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Golden Star Resources Ltd (NYSEMKT:GSS)
Q4 2019 Earnings Call
Feb 19, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Golden Star Resources Full Year 2019 Results Conference Call and Webcast. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Michael Stoner, Investor Relations. Please go ahead.

Michael Stoner -- Investor Relations

Thank you for joining us for the 2019 Results call for Golden Star. I'm joined in London by Andrew Wray, our CEO; Graham Crew our COO; and Peter Spora, who is Head of Growth and Discovery; and on the line from Canada, we've got Andre van Niekerk, our CFO.

I'll now hand over the call to Andrew to kick off the presentation.

Andrew Wray -- President and Chief Executive Officer

Thank you very much. Michael. Good morning, good afternoon everybody. Thanks for joining the call. I'll go straight to slide 4 in the presentation, so the slide 2019 key achievements, and give a quick overview of where we got to. 2019 was a pretty busy year for Golden Star, with some significant change in the business. We have a new management team, as you're aware, in place. As we said, Andre is on the call today, and Andre is now handing over CFO to Paul Thompson, now that the financial results are public. So a new team based in London up and running here. So we're pretty much on the same time zone as our assets in Ghana and easily accessible. So the aim being to be more accessible and more responsive to the asset base.

In terms of the assets themselves, Wassa, they had another year with good progress as you know in Q3 and Q4. There is some work to be done, which we have identified in terms of catching up on both development, as well as the definition drilling, which with the Q4 results I think you could see, we've got the mine back to where it needed to be. We've also been focusing on playing some pretty significant infrastructure there, in terms of ventilation, electrical upgrades, the paste plant, which will help set that mine up for the longer term, and all of that with still maintaining very good cost discipline, good cash generation from Wassa and some impressive unit cost rates.

At Prestea, and when I joined mid year, we initiated an operational review there of an asset that needed some quick work, in terms of identifying the issues, we've spend some time to put in place a turnaround plan. We've been working on the new mine plan there, which is what has been used for the carrying value review we did, and you will have seen, there is an impairment of just under $57 million at Prestea, which effectively means the residual value is equal to liabilities going forward, and we've taken what we think is a relatively conservative view there, given it's early in the turnaround, there is execution risk, but we are confident, there is still significant value to be derived at Prestea.

Then on the sustainability, which is mentioned on slide 4. That for us, as with many of our peers in the industry is of an increasing focus. We've made the Head of Sustainability position, a senior position on the Executive Committee, and we've got a strong starting base, a good reputation in Ghana, but it will continue to be an increasing area of focus for the business, as we go forward, and one which is going to help the sustainability of the business itself to deliver the long-term value, particularly at Wassa.

Moving on to slide 5, on our 2019 performance versus the guidance that we revised shortly after I joined middle of the year. Everyone has seen the production performance numbers, which were out last month. As you can see there broadly, costs are in roughly the middle of most ranges. The one exception where we put in some additional investment over the second half of the year was on our Group capital spend. Predominantly that additional spend was -- at Wassa was, as I said, we identified the need for some catch-up, spend on both the development rates and definition drilling, to ensure that we exited the year in a position, where we can continue to ramp up the volumes and have much better visibility and higher confidence levels, in what we're guiding going forward, and that's the position we start 2020 in.

We also brought some of that infrastructure spend forward, in terms of the paste plant and the electrical upgrade, which came into -- late in Q4, rather than 2020, just to make sure with some of those long lead items, we got ahead of ourselves. So really about positioning ourselves to extract the value from Wassa, we've pushed our capital a little bit at the end of 2019.

In terms of 2020, on slide 6; I think for us, the objectives there summarize that Wassa, obviously continue with the volume improvements that we've seen of that site, to make sure the infrastructure is in place, and critically increase the understanding of the orebody, so we can continue to refine the longer-term plans, but also, have a higher degree of confidence in those plans.

At Prestea, we're looking to improve the underground delivery, as we go through the year, given we will see a significantly lower amount of open pit ounces in 2020 versus '19. So that will mean that we will need to ramp up the tonnes from underground and better quality tonnes in terms of higher grade, less dilution. The second level on 17-Level is being set up for Long Hole Open Stoping. We should in the next couple of months, start to see some of the early development ore and then Stoping tonnes later in the year, but that will give us greater flexibility at the asset and help us to eliminate the cash burn that we've seen, as we go through 2020 into 2021.

Exploration, the focus at Wassa really is trying to identify additional tonnes that are nearer to surface. So if we can find more lateral material, we're doing some of the footwall drilling that Peter and the team has just kicked off, and which will help us to push volumes more quickly, if we can identify additional structures. At Prestea, there will be later in the year, some extensional drilling just to push out from 17-Level to the north. And then regionally, we started to test some of those earlier targets, the additional material around Wassa.

At the corporate level, all of that sets us up longer term, to be able to deliver higher levels of free cash flow out of the business to grow the production profile, both with step back up at Prestea and increasing output from Wassa, and then to improve the structure of the business with the changes we've made in the confidence in delivery of the two assets and returns from them.

So with that, I'll hand over to Graham, who is going to go through both Wassa and Prestea in a little bit more detail. Graham?

Graham Crew -- Chief Operating Officer

Thanks Andrew. So just moving on to slide 8, positive quarter for Wassa end year, but positive quarter for Wassa, as Andrew mentioned. A step up from the same quarter in 2018, but importantly on think improved great quarter-on-quarter. So people would remember that we had our challenges in quarter two and quarter three. Fourth quarter, we were back into the central part of the ore body in 595 and 620 levels, and so moving out of those lower grade areas that we'd experienced. So that certainly helped the mine. The production rate continued, averaged over 4,000 tonnes a day. So again, that's a significant step-up, 2018 to 2019 and the team on site showed that they can sustain those sort of production rates. The plant -- as we know, the plant has got plenty of capacity. So any incremental tonnes that we can bring out of Wassa can be processed. So as I said, good grade improvements over the quarter, slight increase in production year-on-year, but that's an important -- moves forward for Wassa.

Moving on to slide 9, and just looking how that comes out in the costs. Andrew touched on the unit costs. The unit costs continue to be very impressive at Wassa and the cash operating costs per ounce as a result, very much the same between quarter comparisons Q4 2018 to 2019. One area that we also touched on, was just on the capital expenditure increase from 2018 to 2019, largely due to the paste plants, electrical and pump station upgrades, which are all important long-term investments for Wassa. Yes, the paste plant in particular will help us unlock and improve that mining recovery over the long-term, which is supported by the electrical upgrade.

In terms of full year 2019, the cost per ounce came down a little bit and the cash operating costs in line with the unit costs was, very-very strong, you know $630 an ounce and all-in sustaining costs increased slightly over 2018, but when you take into account the capital investment, very strong performance, from the team at Wassa.

Moving on to Prestea on slide 12; obviously, we still got our challenges at Prestea. The 11,3000 ounces produced in Q4 was in line with Q4 2018, with increased grade from underground. So we did start to see a little bit of improvement from some of the initiatives that we've taken, couple of important ones, reducing the Alimak size, reducing the height where we can, by reducing the hydraulic radius or the span of the stopes. And also, separating with some development, we have now got in place, where that would separate some of the waste from the ore, instead of diluting the ore stream through to the plant. Few problems in the quarter, late in the quarter, I guess just demonstrates the challenges with the configuration of Prestea as we currently have it, sort of down to one stope. That stope locks up and affects the production for the quarter. So this shows the importance of the work that we're doing on 17 Level to bring in another mining method and another area that we can we can mine from.

FY '19, Andrew touched on the decreasing open pit. We are still looking at oxide open pit opportunities around Prestea/Bogoso, they're smaller scale. But we're still looking at those to supplement production where we can a little bit, but it's significantly reduced in the FY '20 plan. And as is mentioned there on the slide, the underground production decreased year-on-year, mainly due to the geotechnical issues and the issues we've had with Alimak stoping. So again, just highlighting the importance of improvement work that we're doing.

Moving on to slide 13, fairly well -- those operating results fairly well reflected in the costs. We're still talking about a fairly high cost operation and the full year 2019, all-in sustaining costs at $19.37 up from $15.58 in 2018. So, still work to be done at Prestea on the costs.

Slide 14, so just focusing on what we are doing to improve the operations at Prestea. Andrew touched on the independent review that CSA undertook for us midyear. We turned that into an overall project and a series of subprojects that we're doing to increase the flexibility of the mine plan. So a couple of things that I mentioned, reducing the Alimak stope pipe from 160 metres down to something more manageable, below sort of 120 metres. that has a few benefits. Makes the Alimak cycle time faster, not as much trouble time involved, and reduces the hydraulic radius of the stopes as I mentioned. So we saw some signs of improvement with the South 12 stope, about how that performed over Q4, so that gives us some confidence of the changes that we're making to the Alimak areas, will definitely add to the flexibility of the mine plan.

On 17-Level, that's progressing well. We're into the development. We have setup the ventilation and started on the main decline from 17 to 21-Level. Again as Andrew touched on, we'll start bringing in some development ore as we open up the levels and importantly, second half of 2020, we'll be into some long-haul open stopping over a couple of levels, which will give us some flexibility. So then we'll have three or four mine plan areas open at a time, where we can stope from, rather than be down to one. The other significant improvement over the quarter is opening up the North block on 24-Level Alimak. We've got that development set up now. So we're now developing stopes North and South at 24-Level. So quite a bit of work going on at Prestea to improve the sustainability of that operation, and mainly through reducing the mining execution risk in -- geotechnically, reducing dilution through that and improving the stope cycle time.

So it's a lot of work going on, but the team is heavily involved, the site team, driving those improvements and we're starting to see some of the benefits flow through on a week-to-week basis.

With that, I'll hand over to Andre to talk about the financial results.

Andre van Niekerk -- Executive Vice President and Chief Financial Officer

Thank you, Graham. Good morning, everyone. I'm on slide 16. Gold revenues for Q4 totaled approximately $66 million from gold sales of 33,400 ounces. Included in the revenue for the quarter and the full year is a $9.3 million non-cash cumulative adjustment to revenue, relating to the accounting treatment of the extension of reserves and resources under IFRS 15. Now that's mouthful, and for further details on that please refer to the MD&A for an explanation of that. But excluding this negative $9.3 million adjustment, revenue for the quarter totaled $75 million for the quarter. This represents a 31% increase compared to the fourth quarter of 2018, and this is as a result of a 19% increase in the average realized gold price and a 10% increase in gold sales.

The consolidated mine operating margin improved dramatically for both the quarter and the full year of 2019. Q4 2019 shrunk from a mine operating margin loss of $8.9 million, due -- and mine operating margin of $8.4 million. For the year, the mine operating margin improved from $15 million to $49 million for 2019. Both operations saw significant improvement in margin. However, in 2019, Prestea still incurred a mine operating loss, which was offset by the significant contribution at Wassa. The loss before tax increased to $15 million for 2019, that's up from $12 million in 2018. The $37 million impairment of the Prestea underground property was the primary reason for the increase in the loss before tax. I'll discuss the impairment further in the following slide.

At Wassa, we saw a 56% increase in income before tax to approximately $68 million. Corporate and other expenses were $9 million higher than in 2018, mainly due to relocation and severance costs related to the relocation of the company's headquarters to the U.K. Income tax increased to $27 million up from $12 million in 2018 due to Wassa now generating taxable income on a consistent basis.

In total, net loss attributable to Golden Star shareholders was $67 million or $0.62 per share, compared to a net loss of $18 million or $0.21 per share last year. On an adjusted basis, the EPS improved to $0.16 per share in 2019, up from a loss of $0.02 per share in 2018. The improvement in the adjusted EPS is due to the improved mine operating margin at both of our operations in 2019.

Now moving on to slide 17; looking at the impairment in more detail. During the fourth quarter management, as part of the budgeting process review, the expected cash flows from Prestea based on both the internal analysis and the results of the CSA report. The fair value for the purpose of the impairment test was done using the value in used model, through which the value of Prestea was determined by a discounted cash flow analysis of the indicative life of mine

Model. The life of mine model was developed for impairment testing purposes and its management's best, but conservative estimate of the recoverable value of Prestea's assets. The impairment test concluded that Prestea value is lower than its previous carrying value, resulting in an impairment charge of $57 million. Prestea's asset value is now balanced by the liabilities and working capital for net carrying value of zero.

Moving on to slide 18; looking at the cash flow waterfall chart for the year; the Wassa operations contributed approximately $94 million during 2019, while Prestea used $15 million. G&A excluding share-based compensation was $16 million and the company also made $7 million of interest payments during the year. Working capital used $14 million, consisting primarily of a $5 million investment in inventories, an increase of $3 million in accounts receivable and a decrease in liabilities of $6.4 million related to the settlement of the PSU liability. As a result the net cash flow provided by operations totaled $23 million.

During the year, we spent $73 million on capital, of which $60 million was incurred at our Wassa operation. Some of the major items include $11 million on capitalized development costs, $8.7 million in mobile equipment, $8.5 million on other underground development expenditures like the electrical and ventilation upgrade. We also spent $7 million on the construction of the paste fill plant in 2019, and then finally, we spend $60.5 million on exploration at Wassa. At Prestea, we incurred total capital of $13 million, of which $10 million was incurred on the underground development.

During the fourth quarter, we closed the $60 million credit facility with Macquarie and repaid the remaining balance of the Ecobank loans and settled the outstanding balance of the vendor agreement. As a result, net cash provided by financing activities totaled $1.4 million, which resulted in Golden Star ending with a year-end cash balance of approximately $54 million.

I will now hand it over to Peter Spora, to tell us more about the exploration activities.

Peter Spora -- Executive Vice President Growth & Exploration

Thank you, Andre. Good afternoon, good morning, everyone. Full year results for exploration; 2019 saw $20.5 million spent on exploration, of which $17.3 million of it was capitalized and the majority of that -- the spend was focused on Wassa -- on the Wassa extensions, satellite opportunities at Wassa and other opportunities around the Wassa exploration properties. Additional exploration drilling was spent at Prestea focused on, as Graham said earlier, looking at infill drilling around our Alimak stopes and in the segment [Phonetic], following the focus on the 17-Level.

Looking back into Wassa; the drilling there was 62,000 metres of surface drilling. It was focused on into and step out on the Wassa extensions to the South of the existing and current mining area and area of focus. That drilling has shown that the system is now extended over a two-kilometre strike length that's shown in the slide on slide 20. It extends also to a depth of 1.3 kilometres, and that extension to two kilometres is shown by the last section 18,500 on the image in the presentation, which hole the 19-400 intersected 19 metres at 5.5 grams on the southernmost drill fence.

Infill drilling undertaken during the year has demonstrated the continuity for mineralized envelopes, and grades of the main B-Shoot mineralization that we've been following down plunge to the south. The majority of the drilling in 2019 was focused in a one kilometre window between Sections 19-500 and 18-500. The main difference that we've seen with the deeper drilling has been that the zone is somewhat more discrete, but they still range in thickness anywhere between 15 to 17 metres in true thickness when we look at them.

The geological interpretation for this area is evolving now, for the southern area, as we've done infill drilling from closing in from 200 metres space drilling into 50 and 100-metre space drill sections in this area. We're currently in the process of doing a resource update on the total long range plan for Wassa, and we expect to release that prior to the end of March this year.

Looking at the drill results and the results from the work to-date; we do not expect to see a major change in the resource based on infill drilling. It's predominantly confirmed what we had seen in a broader space drilling from 2018. We do expect to see overall multiple zones of mineralization. And at the same time, we've identified what looks to be some footwall zones to the main B-Shoot, which we will be testing as Andrew said, throughout 2020.

So in 2020, our focus will shift from surface drilling, which we've now completed and we don't intend to continue further surface drilling on the southern extensions in the short to medium term, instead we will be focused in these areas, drilling from undergrounds, as the mining and development extends to the South. At the same time, we'll be targeting the footwall zone to our underground drill platforms this year. We've currently started to drill program in Q1, targeting three drill fences from undergrounds, 200 metres space centres, targeting 500 metres into the footwall looking for repeats of the B-Shoot zone. The repetitions we're looking at, we have identified in the deeper drilling to the South in the footwall zone and we're following and targeting those up plunge, to where we expect them to daylight, where there was some previously mined open pits. So that's the main target for the 2020 drilling.

And if we change over to slide 21, in terms of Wassa we also started to look more regionally at the opportunities around Wassa. The inset box on the left hand side of slide 20, shows the geochemical footprint of the Wassa system, beside the Wassa main label. Today we've tested about two kilometres of that soil anomaly, which extends over six kilometres, and there's a general paucity of drilling as we continue to the South, which we'll be identifying targets from as we go forward. And likewise, the SAK & Ballyebo projects which seems like a parallel trend, we will be also working those targets up for future drilling.

If we look at the broader land package, you can see on the geological mapping in the centre of the slides. The Wassa mining license, which sits in the upper right hand corner, is connected to our other regional exploration targets by an 85 kilometre hole road, which has been used in the past for holing open pit or from Father Brown, that's passed to the bottom in the -- to the South, 85 kilometres away to the Benso and Subriso pits, which sit about 35 to 40 kilometres away from Wassa.

The work that we did in Q4 of 2019 identified at least 25 targets for follow-up work on this land package, based on soil, geochem, auger and RAB core drilling results from historical work which had not been followed up since 2012/2014. So the plan in 2020 is to test the specifics of these targets. One such target is the Manso North target, which is highlighted on the map there. It's a five-kilometer long soil anomaly greater than 100 parts per billion, up to 2.5 grams per tonne gold in auger, sampling and with rock chips up to 10 grams per tonne, which was identified in 2006, and which hasn't had any further follow-up work. These are the sorts of targets we expect to come out of this land package, as we do more systematic exploration and targeting.

Budget for 2020 is $6.2 million, of which $5 million is going to be spent on Wassa and Wassa Brownfield exploration targets and $1.2 million on the Prestea Northern extensions and exploration targets.

And that's it from me. At this point, I'll hand over now back to Andrew to do the wrap up.

Andrew Wray -- President and Chief Executive Officer

Thank you very much, Peter. So just finishing on slide 22. As you can see there, we are talking about a new focus and discipline, and with that we mean, putting in place the proper structure, systems, processes in the business, so that we can define higher confidence level plans for our assets, and then it's the discipline around mining those plans to deliver value from them. That way, we will unlock the potential in the assets and we see significant potential in our asset base. And then ultimately, that gives us the platform, from which we can identify growth opportunities for this business.

So with that, I'll hand back to the operator and we'll take Q&A.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from the line of Heiko Ihle from H.C. Wainwright. Please go ahead. Your line is open.

Marcus Giannini -- H.C. Wainwright -- Analyst

Hey guys, this is Marcus Giannini calling in for Heiko. Thanks for taking my questions. With the 2019 capex, about $20 million above guidance, in the release you've stated that this was an acceleration of spend, but that it also has additional exploration expenditure at Wassa, focused on infill drilling and some expansionary step out drilling of the Southern extension of the Wassa orebody? Can you break down how much of this will actually come off the 2020 capex and also, potential items that may make your figure change in either direction, especially given that your release states that the 2020 capex budget remains at elevated levels, to fund the introduction of a new mining level and method that Prestea?

Andrew Wray -- President and Chief Executive Officer

Hi Marcus, it's Andrew. So I think you said that capex was $20 million, it was $12 million over guidance, but it was over guidance. In terms of impact on 2020 and the 2020 guidance is unchanged. So those numbers don't shift. You know really, the bulk of what we did was both the catch-up in terms of -- as I said that definition and development work at Wassa. We did do a little bit of extra work there, in terms of getting a better understanding, as we are pulling together the longer term plans with some of that infill drilling and moving some of the material into higher confidence levels. But at the same time, with the paste plant for example, which is a big project, a little bit of that spend fell in the back end of 2019 versus 2020, the overall spend on the project doesn't shift. We just wanted to try and make sure, that we are ahead of the schedule as we can be. Particularly relevant now, giving potential delays to some of the elements of that project that are coming out of China, in terms of logistics.

Likewise, on the electrical upgrades, just trying to make sure that's in place sooner rather than later, so we can take up the extended volume. So that was really -- as I joined in the middle of the year and identified certainly that we were behind in terms of some of those elements at Wassa, which it was pretty clear, has the potential to cost us, which it did in Q2 and Q3. So, we made sure we were caught up. Remember as well, that volumes at Wassa in 2019 were significantly ahead of plan for the full year. So we were $0.10 to $0.15 ahead of where we plan to be, which meant as a result mathematically, you've got to do more definition drilling, you've got to do more development. So that's a chunk of it and setting ourselves up now for 2020, where again we're pushing volumes further. So that's really what's behind it; the 2020 capital guidance, as you say, versus where we'd expect longer term to normalize, is a little bit elevated.

As you pointed out, we're bringing in a new level of Prestea, so clearly, there is all the equipment spends the needs to go in place, as well as the development work that's going on there. And at Wassa as I mentioned, there's a lot of infrastructure spend, which sets the mine up for the longer term. So capex numbers will come down after 2020, but that's really what's going on in 2019 and 2020. So, does that answer your question Marcus?

Marcus Giannini -- H.C. Wainwright -- Analyst

Yes, that was great, thanks a lot. And I just had one more question. You're expecting favorable all-in sustaining cost for Wassa of 9.30 to 9.90. Though, even at the low end of this, it's a bit higher than the 9.22 you reported for 2019. Can you just go through the items to which you're attributing this cost creep and how much these individual items each impact beyond sustaining?

Andrew Wray -- President and Chief Executive Officer

Remember that number as well does include the G&A allocation to Wassa. So just in terms of looking at what the operating level is, we do that on a proportionate basis per ounces produced. But versus 2019, labor costs probably a big element, if not the single biggest element in that -- in the sense that we'll see labor inflation in real terms of 4% to 5% for the year. Yes, we can take you through the ins and outs, because there will be a lot of ins and outs. But if you strip out that labor element, and remembering labor is 30% to 40% of costs on an operating basis, so a 5% increase, then 2% increase in the overall cost base. And that's pretty much what we're talking about. So I will say Mike will follow-up with you, to take you through all of the ins and outs of that. But I think that probably is the main one. We put a little bit in the paste plant coming in Q4 and at $6 a tonne, but it's really only Q4, so it's not huge for the full year. But I think those are probably where you'll see the delta.

Marcus Giannini -- H.C. Wainwright -- Analyst

Okay, great. Thanks a lot. That's all from me.

Operator

[Operator Instructions]. There are no further questions. I will now turn the call back to Andrew Wray for closing remarks.

Andrew Wray -- President and Chief Executive Officer

Thank you very much. Everybody knows where we are and I think you got Michael's contact details. So as you digest the results and the release, please let us know if there's anything further. But thank you very much everybody for participating.

Operator

[Operator Closing Remarks].

Duration: 39 minutes

Call participants:

Michael Stoner -- Investor Relations

Andrew Wray -- President and Chief Executive Officer

Graham Crew -- Chief Operating Officer

Andre van Niekerk -- Executive Vice President and Chief Financial Officer

Peter Spora -- Executive Vice President Growth & Exploration

Marcus Giannini -- H.C. Wainwright -- Analyst

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