Golden Star Resources Ltd.

Transcription

1 GSC/GSS (T; N MKT) Stock Rating: $1.34 US$1.03 Outperform (Unchanged) Target: $1.75 (Was $1.35) Risk Rating: Speculative (Unchanged) Est. Total Return 31% Share Data 52-week Low-High $ $1.33 Shares Outstanding - Fully Diluted (mln) S/O - In the money & Fully Financed (mln) Market Capitalization (FD) (mln) $467.1 Year End: Dec A 2016E 2017E EPS (US$) ($0.26) $0.07 $0.30 CFPS (US$) ($0.05) $0.15 $0.35 P/E (x) n/a 15.2x 3.4x P/CF (x) n/a 7.0x 2.9x Production ('000s oz) TCC (US$/oz) US$976 US$858 US$746 CAPEX (US$ mln) US$57 US$93 US$44 Financial Data: Estimated for Q Cash (US$ mln) $42.1 Total long-term liabilities (US$ mln) $286.7 Net Asset Value Per Share (Base Case Cdn$) $1.59 Price to NAVPS - Base Case (x) 0.84x Dividend Yield (%) 0.0% Changes New Old 2016 CFPS (US$) $0.15 $ CFPS (US$) $0.35 $ TCC (US$/oz) $858 $ TCC (US$/oz) $746 $ Production ('000s oz) Production ('000s oz) Base Case NAVPS (Cdn$/share) $1.59 $1.24 Industry Rating: Overweight (NBF Economics & Strategy Group) Company Profile: Golden Star is a junior gold producer with operations in Ghana. Since shifting to non-refractory operations from its open-pit mines GSC has shown better control on operations and costs. However, key to sustainable low-cost operation lies in the development of the brownfield Wassa underground and Prestea underground projects. Raj Ray, MBA - (416) raj.ray@nbc.ca Alexandra Foty, B. Eng. - (416) alexandra.foty@nbc.ca July 18, 2016 Golden Star Resources Ltd. The NBF Daily Bulletin Golds Q2/16 Production Results & Valuation Update GSC Warrants a Re-Rating on Improving Outlook and Attractive Valuation HIGHLIGHTS GSC announced Q2/16 production of 42.5k oz ounces of gold from its open pit operations in Ghana, slightly below our expectations for ~44.5k oz. The miss is attributable to a ~2.5-week maintenance shutdown at Wassa, slightly longer than our assumption of ~2.0 weeks. Production from Prestea open-pit was in line with our expectations. GSC operations well positioned for a turnaround. The lower production in Q2/16 was already telegraphed by management and with the mill issues at Wassa now fixed we believe GSC s operations are well positioned to deliver strong results in H2/16. The company started initial stoping activities at Wassa U/G with commercial production expected by year end. Prestea open-pit continues to operate as per expectation with potential for exploration upside (we increased mine-life to end of 2017 from Q2/17). Prestea U/G development is continuing with initial production expected H2/17. Note that both Wassa U/G and Prestea U/G remain key to GSC s production growth and cost stability. Balance sheet challenges seem to be dissipating. GSC s total liquidity at the end of Q1/16 was ~US$85 mln (~US$14.6 mln cash; ~US$70 mln available under the RGLD stream arrangement), although the working capital deficit was US$80.3 mln. The company received equal payments of US$20 mln on April 1 and July 1, 2016 under the streaming agreement with additional US$30 mln of funding remaining. GSC also completed a US$15 mln bought deal financing in May GSC s long-term debt at the end of Q1/16 was US$90.5 mln of which the US$74 mln converts are due June 1, However, we believe the company will be in a comfortable position to refinance the converts by the end of the year. We maintain Outperform rating and increasing target to $1.75 (was $1.35); GSC valuation looks compelling. We made some changes to our model assumptions which include slight increase in resources at Prestea open-pit and decrease in discount rate at Prestea underground to 6% from 8%. In addition our model now assumes conversion of the convertible debentures given our target price is above the $1.65 conversion price. The net impact is an increase in our NAVPS to $1.59 (was $1.24). Our target is based on 1.1x our base case NAVPS. GSC continues to trade at a discount to peers and with operations and balance sheet in a much better shape we believe GSC shares are due for a re-rating. On P/NAV GSC trades at 0.84x vs. peers at ~1.1x and on P/2017 CFPS GSC trades at 2.9x vs. peers at over ~10.0x. Stock Performance Price (Cdn$) $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Jul-15 Source: Thomson One Sep-15 Nov-15 Jan-16 Mar-16 May-16 1,500 1, Volume (000)

2 STOCK RATING Outperform TICKER GSC.TO; GSS.A TARGET PRICE (Cdn$) $1.75 CURRENT PRICE (Cdn$) $1.34; US$1.03 RETURN TO TARGET 31% 52-WEEK HIGH (Cdn$) $1.33 RISK RATING Speculative 52-WEEK LOW (Cdn$) $0.21 SECTOR RATING Overweight SHARES OUTSTANDING (mln) MARKET CAPITALIZATION (Cdn$mln) $378.7 FINANCIAL DATA STOCK CHART Capital Structure Shares Millions Shares Outstanding Options 16.2 Shares from Convertible Debt 44.8 Fully Diluted Shares FINANCIAL AND OPERATING SUMMARY: GOLDEN STAR RESOURCES LTD Ownership (February 2016) Shares O/S (mln) % O/S $ Sentry Investments % Renaissance Technologies Corp % $ Millennium Management Inc % Universal Investment GMBH % $ Norges Bank % Financial Summary (US$) $ Year-end December 31st 2014A 2015A 2016E 2017E 2018E 2018E Shares Outstanding, mln Source: Thomson One EPS (0.28) (0.26) CFFOPS 0.03 (0.05) TECHNICAL ASSUMPTIONS P/CF 41.1x na 7.0x 2.9x 2.5x 2.6x 2014A 2015A 2016E 2017E 2018E 2019E+ Income Statement (US$mln) Gold (US$/oz) $ 1,266 $ 1,160 $ 1,304 $ 1,400 $ 1,400 $ 1,350 Revenue Exchange Rate (Cdn$/US$) Operating Expenses (304.9) (245.5) (170.8) (195.1) (217.7) (197.7) Depreciation (26.2) (37.3) (35.5) (51.6) (62.1) (69.1) PRODUCTION ESTIMATES General & Admin (16.4) (14.3) (15.4) (11.0) (12.3) (11.1) 2014A 2015A 2016E 2017E 2018E General Exploration (0.6) (1.3) (2.5) (2.8) (3.2) (3.1) Gold Production, 000oz Net Income (73.6) (67.7) Cash Operating Costs, US$/oz $ 1,090 $ 976 $ 787 $ 679 $ 666 Balance Sheet (US$mln) All-In Cash Costs, US$/oz $ 1,374 $ 1,408 $ 1,442 $ 990 $ 939 Cash & Equivalents Capex Spending, US$mln $ 34 $ 57 $ 93 $ 44 $ 41 Debt RESOURCE ESTIMATE Tonnes Grade Contained Gold (mln) (g/t) (mln oz) Cash Flow (US$mln) Reserves Op. CF (before W/C) 3.0 (12.9) M&I (Inclusive of Reserves) Financing CF 8.0 (7.9) (13.6) (28.3) Inferred Investing CF (36.6) (56.5) (98.9) (44.4) (41.3) (38.0) Change in Cash (26.3) (4.2) NET ASSET VALUE (Cdn$mln) (Cdn$/Sh) Multiple (Cdn$/Sh) Price (Cdn$) $1.40 $1.20 $1.00 $0.80 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 1,400 1,200 1, Volume (000) % Change in NAV 000 oz $1,600 $1,400 $1,200 $1,000 $ A 2015A 2016E 2017E 2018E Gold Production, 000oz Cash Operating Costs, US$/oz All-In Cash Costs, US$/oz Gold (US$/oz) NAVPS Sensitivity 100% 75% 50% 25% 0% -30% -20% -10% 0% 10% 20% 30% -25% -50% -75% -100% % Change from Base US$/oz Au Cdn$/US$ US$/oz Bogoso/Prestea - Non-Refractory (90%), Ghana $ 99.2 $ x $ 0.29 Prestea Underground (90%), Ghana $ $ x $ 0.69 Wassa Underground (90%), Ghana $ $ x $ 1.84 Wassa/HBB (90%), Ghana $ $ x $ 0.47 Taxes $ (188.0) $ (0.55) 1.00x $ (0.55) Corporate adjustments (incl. streaming liability) $ (340.5) $ (1.00) 1.00x $ (1.00) Total NAV $ $ x $ 1.75 COMPARABLES (Consensus versus Our Estimates) Company Ticker Share P / P/CFPS Cdn$ NAV FY FY+1 FY+2 Alacer Gold Corp ASR.TO x 9.2x 14.3x 9.8x Newmarket Gold Inc NMI.TO x 4.8x 4.1x 4.7x Richmont Mines Inc RIC.TO x 12.6x 10.1x 9.7x Semafo Inc SMF.TO x 11.5x 11.5x 9.7x Timmins Gold Corp TMM.TO x 5.2x 16.6x 13.2x Wesdome Gold Mines Ltd WDO.TO x 12.0x 6.0x 5.1x Selected Company Consesnus Average 1.06x 9.2x 10.4x 8.7x Golden Star Resources Ltd GSC.TO x 7.0x 2.9x 2.5x NAV (Cdn $Mln) $800 $700 $500 $300 $100 Valuation Sensitivity to Discount Rate $0 0% 2% 4% 6% 8% 10% 12% 14% Discount Rate (%) Source: NBF Estimates, Company Reports, Thomson, Bloomberg

3 Investment Thesis A gradual transition to a low-cost producer; GSC operations well positioned for a turnaround. As highlighted in Exhibit 1, GSC s operating costs are expected to show a declining trend given the cost reduction and productivity improvement initiatives undertaken by the company over the last two years, including move to low-cost non-refractory operation (refractory operation suspended in Q2/15), reduction of personnel and development of the Wassa underground and Prestea underground projects which remain key to production growth and cost stability for GSC. Initial stoping at Wassa underground started in early Q3/16 with commercial production expected by the end of the year. First production from Prestea underground is expected H2/17. We expect 2016 and 2017 to be a transition period for GSC as the company ramps up production at both these projects. While execution risks remain, the brownfield nature of the projects and management s prior understanding of the ore body should allay some concerns. Despite increase in our base-case NAVPS we believe it is still understated; we currently do not model any exploration upside. As mentioned earlier the increase in our NAVPS was partly due to a small increase in resources modelled at Prestea open-pit. However, we currently do not ascribe any value to the exploration potential at Prestea underground and Wassa underground. For example, at Prestea underground given the change in mining method to mechanized shrinkage stoping, with additional resources and mining horizons, we believe potential exists to not only increase mine-life (currently ~5.5 years), but also increase maximum throughput beyond the ~650 tpd we are currently modeling. In addition, at Wassa underground we continue to model an ~8.0-year mine-life in line with feasibility study. However, as shown in Exhibit 2 recent exploration has shown potential to further increase mine-life at Wassa. Balance sheet concerns dissipating at current spot gold prices. GSC s total liquidity at the end of Q1/16 was ~US$85 mln (~US$14.6 mln cash; ~US$70 mln available under the RGLD stream arrangement), although the working capital deficit was US$80.3 mln. The company received equal payments of US$20 mln on April 1 and July 1, 2016 under the streaming agreement with additional US$30 mln of funding remaining. GSC also completed a US$15 mln bought deal financing in May GSC s long-term debt at the end of Q1/16 was US$90.5 mln of which the US$74 mln converts are due June 1, However, we believe the company will be in a comfortable position to re-finance the converts by the end of the year. At current spot gold prices we estimate FCF of ~US$60 mln in 2017 and similar amount in 2018 (Exhibit 3). GSC continues to trade at a deep discount to peers. GSC continues to trade at a discount to peers and with operations and balance sheet improving we believe GSC shares are due for a re-rating. On P/NAV GSC trades at 0.84x vs. peers at ~1.1x and on P/2017 CFPS GSC trades at 2.9x vs. peers at ~10.0x.

4 Exhibit 1: GSC Annual Production Profile. Beginning 2016 Wassa underground (initial stoping activities started) will operate in conjunction with Wassa open pit. We currently model Prestea underground production starting H2/17. GSC Annual Gold Production Profile $1, $1,200 Production (mln oz) $1,000 $800 Total Cash Costs (US$/oz) A 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E Wassa Underground (90%), Ghana Prestea Underground (90%), Ghana Bogoso - Non-Refractory (90%), Ghana Bogoso - Refractory (90%), Ghana Wassa/HBB (90%), Ghana Total Cash Costs $1,152 $1,034 $858 $746 $736 $657 $721 $603 $621 $0 Wassa/HBB (90%), Ghana Bogoso - Refractory (90%), Ghana Bogoso - Non-Refractory (90%), Ghana Prestea Underground (90%), Ghana Wassa Underground (90%), Ghana Total Cash Costs Source: Company reports and NBF estimates. Exhibit 2: Wassa Underground Exploration Potential. Note that Wassa underground has advanced significantly since development began in July 2015, from a single orebody (the B Shoot) to adding the F Shoot (Exhibit 2) which GSC believes to be a parallel zone to the main mining stopes along the B Shoot structure. The 2015 year-end mineral reserves and resources statements include additions for the F Shoot target that were delineated during 2015 drilling. However, more recent drilling has extended the F Shoot target north of the current reserve and the company plans to assess the full potential of the F Shoot, which remains open down plunge to the south. Source: Company reports.

5 Exhibit 3: Estimated Cash Flow Profile Base Case and at spot gold price (~US$1,325/oz). We currently assume conversion of the US$74 mln outstanding converts to equity at the conversion price of Cdn$1.65. We also assume a US$50 mln debt refinancing in Q1/17. NBF gold price assumptions: 2016 US$1,304/oz; 2017 US$1,400/oz; 2018 US$1,400/oz; 2019 and thereafter US$1,350/oz. $500 Cash from financing activities Cash from investing activities Cash from operating activities Cash EOY - Base Case Cash EOY - at Spot gold price Cash Flow vs Cash Balance (Estimated US$ mlns) $300 $100 $0 ($100) () Source: Company reports and NBF estimates.

6 DISCLOSURES: Ratings And What They Mean: PRIMARY STOCK RATING: NBF has a three-tiered rating system that is relative to the coverage universe of the particular analyst. Here is a brief description of each: Outperform The stock is expected to outperform the analyst s coverage universe over the next 12 months; Sector Perform The stock is projected to perform in line with the sector over the next 12 months; Underperform The stock is expected to underperform the sector over the next 12 months. SECONDARY STOCK RATING: Under Review Our analyst has withdrawn the rating because of insufficient information and is awaiting more information and/or clarification; Tender Our analyst is recommending that investors tender to a specific offering for the company s stock; Restricted Because of ongoing investment banking transactions or because of other circumstances, NBF policy and/or laws or regulations preclude our analyst from rating a company s stock. 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7 ADDITIONAL COMPANY RELATED DISCLOSURES ASR GSC NMI RIC 2,3,4,5,7,10 SMF 2,3,4,5,7 TMM WDO 2,3,4,5,7 LEGEND FOR COMPANY RELATED DISCLOSURES: 2 National Bank Financial Inc. has acted as an underwriter with respect to this issuer within the past 12 months. 3 National Bank Financial Inc. has provided investment banking services for this issuer within the past 12 months. 4 National Bank Financial Inc. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months. 5 National Bank Financial Inc. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. 6 National Bank Financial Inc. or an affiliate has a non-investment banking services related relationship during the past 12 months. 7 The issuer is a client, or was a client, of National Bank Financial Inc. or an affiliate within the past 12 months. 8 National Bank Financial Inc. or its affiliates expects to receive or intends to seek compensation for investment banking services from this issuer in the next 3 months. 9 As of the end of the month immediately preceding the date of publication of this research report (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), National Bank Financial Inc. or an affiliate beneficially own 1% or more of any class of common equity securities of this issuer. 10 National Bank Financial Inc. makes a market in the securities of this issuer, at the time of this report publication. 11 A partner, director, officer or research analyst involved in the preparation of this report has, during the preceding 12 months provided services to this issuer for remuneration other than normal course investment advisory or trade execution services. 12 A research analyst, associate or any other person (or a member of their household) directly involved in preparing this report has a financial interest in the securities of this issuer. 13 A partner, director, officer, employee or agent of National Bank Financial Inc., is an officer, director, employee of, or serves in any advisory capacity to the issuer. 14 A member of the Board of Directors of National Bank Financial Inc. is also a member of the Board of Directors or is an officer of this issuer. * National Bank Financial Inc. is acting as financial advisor to Sherritt International Corp. in regards to its announcement to extend the maturities on all outstanding notes by way of a CBCA Plan of Arrangement ** National Bank Financial Inc. is acting as the exclusive financial advisor to OceanaGold.