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| GSS > SEC Filings for GSS > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-Nov-2008
Quarterly Report
The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes. The financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Cdn GAAP"). For reconciliation to accounting principles generally accepted in the United States ("US GAAP"), see Note 24 to the consolidated financial statements. This Management's Discussion and Analysis of Financial Condition and Results of Operations include information available to November 3, 2008. All financial amounts shown in this section (ITEM 2) are in thousands of US dollars unless stated otherwise.
OUR BUSINESS
Through our subsidiaries, we own a controlling interest in four gold properties in southern Ghana, West Africa:
• Bogoso/Prestea property, which is comprised of the adjoining Bogoso and Prestea surface mining leases ("Bogoso/Prestea"),
• Wassa property ("Wassa"),
• Prestea Underground property ("Prestea Underground"), and
• Hwini-Butre and Benso concessions ("HBB Properties").
In addition to these gold properties, we hold other exploration rights and interests and are actively exploring several gold properties in West Africa and South America.
Bogoso/Prestea is owned by our 90% owned subsidiary Golden Star (Bogoso/Prestea) Limited ("GSBPL") which was acquired in 1999. The Prestea Underground is located on the Prestea property and consists of a currently inactive underground gold mine and associated support facilities. GSBPL owns a 90% operating interest in the Prestea Underground.
Through another 90% owned subsidiary, Golden Star (Wassa) Limited ("GSWL"), we own the Wassa gold mine located some 35 kilometers east of Bogoso/Prestea. GSWL also owns a 90% interest in the HBB Properties in southwest Ghana. The Hwini-Butre and Benso concessions are located approximately 80 and 50 kilometers by road south of Wassa, respectively. Development activities were initiated at Benso in late 2007, and are expected to be completed in the fourth quarter of 2008. We began moving Benso ore to the Wassa plant for processing in the third quarter of 2008.
We hold interests in several gold exploration projects in Ghana and elsewhere in West Africa including Sierra Leone, Burkina Faso, Niger and Cote d'Ivoire. We also hold and manage exploration properties in Suriname and French Guiana in South America.
Our administrative offices are located in Littleton, Colorado, USA and we also maintain a regional corporate office in Accra, Ghana.
NON-GAAP FINANCIAL MEASURES
In this Form 10-Q, we use the terms "total operating cost per ounce," "total cash cost per ounce" and "cash operating cost per ounce."
Total operating cost per ounce is equal to "Mine operating costs" for the period, as found in the table below, divided by the ounces of gold sold in the period. "Mine operating costs" include all mine-site operating costs, including the costs of mining, processing, maintenance, work-in-process inventory changes, mine-site overhead as well as production taxes and royalties, mine site depreciation, depletion, amortization, asset retirement obligations, foreign currency gains and losses on operational purchases and by-product credits but does not include exploration costs, corporate office general and administrative expenses, impairment charges, corporate business development costs, gains and losses on asset sales, interest expense, mark-to-market gains and losses on derivatives, gains and losses on investments and income tax.
Total cash cost per ounce for a period is equal to "Cost of Sales" less "Mining related depreciation and amortization" and "Accretion of asset retirement obligations" costs for the period, as found in footnote 9 to our consolidated statements of operations, divided by the number of ounces of gold sold during the period.
The following table shows the derivation of these measures and a reconciliation of "total cash cost per ounce" and "cash operating cost per ounce."
For the three months ended
September 30, 2008
Bogoso/
Wassa Prestea Combined
Mining operations $ 19,248 $ 42,287 $ 61,535
Change in inventory (costs from / (to) metals inventory) (935 ) 6,278 5,343
Mining related depreciation and amortization 4,909 9,202 14,111
Accretion of asset retirement obligations 129 93 222
Total Cost of Sales - GAAP 23,351 57,860 81,211
Foreign exchange (gains)/losses - GAAP (219 ) (273 ) (489 )
Mine operating costs $ 23,135 $ 57,586 $ 80,721
Ounces sold 22,083 51,959 74,042
Derivation of cost per ounce:
Mine operating costs per ounce $ 1,048 $ 1,108 $ 1,090
Less depreciation and amortization per ounce 222 177 191
Less accretion of asset retirement obligations per ounce 6 2 3
Total cash cost per ounce 819 929 897
Less royalties and production taxes per ounce 26 26 26
Cash operating cost per ounce $ 793 $ 903 $ 871
For the three months ended
September 30, 2007
Bogoso/
Wassa Prestea Combined
Mining operations $ 15,253 $ 33,643 $ 48,899
Change in inventory (costs to metals inventory) (635 ) 1,313 678
Mining related depreciation and amortization 4,773 5,670 10,443
Accretion of asset retirement obligations 83 175 258
Total Cost of sales - GAAP 19,474 40,804 60,278
Foreign exchange (gains)/losses - GAAP 11 19 72
Mine operating costs $ 19,485 $ 40,823 $ 60,308
Ounces sold 29,626 40,518 70,144
Derivation of cost per ounce:
Mine operating costs per ounce $ 658 $ 1,008 $ 860
Less depreciation and amortization per ounce 161 140 149
Less accretion of asset retirement obligations per ounce 3 4 4
Total cash cost per ounce 493 863 707
Less royalties and production taxes per ounce 20 20 20
Cash operating cost per ounce $ 473 $ 843 $ 687
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For the nine months ended
September 30, 2008
Bogoso/
Wassa Prestea Combined
Mining operations $ 51,590 $ 117,595 $ 169,184
Change in inventory (costs from / (to) metals inventory) (2,480 ) (3,153 ) (5,633 )
Mining related depreciation and amortization 15,023 22,878 37,902
Accretion of asset retirement obligations 286 299 585
Total cost of sales - GAAP 64,419 137,619 202,038
Foreign exchange (gains)/losses - GAAP (246 ) (396 ) (642 )
Mine operating costs $ 64,173 $ 137,223 $ 201,396
Ounces sold 79,475 130,307 209,782
Derivation of cost per ounce:
Mine operating costs per ounce $ 807 $ 1,053 $ 960
Less depreciation and amortization per ounce 189 176 181
Less accretion of asset retirement obligations per ounce 4 2 3
Total cash cost per ounce 615 875 777
Less royalties and production taxes per ounce 27 27 27
Cash operating cost per ounce $ 588 $ 848 $ 750
For the nine months ended
September 30, 2007
Bogoso/
Wassa Prestea Combined
Mining operations $ 43,629 $ 60,392 $ 104,021
Change in inventory (costs to metals inventory) (1,345 ) (2,705 ) (4,050 )
Mining related depreciation and amortization 13,875 9,565 23,440
Accretion of asset retirement obligations 253 576 829
Total cost of sales - GAAP 56,412 67,828 124,240
Foreign exchange (gains)/losses - GAAP 17 82 181
Mine operating costs $ 56,429 $ 67,901 $ 124,339
Ounces sold 86,114 72,149 158,263
Derivation of cost per ounce:
Mine operating costs per ounce $ 655 $ 941 $ 786
Less depreciation and amortization per ounce 161 132 148
Less accretion of asset retirement obligations per ounce 3 8 5
Total cash cost per ounce 491 801 632
Less royalties and production taxes per ounce 20 20 20
Cash operating cost per ounce $ 471 $ 781 $ 612
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1 See note 9 to the accompanying consolidated financial statements.
Total cash cost per ounce and cash operating cost per ounce should be considered as non-GAAP financial measures as defined in SEC Regulation S-K Item 10 and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. There are material limitations associated with the use of such non-GAAP measures. Since these measures do not incorporate revenues, changes in working capital and non-operating cash costs, they are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP. Changes in numerous factors including, but not limited to, mining rates, milling rates, gold grade, gold recovery, costs of labor, consumables and mine site general and administrative activities can cause these measures to increase or decrease. We believe that these measures are the same as, or similar to the measures of other gold mining companies, but may not be comparable to similarly titled measures in every instance.
BUSINESS STRATEGY AND DEVELOPMENT
Our business and development strategy has been focused primarily on the acquisition of producing and development-stage gold properties in Ghana and on the exploration, development and operation of these properties. Our exploration efforts have been focused on Ghana, other West African countries and South America.
In line with our business strategy, we acquired Bogoso in 1999 and have operated a nominal 5,000 tonne per day carbon-in-leach ("CIL") processing plant most of the time since then to process oxide and other non-refractory ores ("Bogoso oxide plant"). In 2001, we acquired Prestea and mined surface deposits at Prestea from late 2001 to late 2006. In late 2002, we acquired Wassa, and constructed a new nominal 10,000 tonne per day CIL processing plant at Wassa, which began commercial operation in April 2005. In July 2007, we completed construction and development of a new nominal 3.5 million tonnes per annum processing facility at Bogoso/Prestea that uses bio-oxidation technology to treat refractory sulfide ore ("Bogoso sulfide plant").
In late 2005, we acquired the HBB Properties consisting of the Benso and Hwini-Butre properties. Development activities were initiated in late 2007 at Benso, and in August 2008 Benso began trucking ore to the Wassa plant for processing. We expect the Benso development work will be completed in the fourth quarter of 2008.
Our overall objective is to grow our business to become a mid-tier gold producer with an annualized production rate in excess of 500,000 ounces. With the new sulfide plant at Bogoso and development of Benso in 2008, we expect to reach this goal in 2010. We continue to evaluate potential acquisition and merger opportunities that could further increase our annual gold production. However, we presently have no agreement or understanding with respect to any specific potential transaction.
SIGNIFICANT TRENDS AND EVENTS DURING THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2008
Bogoso/Prestea Operations
During 2008 quarterly gold output from the Bogoso sulfide plant increased to 45,585 ounces in the third quarter, up from 35,248 ounces in the second quarter and 31,414 ounces in the first quarter. The improvements in gold output reflects a more stable and reliable operational status following resolution of various equipment issues, including replacement of all bio-oxidation tank agitators and gear boxes earlier in 2008. Total Bogoso/Prestea gold output, including production from the Bogoso oxide plant totaled 51,659 ounces in the third quarter, up from 46,934 in the second quarter and 31,683 in the first quarter. The Bogoso oxide plant was idled during much of the third quarter awaiting oxide ores from the Prestea South development project which is now scheduled to startup in 2009.
Benso Development
The Benso mine development was substantially completed in the third quarter of 2008 and production mining is now underway. A total of 32,445 tonnes of ore averaging 5.0 g/t was hauled from Benso to the Wassa plant by September 30, 2008. It is expected that the deliveries of approximately 3,000 tonnes per day of higher grade Benso ore to the Wassa plant over the next several quarters will result in substantial improvements in Wassa's operational and financial results.
Energy Prices
In the third quarter of 2008, the Public Utilities Regulatory Committee ("PURC") of Ghana increased electric power rates for high voltage electric power customers effective July 1, 2008. The new rate, including demand charges, is approximately $0.175 per kilowatt hour, up from $0.10 per kilowatt hour prior to the increase. Since the power rate is stated in Ghanaian Cedis, the US dollar cost will fluctuate with changes in the US$/Cedis exchange rate and recent weakening of the Cedis has helped to alleviate a portion of this power price increase. During the fourth quarter of 2008 diesel fuel prices began to decline reflecting decreasing world crude oil prices. Fuel is one of our largest cost factors and the price drop, if continued, should have a beneficial impact on our unit costs.
Gold Prices
Gold prices have generally trended upward during the last seven years, from a low of $260 per ounce in 2001 to a high of $1,023 per ounce in March 2008. Since March 2008, and especially in recent months, gold price volatility has increased with prices fluctuating in a wide band mostly between $700 and $950 per ounce. The realized gold price for our shipments during the first nine months of 2008 averaged $895 per ounce, as compared to $668 per ounce in the same period of 2007.
We continue to seek environmental permits to allow surface mining at the Prestea South gold deposits southeast of the town of Prestea. We expect to begin developing the Prestea South deposits in 2009 and plan to commence mining later in the year subject to receipt of the requisite permit. The Prestea South oxide ore will be transported to Bogoso where it will be processed through the Bogoso oxide plant and sulfide ores will be moved to Bogoso and processed at the Bogoso sulfide plant.
Management Changes
In March 2008, Mr. Tom Mair was appointed President and CEO and as a member of the Board of Directors. Mr. Mair previously served as Interim President and CEO since January 1, 2008 and as Senior Vice-President and Chief Financial Officer from February 2007 to December 2007. In April Mr. Scott Barr was appointed as Executive Vice President and Chief Operating Officer. Mr. John Labate was appointed Senior Vice President and Chief Financial Officer effective August 20, 2008.
Ghana Stock Exchange Listing and Share Offering
In February 2008, our common shares were listed on the Ghana Stock Exchange in Accra, to support the further growth of the Ghana Stock Exchange and to allow our employees and stakeholders in Ghana an opportunity to invest in Golden Star. In conjunction with the listing we, completed an offering of 1,869,020 Golden Star common shares to investors in Ghana and Europe at a price of $3.10 (3.0 Cedis) per share. All shares issued are tradable on the Toronto Stock Exchange and the American Stock Exchange as well as on the Ghana Stock Exchange.
Illegal Mining
As with most gold mining operations in Ghana, illegal mining is occurring on some of our properties, including Prestea South and Hwini-Butre. We brought this situation to the attention of the local and national governmental authorities. While illegal mining has had minimal impact at our active mining operations, there is increasing amounts of illegal mining activity on our properties and closer to our operating mines.
Bogoso Power Plant
Construction was initiated in the first quarter of 2008 on a nominal 10 megawatt power plant at Bogoso following completion of a construction letter of credit. As collateral for the letter of credit, we restricted $2.9 million of cash as required by the bank providing the letter. The provider of the power plant will construct, operate and maintain the plant on our behalf. This is a stand-by power facility that would be utilized only in the event of an emergency or when there is insufficient power available from the Ghana national power grid. Completion of construction is scheduled in the fourth quarter of 2008.
International Financial Reporting Standards
The Canadian Accounting Standards Board recently confirmed January 1, 2011 as the date International Financial Reporting Standards ("IFRS") will replace current Canadian GAAP for publicly traded companies.
While we had earlier considered the option of converting our accounting to IFRS rules as early as January 2009, a decision has been made to continue using Canadian GAAP accounting rules beyond January 2009, except at our Ghanaian registered subsidiaries where IFRS rules are mandated by the Ghana government beginning in 2009. We are currently developing an IFRS change-over plan for the Ghanaian subsidiaries. Towards this end we have retained a qualified consulting team to oversee and effect the conversion process. Adoption of IFRS rules by our Ghanaian subsidiaries will have no impact on our consolidated financial results since the IFRS based results from the Ghanaian subsidiaries will be converted to Canadian GAAP prior to being consolidated.
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