view on Lake Shore Gold. As a majority of gold sector participants struggle to create cash flows on a consistent basis, Lake Shore Gold has managed to control costs, ramp up production and beat the market. Shares have climbed 30% year-to-date, while notable gold ETFs such as GLD, GDX and GDXJ have seen negative returns. The ability to generate good cash flow has led to increased exploration spending on the 144 Gap exploration area, which is immediately adjacent to its Timmins and Bell Creek operations. We think the 144 Gap area along the TC-144 Trend will create an economic and value-adding satellite deposit for the company over the near term.
The increasing cash position at Lake Shore Gold also has allowed the company to dive into the M&A space, with a proposed $25 million all-share takeover bid for Temex Resources. Temex Resources is an early-stage gold exploration company engaged in developing its gold properties in northern Ontario, mainly its 60% owned Whitney gold project, which is conveniently near Lake Shore Gold's Bell Creek mine and mill facility. We plan to look into the proposed takeover deal and the quality of Temex Resources' properties and assets in our next report for Lake Shore Gold. Again, we hold our bullish view on Lake Shore Gold. It offers an interesting investment opportunity, with positive cash flow gold assets and a solid management team.
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