Lake Shore Gold Corp. was upgraded to sector perform from outperform at RBC Capital after the company achieved several positive milestones.
The Northern Ontario-based gold miner recently completed its mill expansion, delivered two months of solid operating results, and raised 2014 production guidance.
“With an improvement in grades, now in line with reserve grades, we forecast sufficient free cash flow to repay debt obligations and strengthen the balance sheet,” RBC analyst Stephen Walker told clients, raising his target price on the stock to 75¢ from 50¢.
He now forecasts 2014 production of 171,000 ounces at total cash costs of $689 per ounce and an all-in sustaining cost of $957 per ounce, a substantial improvement from his previous estimates. RBC’s long-term gold price assumption is $1,300 per ounce.
“We believe Lake Share Gold shares can re-rate higher as the company continues to execute on its operational turnaround and reduce debt in 2014,” Mr. Walker said.
At a spot gold price of $1,250 in 2014, he anticipates the company will have the capacity to make an early debt repayment as high as $15-million on its $35-million fully drawn credit facility, which is due January 2015.
The analyst also noted the miner has significant leverage to the gold price and may need to refinance or extend the maturity of its credit line should gold prices weaken further. Some of the debt covenants are triggered at $1,250 gold.
Mr. Walker pointed out that every $100 change in the gold price impacts the Lake Shore’s cash balance by approximately $8-million in his base-case scenario. However, he believes that recent throughput and grades above this forecast could offer upside potential.