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GSS > SEC Filings for GSS > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for GOLDEN STAR RESOURCES LTD

Form 10-Q for GOLDEN STAR RESOURCES LTD


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Form 10-K for the period ended December 31, 2011, and with the accompanying unaudited consolidated financial statements and related notes for the period ended September 30, 2012. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes information available to November 7, 2012. All amounts shown are in thousands of dollars unless noted otherwise. All currency amounts are stated in U.S. dollars unless noted otherwise.
OVERVIEW OF GOLDEN STAR
We are a Canadian federally-incorporated, international gold mining and exploration company producing gold in Ghana, West Africa. We also conduct gold exploration in other countries in West Africa and in South America. Golden Star Resources Ltd. was established under the Canada Business Corporations Act on May 15, 1992. Our principal office is located at 10901 West Toller Drive, Suite 300, Littleton, Colorado 80127, and our registered and records offices are located at 333 Bay Street, Bay Adelaide Centre, Box 20, Toronto, Ontario M5H2T6. We own controlling interests in several gold properties in southwest Ghana:
Through a 90% owned subsidiary, Golden Star (Bogoso/Prestea) Limited ("GSBPL"), we own and operate the Bogoso/Prestea gold mining and processing operations ("Bogoso/Prestea") located near the town of Bogoso, Ghana. GSBPL operates a gold ore processing facility at Bogoso/Prestea with a capacity of up to 3.5 million tonnes of ore per annum, which uses bio-oxidation technology to treat refractory ore ("Bogoso refractory plant"). In addition, GSBPL has a carbon-in-leach ("CIL") processing facility located adjacent to the refractory plant, which is suitable for treating non-refractory gold ores ("Bogoso non-refractory plant") at a rate up to 1.5 million tonnes per annum. Bogoso/Prestea produced and sold 140,504 ounces of gold in 2011 and 125,201 ounces of gold in the nine months ending September 30, 2012.

Through another 90% owned subsidiary, Golden Star (Wassa) Limited ("GSWL"), we own and operate the Wassa open-pit gold mine and CIL processing plant ("Wassa"), located approximately 35 kilometers east of Bogoso/Prestea. The design capacity of the CIL processing plant at Wassa ("Wassa processing plant") is nominally 3.0 million tonnes per annum but varies depending on the ratio of hard to soft ore. GSWL also owns the Hwini-Butre and Benso concessions ("HBB") in southwest Ghana. Ore from the HBB mines is sent to Wassa for processing. The Hwini-Butre and Benso concessions are located approximately 80 kilometers and 50 kilometers, respectively, south of Wassa along the Company's dedicated haul road. Wassa/HBB produced and sold 160,616 ounces of gold in 2011 and 118,533 ounces of gold in the nine months ending September 30, 2012.

We also hold interests in several gold exploration projects in Ghana and other parts of West Africa, and in South America we hold and manage exploration properties in Brazil.
All our operations, with the exception of certain exploration projects, transact business in U.S. dollars and keep financial records in U.S. dollars. Our accounting records are kept in accordance with U.S. GAAP. Our fiscal year ends December 31. We are a reporting issuer or the equivalent in all provinces of Canada, in Ghana and in the United States and file disclosure documents with securities regulatory authorities in Canada and Ghana and with the United States Securities and Exchange Commission.
NON-GAAP FINANCIAL MEASURES
In this Form 10-Q, we use the terms "total cash cost per ounce", "cash operating cost per ounce" and "cash generated before working capital changes". "Cost of sales" as found in our statements of operations, includes all mine-site operating costs, including the costs of mining, ore processing, maintenance, work-in-process inventory changes, mine-site overhead as well as production taxes, royalties, mine site depreciation, depletion, amortization, asset retirement obligation accretion and by-product credits, but excludes exploration costs, property holding costs, corporate office general and administrative expenses, foreign currency gains and losses, impairment charges, corporate business development costs, gains and losses on asset sales, interest expense, gains and losses on derivatives, gains and losses on investments and income tax expense/benefit.
"Cash operating cost per ounce" for a period is equal to "Cost of sales" for the period less mining related depreciation, depletion and amortization costs, royalties, production taxes, accretion of asset retirement obligation costs, costs that meet the definition of Betterment Stripping under International Financial Reporting Standards ("IFRS") and operations-related foreign currency gains and losses for the period, divided by the number of ounces of gold sold during the period. "Total cash cost per ounce" for a period is equal to "Cash operating costs" for the period plus royalties and production taxes, divided by the number


of ounces of gold sold during the period.
                                                             For the three months ended
                                                                 September 30, 2012
                                                       Wassa       Bogoso/Prestea     Combined
Operating costs                                     $  34,574     $       57,431     $  92,005
Royalties                                               3,390              3,292         6,682
Costs to metals inventory                              (1,432 )           (2,890 )      (4,322 )
Mining related depreciation and amortization           17,576              8,255        25,831
Accretion of asset retirement obligations                 324                379           703
Cost of sales - GAAP                                   54,432             66,467       120,899
Less royalties                                         (3,390 )           (3,292 )      (6,682 )
Less betterment stripping costs                             -             (8,406 )      (8,406 )
Less operations-related foreign exchange losses           332                542           874
Less mining related depreciation and amortization     (17,576 )           (8,253 )     (25,829 )
Less accretion of asset retirement obligations           (324 )             (381 )        (705 )
Cash operating cost                                 $  33,474     $       46,677     $  80,151

Plus royalties                                          3,390              3,292         6,682
Total cash cost                                     $  36,864     $       49,969     $  86,833

Ounces sold                                            40,982             39,844        80,826
Cost per ounce measures ($/oz):
Cash operating cost per ounce                       $     817     $        1,171     $     992
Total cash cost per ounce                           $     900     $        1,254     $   1,074



                                                             For the three months ended
                                                                 September 30, 2011
                                                       Wassa       Bogoso/Prestea     Combined
Operating costs                                     $  31,967     $       49,021     $  80,988
Royalties                                               2,881              3,664         6,545
Costs from metals inventory                                16              1,278         1,294
Mining related depreciation and amortization            7,754              7,759        15,513
Accretion of asset retirement obligations                 291              1,754         2,045
Cost of sales - GAAP                                   42,909             63,476       106,385
Less royalties                                         (2,881 )           (3,664 )      (6,545 )
Less betterment stripping costs                          (281 )             (434 )        (715 )
Less operations-related foreign exchange losses           121                124           245
Less mining related depreciation and amortization      (7,754 )           (7,759 )     (15,513 )
Less accretion of asset retirement obligations           (291 )           (1,754 )      (2,045 )
Cash operating cost                                 $  31,823     $       49,989     $  81,812

Plus royalties                                          2,881              3,664         6,545
Total cash cost                                     $  34,704     $       53,653     $  88,357

Ounces sold                                            33,485             40,376        73,861
Cost per ounce measures ($/oz):
Cash operating cost per ounce                       $     950     $        1,238     $   1,108
Total cash cost per ounce                           $   1,036     $        1,329     $   1,196


                                                             For the nine months ended
                                                                 September 30, 2012
                                                       Wassa       Bogoso/Prestea     Combined
Operating costs                                     $ 109,838     $      168,514     $ 278,352
Royalties                                               9,764             10,304        20,068
Costs to metals inventory                              (6,305 )           (9,297 )     (15,602 )
Mining related depreciation and amortization           45,493             24,492        69,985
Accretion of asset retirement obligations                 969              1,142         2,111
Cost of sales - GAAP                                  159,759            195,155       354,914
Less royalties                                         (9,764 )          (10,304 )     (20,068 )
Less betterment stripping costs                             -            (18,770 )     (18,770 )
Less operations-related foreign exchange losses           812                705         1,517
Less mining related depreciation and amortization     (45,493 )          (24,492 )     (69,985 )
Less accretion of asset retirement obligations           (969 )           (1,142 )      (2,111 )
Cash operating cost                                 $ 104,345     $      141,152     $ 245,497

Plus royalties                                          9,764             10,304        20,068
Total cash cost                                     $ 114,109     $      151,456     $ 265,565

Ounces sold                                           118,533            125,201       243,734
Cost per ounce measures ($/oz):
Cash operating cost per ounce                       $     880     $        1,127     $   1,007
Total cash cost per ounce                           $     963     $        1,210     $   1,090



                                                             For the nine months ended
                                                                 September 30, 2011
                                                       Wassa       Bogoso/Prestea     Combined
Operating costs                                     $ 104,863     $      138,288     $ 243,151
Royalties                                               8,046              7,290        15,336
Costs (to)/from metals inventory                       (1,504 )            2,355           851
Mining related depreciation and amortization           31,234             20,789        52,023
Accretion of asset retirement obligations                 868              4,432         5,300
Cost of sales - GAAP                                  143,507            173,154       316,661
Less royalties                                         (8,046 )           (7,290 )     (15,336 )
Less betterment stripping costs                             -             (1,890 )      (1,890 )
Less operations-related foreign exchange losses           293                251           544
Less mining related depreciation and amortization     (31,234 )          (20,789 )     (52,023 )
Less accretion of asset retirement obligations           (868 )           (4,432 )      (5,300 )
Cash operating cost                                 $ 103,653     $      139,004     $ 242,656

Plus royalties                                          8,046              7,290        15,336
Total cash cost                                     $ 111,699     $      146,294     $ 257,992

Ounces sold                                           125,280            105,029       230,309
Cost per ounce measures ($/oz):
Cash operating cost per ounce                       $     827     $        1,323     $   1,054
Total cash cost per ounce                           $     892     $        1,393     $   1,120


"Cash generated before working capital changes" is calculated by subtracting the "Changes in working capital" from "Net cash provided by operating activities" as found in our statements of cash flows.
We use total cash cost per ounce, cash operating cost per ounce and cash generated before working capital change as key operating indicators. We monitor these measures monthly, comparing each month's values to prior periods' values to detect trends that may indicate increases or decreases in operating efficiencies. These measures are also compared against budget to alert management of trends that may cause actual results to deviate from planned operational results. We provide these measures to our investors to allow them to also monitor operational efficiencies of our mines. We calculate these measures for both individual operating units and on a consolidated basis. Total cash cost per ounce, cash operating cost per ounce and cash generated before working capital changes should be considered as non-GAAP financial measures as defined in SEC Regulation S-K Item 10 and in applicable Canadian securities laws 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, ore 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 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 is focused primarily on the acquisition of producing and development-stage gold properties in Ghana and on the exploration, development and operation of these properties. We also pursue gold exploration activities in South America and other countries in West Africa.
We acquired the Bogoso property and began operating its mines and non-refractory processing facility in 1999. In 2001, we acquired the Prestea property located adjacent to the Bogoso property. In late 2002, we acquired Wassa and constructed the Wassa processing plant, which began commercial operations in April 2005. In July 2007, we completed construction and development of the Bogoso refractory plant. In late 2005, we acquired the HBB properties consisting of the Benso and Hwini-Butre properties. Benso began sending ore to the Wassa processing plant in 2008, and in 2009, following its development phase, Hwini-Butre began sending ore to the Wassa processing plant.
Our current focus is to improve operating efficiencies at both operations; to evaluate in detail the opening of the Prestea Underground and to continue broader and deeper drilling at Wassa Main to evaluate the expansion potential for the Wassa operation.
Our longer term objective is to continue the growth of our mining business to become a mid-tier gold producer. 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.
We actively explore for gold in West Africa and South America, investing approximately $24.4 million in 2011 and we plan to spend approximately $16.0 million in 2012. We are conducting regional reconnaissance projects in Ghana, Cote d'Ivoire and Brazil, and have drilled more advanced targets in Ghana and Niger. See Item 2 - "Description of Properties" in our Annual Report on Form 10-K for the year ended December 31, 2011, for additional details on these properties.
TRENDS AND EVENTS IN THE THREE MONTHS ENDED SEPTEMBER 30, 2012 RESTART OF THE BOGOSO NON-REFRACTORY PLANT Ore processing was restarted at our Bogoso non-refractory plant in the first quarter of 2012 following completion of the plant renovation project in late 2011. Feed for the restarted plant came initially from non-refractory ore stockpiles at Bogoso, but by March 2012, the plant began receiving non-refractory ore from our Pampe mine, where mining was restarted in the third quarter of 2011. For the rest of 2012 and 2013, we expect most of the feed for the Bogoso non-refractory plant to come from Pampe, with minor amounts of supplemental non-refractory ores from the Bogoso pits. The Bogoso non-refractory plant produced and sold 9,567 ounces of gold in the third quarter of 2012 and 26,535 ounces in the first nine months of 2012. See Bogoso's Results of Operations section below for additional detail.
GOLD PRICES
While gold prices have generally trended upward during the last eleven years from a low of $252 per ounce in 2001 to a high of $1,895 per ounce in September 2011, prices have tracked between $1,550 per ounce and $1,750 per ounce in the first nine


months of 2012. Gold prices can fluctuate widely due to several factors such as changes in demand for physical gold, forward selling by gold mining companies, government actions, changes in the value of the U.S. dollar and global mine production rates. We realized an average of $1,653 per ounce for our gold shipments during the third quarter of 2012 and $1,704 per ounce for our gold shipments during the third quarter of 2011.
INCREASES IN MINING COSTS
While gold prices have trended sharply upward in recent years, the mining industry has also experienced steady increases in mine operating costs including the costs of fuel, electric power, labor, explosives, mining equipment, equipment maintenance parts and chemicals consumed in the processing plants. In addition, many governments around the world have increased mineral royalties, fees and income tax rates in recent years.
Mining is an energy intensive industry using large quantities of electricity and fuel in the mining, transport, crushing, grinding and processing of ores and as a result, a mine's cost structure is sensitive to changes in fuel and electric power costs. Increases in crude oil prices from $45 per barrel in early 2009, to in excess of $100 per barrel in early 2012 have thus contributed to higher mining costs worldwide. Increasing fuel costs have also resulted in higher electric power costs in many areas including Ghana. The resource boom of recent years has constrained the availability of skilled mining personnel, which in turn has put upward pressure on labor costs. It has also contributed to increases in mining equipment costs and longer lead times for new orders for large equipment. Despite the higher costs, our mining and processing cost per tonne have remained relatively flat from early 2011.
INCREASES IN TAXATION
In the first quarter of 2012, the Government of Ghana enacted three changes to tax rules which apply to mining companies operating in Ghana and further announced its intent to implement two additional changes.
Changes enacted and implemented in the first quarter of 2012 are as follows:
1. Rate Increase: A 10% increase in income tax rates from 25% in 2011 to 35% in the first quarter of 2012 resulted in a one-time increase in our deferred tax liability of approximately $9.6 million as our deferred future income tax liabilities as of December 31, 2011, were increased to reflect the new higher rate.
2. Tax Depreciation Limits: Prior to 2012, a mining company could add 80% of the cost of its annual qualified capital spending to a tax asset pool known as "Capital Allowances", which was immediately available, on an unlimited basis, to reduce taxable income. Once taxable income was reduced to zero in a given year, the remaining balance of the Capital Allowance pool was available for use in subsequent years. Under the new rule, only 20% of a year's capital spending can be added to the Capital Allowance pool, and one fourth of the remaining 80% is added to the pool in each of the subsequent four years. This new rule delays the availability of Capital Allowances and could result in a smaller amount of available Capital Allowance in a given year which could result in a higher taxable income and accelerated cash paid for taxes.
3. Ring Fencing: The Government's new rules disallow the use of expenditures in one mining area as a deduction from revenues in a separate mining area leased by the same company in determining the company's taxable income. While no details have been released for the application of this new rule, the Company expects this to have an immaterial impact on the calculation of tax expense in the current year. Additional changes announced but not yet enacted:
4. Windfall Profit Tax: The Government of Ghana has stated its intention to implement a 10% windfall profit tax on mining companies. The Government held hearings on this new development during the second and third quarters of 2012, but has not yet finalized this new tax.
5. Stability Agreement Renegotiations: The Government has established a tax stability renegotiation team that is reviewing the existing tax stability agreements of mining companies operating in Ghana. While our subsidiaries do not have tax stability agreements, it is not clear if the tax stability renegotiation team will also review the Deeds of Warranty which specify certain tax agreements for our properties.
EXPIRY OF REVOLVING CREDIT FACILITY
The loan agreement for our $31.5 million revolving credit facility provided that the facility would end on September 30, 2012. The loan agreement further specified that our ability to draw on the facility would expire on April 1, 2012, if there was no outstanding balance as of this date. Since there was no outstanding balance at April 1, 2012, the facility expired on that date.


SALE OF BURKINA FASO EXPLORATION PROPERTIES
In December 2011, Riverstone Resources notified us, per terms of a 2007 exploration earn-in agreement, of their intent to exercise their purchase option for our Goulagou and Rounga exploration properties in Burkina Faso. The sale of these exploration projects was completed in February 2012 upon receipt of $6.6 million of cash and 21.7 million Riverstone common shares valued at $15.8 million on the day of the sale. The underlying properties' carrying value was written down to zero in prior periods, resulting in the recognition of a net gain of $22.4 million on the completion of this disposition in the Statement of Operations. Since the sale of this property in February 2012, the price of Riverstone's shares has dropped from $0.73 per share to $0.31 per share, however the Riverstone share price recovered to $0.71 per share at September 30, 2012. As a result, we recorded an unrealized (gain)/loss of ($8.7 million) and $0.3 million in the Statement of Comprehensive Income/Loss for the quarter and nine months ending September 30, 2012, respectively. As such, at September 30, 2012, the value of these Riverstone shares was $15.4 million.
CONVERTIBLE DEBENTURES
On May 31, 2012, we issued $77.5 million of 5% Convertible Senior Unsecured Debentures due June 1, 2017 (the "5% Debentures") in exchange for an aggregate of $74.5 million of the principal amount outstanding of our 4% Convertible Senior Unsecured Debentures due November 30, 2012, (the "4% Debentures"), by way of privately negotiated transactions with certain holders of the 4% Debentures. We incurred a $0.6 million loss on the extinguishment of the 4% Debentures. As a result, an aggregate of approximately $50.5 million principal amount of 4% Debentures remained outstanding as of May 31, 2012. In September 2012, we redeemed an additional $6.1 million of our 4% Debentures by way of a privately negotiated transaction. After purchasing and canceling the $6.1 million of the 4% Debentures, $44.4 million principal amount remains outstanding at September 30, 2012, which is expected to be settled in cash at maturity. See Note 11 to the accompanying financial statements and also the Liquidity Outlook section below for additional details of this transaction.
PRESTEA UNDERGROUND - WEST REEF
In early May 2012, we completed a preliminary economic assessment ("PEA") of the West Reef area of the Prestea Underground located near our Bogoso mining operation in Ghana. Based on the results of this study, the Company's Board of Directors has asked for a full feasibility study to be prepared to better define the economic potential of this underground property. See "Prestea Underground" in the Development Projects section of this Form 10-Q for additional details of the study.
RECENT CHANGES IN GHANA MINING LAWS
The Ghana Minerals Commission has announced changes in the regulations governing mining and exploration activities and operations in Ghana including, amongst other things, health, safety and environmental standards of mining, incentives for local procurement of mining supplies and equipment, limits on expatriate workers, compensation for land used in mining, mine inspections, mine and exploration permitting, use of explosives, mine closure and rehabilitation, stakeholder concerns, employees training, tailings storage facilities and working conditions. The Chamber of Mines is engaged in discussions designed to clarify the goals, intent and application of the new regulations as they will be implemented. Pending the outcome of the discussions we are not in the position to evaluate their impact on Golden Star.


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