San Gold trims the fat, aims to be cash positive by late 2013

The Hinge portal at San Gold's Rice Lake gold-mining complex, 250 km northeast of Winnipeg, Manitoba. Source: San GoldThe Hinge portal at San Gold's Rice Lake gold-mining complex, 250 km northeast of Winnipeg, Manitoba. Source: San Gold

San Gold (SGR-T) is striving to improve its performance while battling unfavourable market conditions and declining gold prices by focusing on profitability rather than on growth, like many of its peers these days.

To improve its liquidity, the Manitoba-based gold producer closed a $50-million financing in early March, bringing it a step closer towards its 2013 goal of turning the Rice Lake gold-mining complex in Bissett, Man., into a cash-positive operation by as early as October.

“We recently raised about $50 million through a convertible debenture, so we are well financed to execute on the mine plan for the year,” Ian Berzins, the company’s chief operating officer and new CEO, said in an interview.

He described San Gold as being in “pretty good shape” financially and able to “make it through this year and the next,” most likely without another equity raise.

While the 2013 budget is under review, the company plans to defer capital spending to later years with more details expected in the new five-year mine plan, slated to be out by July.

Capital expenditures for 2013 should total $55 million, Berzins says, with the majority going towards developing the 16 and 26 levels in the Rice Lake mine to tap into the downdip extensions of the near-surface Hinge and 007 deposits that are being mined.

The company recently announced three holes from a new underground drilling station located on the 26 level. The platform was designed to better define the 007 structures at depth, with the best intercept intersecting a new zone and returning 14.2 grams over 4.2 metres. San Gold plans to continue drilling throughout the year and says it may add more drill locations near the 007 deposit.

The improved infrastructure should boost operating efficiency as well as output, with the latter missing analyst expectations lately, partly due to declining gold grades.

Berzins says that gold grades have declined in the past two quarters to a little over 4 grams per tonne, below the reserve grade of 5.1 grams.

In the first quarter, San Gold produced 17,354 oz. gold at a head grade of 4.15 grams gold, and in the fourth quarter of 2012 churned out 19,019 oz. at 4.2 grams.

But Berzins, who stepped into his CEO role in late March, maintains that the gold grade should recover, with higher-grade ounces expected from the 007 area and the Rice Lake mine, where output was previously scheduled to come online in 2014.

“Originally in our mine plan, we weren’t planning to do much at Rice Lake, we were just going to do development work. I think a portion of Rice Lake’s feed will come into the mix [this year], and typically it’s better than 5 grams. But we will be looking at the different inputs, and our budget this year averages 5 grams at a 93% recovery.”

Partly because of the light first quarter, San Gold has revised its 2013 guidance to 75,000 to 90,000 oz. from 85,000 to 95,000 oz. earlier. Anticipated cash costs are now $800 to $900 per oz., up from $800, which Berzins says “reflects higher trucking costs more so than anything else,” as the trucking distances have increased from surface.

BMO analyst Brian Quast forecasts the junior should produce 79,000 oz. at cash costs of $892 per oz. this year. He cautions that “with some capital projects likely now deferred, BMO Research expects a slower production ramp at higher operating costs, limiting its ability to drive near-term earnings and cash flow higher and rebuild credibility with investors.” Quast has reduced his target price to 20¢ from 50¢, and downgraded the stock to “underperform” from “market perform.”

While Berzins believes Quast’s concerns are reasonable, he says the company is on track to meet its 2013 target, noting cash costs should improve as it uses the Rice Lake shaft to haul ore to surface.

“Cash costs next year will be fairly flat, but we’d like to see some relief after that, because half of our trucks on paper should be shut down or used more efficiently, because we won’t be trucking all the way to surface,” he explains.

Berzins estimates that all-in cost for 2013, including exploration, overhead capital and corporate, should be under $1,400 per oz. gold, which in 2012 averaged $1,600 per oz.

“This year we are trying to get the all-in below $1,400, and today at a $1,400 cost, you’re just trading dollars. So this is where we’re going to try to drive the all-in cost down into the range of probably $1,300, and see if we can do even a bit better — then at least we would have a modest margin.”

To cut overhead, San Gold let go of 25 workers and is closing its Toronto corporate office and consolidating its head office activities in Winnipeg. It has also retrenched the Bissett operation and is exploring ways to monetize some non-core assets this year.

While the company is reining in costs, it still has 270,000 metres of drilling planned for the year to grow resources and reserves while extending zones and uncovering new mineralization, Michael Michaud, the company’s vice-president of exploration, said on an April 12 conference call.

The Rice Lake complex hosts 253,000 oz. in reserves from 1.7 million tons (1.5 million tonnes) grading 5.1 grams. It has 655,000 oz. gold in measured and indicated from 3.4 million tons (3.1 million tonnes) at 6.55 grams, plus another 2.8 million oz. inferred from 16.5 million tons (15 million tonnes) at 5.92 grams gold.

“We have decent-sized reserves and we have a large resource, so with any kind of modest conversion rate we can have an operation that is more than ten to fifteen years. And we have a fairly large drilling budget, which should add some quality ounces,” Berzins says, adding that drilling could bring measured and indicated ounces to 750,000 by year-end.

While development is ongoing at the project — which is located in the Rice Lake greenstone belt, 250 km northeast of Winnipeg — San Gold’s top priority remains getting into “a positive-cash situation, where we aren’t going to have to go to the markets for money and rebuild confidence,” Berzins says, admitting that the company hasn’t been consistent in its delivery in the past, something he’s pushing to change. “So we have to execute on the guidance we’ve given,” he concludes.

San Gold recently closed at 20¢ within a 52-week range of 16¢ to $1.57, for a $67-million market cap. Berzins said the firm should exit 2013 with $20 million in hand.


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