San Gold aims to become cash positive in late 2013

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2013-04-22

San Gold (SGR-T) is striving to improve its performance while battling unfavourable market conditions and declining gold prices by re-focusing on profitability rather than on growth like many of its peers and seniors these days.

To improve its liquidity, the Manitoba-based gold producer closed a $50-million financing in early March to step closer to achieving its 2013 goal of turning the Rice Lake gold mining complex in Bissett, Man., into a cash positive operation by as earlier as the fourth quarter.

“We recently raised about $50 million through a convertible debenture, so we are well financed to execute on the mine plan for the year,” Ian Berzins, the company’s chief operating officer and new CEO, says in an interview.

He adds San Gold is now financially in “pretty good shape” and could “make it through this year and the next” most likely without another equity raise.

While the 2013 budget is currently under review, the company plans to defer some capital spending to later years with more details expected in the new five-year mine plan, slated to be out by July.

Capital expenditures for 2013 should total roughly $55 million, Berzins says, with a majority of that going towards developing the 16 and 26 levels in the Rice Lake mine to tap into the down dip extensions of the near surface Hinge and 007 deposits that are currently being mined.

The improved infrastructure should boost operating efficiency as well as output, with the latter lately missing analysts’ expectations partly due to declining gold grades.

Berzins admits gold grades have frankly declined in the past two quarters to a little over 4 grams per tonne, below the reserve grade of 5.1 grams.

In the first quarter, San Gold produced 17,354 oz. gold at a head grade of 4.15 grams gold, and in the fourth quarter of 2012 churned out 19,019 oz. at 4.2 grams.

But Berzins, who stepped into his CEO role in late March, maintains that the gold grade should recover with higher grade ounces expected from the 007 areas and from the Rice Lake mine, where output was previously scheduled to come online in 2014.

“Originally in our mine plan we weren't planning to do very much at Rice Lake, we were just going to do development work. I think a portion of Rice Lake's feed will come into the mix [this year] and typically it's better than 5 grams. But we will be looking at the different inputs and certainly our budget this year is to be averaging 5 grams at a 93% recovery.”

Partly because of the light first quarter, San Gold has revised its 2013 guidance to 75,000–90,000 oz. from 85,000–95,000 oz. earlier. Anticipated cash costs are now $800–$900 per oz., up from $800, which Berzins says “reflects higher trucking costs more so than anything else” as the trucking distances have increased from surface.

BMO’s analyst Brian Quast forecasts the junior should produce 79,000 oz. at cash costs of $892 per oz. in 2013. He cautions “with some capital projects likely now deferred, BMO Research expects a slower production ramp at higher operating costs, limiting its ability to drive near-term earnings/cash flow higher and rebuild credibility with investors.” Quast has reduced his target price to 20¢ from 50¢ and downgraded the stock to “underperform” from “market perform.”

While Berzins believes Quast’s concerns are reasonable, he says the company is on track to meet its 2013 target, noting cash costs should gradually improve as it starts using the Rice Lake shaft to haul ore to surface.

“Cash costs next year will be fairly flat, but we like to see some relief after that because half of our trucks on paper should be able to be shut down or used more efficiently because we won’t be trucking all the way to surface,” he explains.

Berzins estimates all-in cost for 2013, including exploration, overhead capital and corporate, should ring under $1,400 per oz. gold, which in 2012 averaged roughly $1,600 per oz.

“This year we are trying to get the all-in below $1,400 and of course today at a $1,400 cost you’re just trading dollars. So this is where we’re going to try to drive the all-in cost down into the range of probably $1,300 and see if we can do even a bit better than that then at least we would have a modest margin.”

In a move to cut overhead and corporate costs, San Gold let go roughly 25 workers and is closing its Toronto corporate office. It has also done some retrenchment at the Bissett operation and is exploring options to monetize on some of its non-core assets this year.

While the company is reining in costs where possible, it still has in excess of 270,000 metres of drilling planned for the year to focus on growing resources and reserves and to extend existing zones and uncover new mineralized zones, Michael Michaud, the company’s vice-president of exploration, said on an April 12 conference call.

Currently, the Rice Lake complex hosts 253,000 oz. in reserves from 1.7 million tons grading 5.1 grams. It has 655,000 oz. gold in measured and indicated from 3.4 million tons at 6.55 grams, plus another 2.8 million oz. inferred from 16.5 million tons at 5.92 grams gold.

“We have a decent size reserve and we have a large resource so again with any kind of modest conversion rate we will have the ability to have an operation like I said that is 10 to 15 years plus. And we continue to have a fairly large drilling budget which should be able to add some quality ounces,” Berzins notes, adding drilling could potentially bring measured and indicated ounces to roughly 750,000 by year-end.

While development is ongoing at the project, located in the Rice Lake greenstone belt, 250 km northeast of Winnipeg, San Gold’s top priority remains getting to “a positive cash situation, where we aren’t going to have to go to the markets for money and rebuild confidence,” Berzins says, admitting the company hasn’t been consistent in its delivery in the past, something he’s pushing to change. “So we have to execute on the guidance we’ve given,” he concludes.

San Gold recently closed at 18.5¢ within a 52-week range of 16¢–$1.57. Berzins believes the junior will exit the year with $20 million in hand.