Gammon tackles ‘credibility issue’

Gammon Gold (GAM-T, GRS-X) was right when it predicted that financial problems stemming from its Mexican operations last quarter would persist into the third quarter, but management is now predicting visible improvement in future results.

The company posted a net third-quarter loss of US$44.8 million, or US8 per share, compared with a loss of US$25.5 million, or US23 per share, during the previous period.

A US$21.6-million non-cash income tax expense was included in the latest results due to the new single-rate income tax law in Mexico, announced in September.

At Gammon’s Ocampo and El Cubo gold operations in Chihuahua state, production reached just over 26,000 oz. gold and 1.12 million oz. silver, or 47,000 gold-equivalent oz., which is a drop from the 59,000 gold-equivalent oz. sold during the second quarter. The company is aiming to eventually produce 400,000 gold-equivalent oz. per year, according to the original feasibility study projection, but doesn’t know when it will be able to reach that target.

Gammon shares fell 11%, or 94, to $7.33 per share on a trading volume of 3.5 million shares on the release of the quarterly results. The company’s share price reached a 52-week high of $21.76 in March.

During a conference call about the results, one analyst asked if the company had been approached by any potential strategic buyers and what it would consider doing to maximize shareholder return.

“In terms of evaluation metrics of looking at the company on a per-ounce basis, it seems attractively valued,” the analyst said. “The market hasn’t really given you any credibility for the type of asset you have.”

New chief executive Rene Marion, who left his post with Barrick Gold (ABX-T, ABX-N, BGD-L) as the regional vice-president for Russia and Central Asia, said Gammon had not been approached by a third party.

“We have no interest in going down that route,” Marion said.

Marion said he thought Gammon has a good strategy in place for turning the company around.

“I do recognize that it’s a credibility issue that we have right now and we have to deliver to the market,” Marion said.

Gammon was accused of misguidance and hyping the market earlier this year, after its poor second-quarter results shocked investors. First-quarter results hadn’t hinted at any trouble, so the series of operational problems that followed made investors question the company’s reliability (T.N.M., Aug. 20-26/07).

But Marion also pointed out the improved results the company saw in October.

At 67,900 tonnes per day during the third quarter, production continued to miss the feasibility target of 80,000 tonnes per day, but October’s daily average was 89,600 tonnes per day, creating some hope for the future.

Marion said he expects production to increase 10% to 15% over the next few quarters, as Gammon tries to bring costs down while increasing production.

Cash costs were US$601 per oz. for the third quarter, but increased to US$764 per oz. after an US$800,000 cash expense was included to reflect the Ocampo operation’s performance, which was less than 70%, and a $6.5-million cash writedown of leach pad and mill inventory. A severance charge of US$22 per oz. was also added to cash costs from cutting 600 positions or 30% of the Ocampo workforce.

Gammon expects the job cuts to save the company US$6 million annually. The positions were considered redundant.

Crushing and heap-leach productivity decreased to 53% from 65% in the third quarter due to 17 days’ worth of downtime as the company waited for a new conveyor belt and dealt with plugged chutes and screens owing to heavy summer rain.