It's been just slightly more than a year since I introduced my list of 10 small-cap companies to rule them all. Golden Star Resources (AMEX: GSS), a junior miner with operations focused in Ghana, was my first selection in the series, and today I thought it would be worthwhile to see how it's performed since then and what you can expect from the company going forward.

Company Golden Star Resources
Performance Since Pick (40%)
Price/Book: 1.04
Forward P/E 6.8

Source: Yahoo! Finance.

Where it has been
Things haven't exactly gone Golden Star's way, with production miscues and lowered guidance almost becoming the norm. I know this first-hand because I've been a Golden Star shareholder for nearly a year now, and it's seemed like a constant uphill battle. Believe it or not, I'm still keeping my head held high, and I remain bullish on the company's long-term outlook.

The biggest deterrent for Golden Star is its sky-high mining costs, which make it difficult to turn a profit even with gold at near-record highs. But, it appears that its Bogoso/Prestea mine is finally ready to pay those dividends I've been expecting for more than a year now.

The operational efficiency at its key mine has been rising with regularity for months, while operating cash costs have fallen for two straight quarters. The metallurgical recovery rate has increased over the past five quarters, beginning in Q4 2010, from 56%, to 61%, 66%, 76%, and now 78% in the fourth-quarter of 2011.

Many of the cash costs that hampered Golden Star in 2011 simply won't be there in 2012. The company spent $3 million last year in refurbishing its Bogoso oxide plant, which is expected to be running at capacity sometime in the second quarter. Getting this oxide plant back to capacity is one way Golden Star will be able to keep its cash operating costs down.

Production at its Wassa/HBB mine isn't as encouraging, with the forecast calling for a slight gold output decrease. The one bright spot is that cash production costs are expected to drop to $950-$985 an ounce from the $1,012 an ounce it experienced in the fourth quarter.

Where it's going
Golden Star's overall outlook for 2012 looks promising -- with total gold output projected to increase by 16%-23% to 350,000-370,000 ounces, from the 301,000 ounces produced in 2011. More importantly, the company's cost-cutting initiatives are expected to reduce Bogoso/Prestea's costs from $1,261 to a range of $1,100-$1,180. Driving costs down is the key to turning a profit and making investors happy.

Finally, there's Golden Star's bare-bones valuation. The entire gold mining sector seems to be priced as if no one wants the shiny yellow metal anymore. Have a look at some of Golden Star's competitors, both big and small, and you'll notice that many are trading at inexpensive valuations.

Company

Price/Book

Forward P/E

Jaguar Mining (NYSE: JAG) 1.74 15.5
Aurizon Mines (AMEX: AZK) 2.34 9.5
Barrick Gold (NYSE: ABX) 1.87 7.2
IAMGOLD (NYSE: IAG) 1.43 8.1

Source: Yahoo! Finance.

Jaguar Mining and Aurizon are both junior miners that are undeniably takeover candidates. For Jaguar, Chinese miner Shandong Gold offered in November to purchase the company for $1 billion, while Aurizon's CEO, George Paspalas, confirmed this week that his company had received informal takeover interest.

For larger miners, their valuations seem remarkably cheap compared with where they were even five years ago. IAMGOLD is strongly entrenched in the Abitibi region of Quebec, while Barrick Gold has the industry's largest reserve base. With single-digit P/Es, they are sure to draw attention.

Foolish roundup
This is exactly why I continue to like Golden Star: It offers a very compelling valuation and is perhaps the cheapest gold stock in the entire sector based on book value. I'm currently a shareholder who has no intention of selling his shares any time soon, and I have considered adding to my position if it yet again trades below its book value.

What's your take on Golden Star: Is it a perpetual disappointment or can it finally turn the corner? Tell me and your fellow Fools about it in the comments section below.

For another gold play that could be sitting on a mountain of gold, check out the latest special report from our analysts at The Motley Fool. Find out for free why they feel big returns could be hidden in small packages.