Not a sunny day for Lake Shore

Lake Shore Gold‘s (LSG-T) shares plunged to a new low, a day after the company reported lower-than-expected gold grades for the second quarter, along with a year-long mill expansion delay and a reduced full-year production target.

“I hear it’s a nice sunny day everywhere,” said Lake Shore Gold’s president and CEO Tony Makuch on a July 19 conference call. “But, we are sitting in a situation were we are not reporting some of the best news we had over awhile.”  

For the quarter, the company’s Bell Creek mill processed 162,974 tonnes grading 3.55 grams gold per tonne for 17,615 oz. from its three gold mines – Timmins Mine, Thunder Creek, and Bell Creek – all in Timmins, Ont.

Timmins Mine is only one in commercial production.

In the previous quarter, the company produced 22,300 oz. from 148,000 tonnes at 4.89 grams gold.

The quarter’s lower production was mostly due to “a change in mining sequence in the higher-grade UM1 zone at the Timmins Mine caused by developmental and backfill delays,” explained Makuch in a press release. As a result, the company mined lower-grade areas at the mine.  

In a recent research note, BMO Capital Markets’ analyst Andrew Kaip said that the company “identified a larger volume of low-grade gold mineralization than predicted by the geological model” when mining the Footwall zone.

Lake Shore also used low-grade stockpiles from the Bell Creek mine to supplement mill-feed.   

Owing to lower grades and production levels, along with more development and sill work needed for the UM1 zone, the company anticipates higher cash operating costs for the second quarter compared to the previous quarter’s US$586 per oz.

Kaip anticipates cash costs for the second quarter to average above US$1,000 per oz. compared to his previous estimate of US$741 per oz.

Amidst the dreary production numbers, the company had higher mill throughput of 1,790 tonnes per day compared to the first quarter’s 1,650-tonne-per-day rate. In June, the Bell Creek mill averaged 1,950 tonnes per day. Lake Shore expects to keep milling rates in the 2,000-tonne-per-day range for the rest of 2011.  

Haywood Securities’ analyst Kerry Smith outlined in a recent research note that the “biggest disappointment” was the 12-month delay in the Bell Creek mill expansion. Originally, the miner planned to expand the mill to 3,000-3,500 tonnes per day by the second of half of 2011, then pushed that to year-end, and now delayed it to late 2012 or early 2013.  

The lower production levels also contributed to the declining gold sales for the quarter of 18,988 oz., compared to the 33,954 oz. sold at an average price of US$1,387 per oz. in the first quarter.

For the year-to-date, Lake Shore churned out 39,942 oz. gold from 311,374 tonnes grading 4.16 grams gold.

Lake Shore forecasts an average grade of 4.5 grams gold per tonne for the full year, a decline from the previously estimated 5.4 grams, said Makuch on the call.

Based on a production re-forecast for 2011, the company says it expects to enhance its mining and processing rates, but trimmed grade estimate because it would be mining less in the UM1 zone and more in lower-grade zones as it re-examines the Timmins mine’s orebody.

“As we continue to build our understanding of the Timmins Mine orebody, we are recognizing that some of the mineralized zones are broader than previously understood, explained Makuch, adding the company will defer mining 130,000 tonnes it had previously planned from UM1 until early 2012.

For the last quarter of 2010 and first two months of 2011, UM1 had an average grade of 7.5 grams. Lake Shore initially said it would restart mining at the zone in May, however, due to the delays it began in July. The company now expects to mine 70,000 tonnes from UM1 for the year, said Smith.

The junior has also cut its previous full-year guidance of 125,000 oz. gold to 85,000-100,000 oz.

Smith of Haywood Securities decreased her target price from $5.75 to $3.15 per share, and downgraded the stock to “sector perform.”

 “Delivery on the operational front remains critical to a better valuation and this current revision for 2011 along with further delay in commissioning of the mill expansion at Bell Creek has put Lakeshore in the penalty box until they can start beating expectations on the production front,” she wrote.

Similarly, Kaip of BMO Capital Markets revised his target from $5.00 to $3.50, and lowered his rating to “market perform.”

 “While BMO Research still views LSG’s long-term future production potential as intact, the near-term production ramp-up schedule is now expected to take longer than previously expected,” said Kaip.

On the July 19 quarterly news, Lakeshore shares dropped 53¢ to close at $2.86. It plunged another 59¢ during intra-day trading on July 20 to $2.27.