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TABLE OF CONTENTS Nov 26 - Dec 2, 2012 Volume 98 Number 41 - 0 comments

Lake Shore catches its breath

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By: Anthony Vaccaro

Lake Shore Gold (LSG-T, LSG-X) is pushing for redemption after falling out of investor favour in early 2011 with disappointing production at its two gold mines near Timmins, Ont.

After a steady slide for most of last year, its share price settled into a sideways pattern within an 80¢ to $1.15 range for much of 2012. Before the drop-off, its shares traded north of $4.

The latest quarterly results show a company grappling with operational issues, but with bigger plans for the future.
Lake Shore produced 20,939 oz. gold over the quarter, which is up 11% from a year ago, but roughly 14% less than it produced the quarter before from Timmins West and Bell Creek in the Timmins area.

The drop comes courtesy of an average grade of 3.5 grams per tonne — considerably less than the average grade of its key deposits.

“We recognize we disappointed in terms of overall average grade coming in at 3.5 grams,” Lake Shore president and CEO Anthony Makuch said on a conference call, “and that had some impact on the company — but it was still a strong quarter in many ways.”

He points to record mine and mill throughput, lower costs per tonne, improved efficiencies and progress on mill expansion as signs of strength.

Cash operating costs were up 8% to US$985 per oz. sold, largely owing to the decline in head grade, although operating cash costs per tonne fell to C$105 from C$124 in the previous quarter.

Lake Shore says it remains on track to produce over 85,000 oz. gold in 2012 at cash costs of US$875 per oz. sold, which is at the higher end of its operating cost guidance of US$825 to US$875.

Makuch pointed out that the company has kept capital spending connected to its mill expansion in-line with its estimates, despite external cost pressures industry-wide.

Lake Shore is expanding its Bell Creek mill to 3,000 tonnes per day by mid-2013. From there, it plans to do another phase and expand the mill to 5,500 tonnes per day. The mill at Bell Creek processes ore from Bell Creek and the Timmins West mine, 42 km east of the plant.

Timmins West supplied 2,500 tonnes per day of throughput while Bell Creek provided 500 tonnes. Mill feed from Timmins West has averaged 3.66 grams per tonne, which is 30% below the reserve grade of 5.21 grams per tonne.

“While the company has done a great job on the exploration front, the operational ramp-up has been less stellar,” Haywood Securities analyst Kerry Smith writes in a research report. He adds that “Lake Shore has to deliver more than a few quarters of consistent operational performance and cash flow before investors acknowledge that the company has turned the corner.”

Makuch said that “we need to get the development done and get a lot of resources out in front of us, then we can properly sequence it and bring in stopes at a blended grade . . . we don’t have any significant high-grade stopes. We do, however, have higher-grade areas that we need to have, and as soon as we lose any of those, it does have a significant impact on grade.”

He adds that the company’s aggressive capital development and drill program will help it gain the flexibility it needs.

A preliminary economic study on Timmins West released earlier this year outlines peak production of 160,000 oz. per year from the third to ninth year of its decade-long mine life, at cash costs of US$625 per oz. The average head grade is anticipated to be 5.2 grams gold.

Lake Shore has spent $132 million of the $175 million budgeted for capex to support higher mining rates. The mill is now at 2,300 tonnes per day, and Lake Shore says it expects to reach 2,500 tonnes per day by late November.

With an improved balance sheet, the funding for such expansion plans are well within reach.

Lake Shore reported cash and cash equivalents of $83.5 million for the quarter, and the company has another $35 million available through its undrawn facility with Sprott — which is enough capital to cover costs this year and next while it builds up more cash, so that it can repay $103.5 million in convertible debt due September 2017.

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