Golden Star Resources (GSC-T, GSS-N) is inching closer to reopening the past-producing Prestea underground mine in Ghana, with a feasibility study on its West Reef deposit showing encouraging results.
The study envisions production at the underground mine averaging 66,000 oz. gold a year over a six-year life, at cash-operating costs of US$734 per oz.
Total costs to build Prestea are pegged at US$150.1 million, including US$90.6 million for development, US$35.8 million for capitalized operating costs and US$23.7 million for sustaining capital.
The Toronto-based firm estimates it will take three years to build the mine, where miners would use mechanized cut-and-fill methods.
As part of the pre-development activities the company intends to add two raise-bored shafts to provide primary access to the steeply dipping vein deposit at 600 to 950 metres below surface, as well as for hoisting ore and providing ventilation.
Ore extracted from West Reef would be processed at the company’s nearby Bogoso oxide plant where it would be blended with non-refractory ore from the
Bogoso pit, with gold recoveries estimated at over 90%.
Mining analyst Andrew Breichmanas of BMO Capital Markets describes the study as “potentially positive.”
It “supports Golden Star’s strategy of focusing on lower-cost non-refractory production, but BMO Research excludes the project from estimates, as addressing challenges at existing operations and ensuring their profitability at current gold prices appear more critical, he notes.
Using a gold price of US$1,500 per oz. and a 5% discount rate, the project’s net present value (NPV) is US$114 million, with an internal rate of return (IRR) of 23%, both on an after-tax basis. Payback under that scenario would take three years.
This compares slightly favourably to the post-tax NPV of US$107 million and 21% IRR estimated in a 2012 preliminary economic assessment at the same gold price.
A sensitivity analysis in the latest study shows that the NPV at a 5% discount rate and the IRR drop to US$87 million and 19% at US$1,400 per oz. gold, and down to US$59 million and 15% at US$1,300 per oz.
However, the feasibility uses US$1,500 per oz. gold as the base case and gold reserves of 443,000 oz. gold from 1.4 million tonnes grading 9.61 grams gold.
With the study checked off, Golden Star is finishing up its environmental impact statement to submit to the Ghana environmental protection agency, and will start exploring financing avenues for West Reef.
“The company’s ability to fund the project from existing cash and projected cash flows will likely place further strain on its already limited balance sheet at current gold prices, reaffirming our cautious view on the name,” comments Raymond James analyst Brad Humphrey.
A week after the feasibility, Golden Star provided an update on its initiative to reduce spending at its operations, noting it identified US$45 million in operating savings for the year by lowering costs for labour, fuel, contractors and equipment.
As part of the review, it adjusted the mining schedule at several pits to account for a weaker gold price. This led to the company reducing its 2013 production guidance by
10% to 290,000 to 310,000 oz. gold. Operating costs were reiterated at US$1,050 to US$1,150 per oz.
Golden Star also trimmed its expected development and sustaining capital for the year to US$34 million and US$40 million, down from US$81 million and US$60 million previously.
Golden Star says the US$51 million in its treasury, combined with its operating cash flow, should be enough to cover the sustaining capital for the year.
It has cut its exploration budget to US$16.5 million from US$20 million.