Great Basin’s great descent

Great Basin Gold (GBG-T, GBG-X) continues to tumble under a delisting review by the Toronto Stock Exchange, following the market response to the company suspending its Burnstone gold mine in South Africa.

After market close on Sept. 11, the company said it stopped development and production activities at Burnstone because it could not fund the mine’s working capital to make it cash-flow positive — a milestone expected by next May.  

Once trading resumed, its stock lost 55% to close Sept. 12 at 10.5¢, with more than 17 million shares traded.

The following day the market operator noted that Great Basin had 30 days to regain compliance with the listing requirements, or it would be booted off the exchange. This news pushed the stock down a further 14% to end at 9¢, with 19.2 million shares changing hands.

Over the past year, Great Basin shares have lost more than 95% of their value.

The Vancouver-based producer says it would seek financing $30 million to $40 million to cover Burnstone’s immediate closure costs, as well as care and maintenance costs of $1.2 million per month.

Great Basin’s interim CEO Lou van Vuuren says the mine’s closure was “disappointing,” but necessary as part of its strategic review launched on Aug. 15 to remedy its financial concerns.

“We came across liquidity issues that have challenged us to the point to having to close one of our mines in order to hopefully develop the company,” Great Basin’s head of investor relations and communications Michael Curlook tells The Northern Miner. “But there’s no telling which way it could go right now.”

BMO Capital Markets analyst Andrew Breichmanas argues in a note that the “shut down of Burnstone demonstrates the company’s growing liquidity concerns and the scarcity of options to address them.”

Great Basin cautioned investors in mid-August that it faces near-term financial challenges after technical and infrastructure problems at its two gold mines — Burnstone in South Africa’s Witwatersrand basin, and Hollister in Nevada’s Carlin trend — caused a shortfall in revenue.

Curlook says the Hollister mine was contributing cash flows to support Burnstone — which is in late-development stage — but that during the year’s first half cash flows from Hollister dropped partially due to milling and grade issues, which put extra liquidity pressure on the company.

According to its second-quarter results, Great Basin reported losses of US$22 million, or 5¢ a share, on revenues of US$32.4 million in the second quarter.

For the three months ended June 30, 2012, both mines performed poorly. Burnstone produced 6,392 oz. and sold 5,610 oz. gold at cash costs of $2,325 per oz., as development and stoping activities were affected by limited service-water supply.

The Hollister mine yielded 14,857 equivalent oz. gold, and had sales of 14,863 oz. at cash costs of US$983 per oz., reporting grade fluctuations, lack of available working stopes and high personnel turnover.

Altogether, the mines generated 21,080 equivalent oz. gold, and sold 20,473 oz. at cash costs of $1,473 oz., greatly missing market expectations.

Breichmanas had forecast production of 40,000 oz. at cash costs of $889 per oz.

At the end of June, the producer had a working capital deficit of $23 million, and $17 million in cash reserves.

To steer through the uncertainty, Great Basin replaced president and CEO Ferdi Dippenaar with chief financial officer Vuuren, and formed a special committee in August to review the company’s assets. The committee aims to raise at least $60 million through asset sales and new equity.

In early September, Breichmanas noted that Great Basin might have to consider selling its Hollister mine — given its attractive jurisdiction and relatively high grade — to add more money to its coffers.

“Given increasing debt repayment obligations in early 2013, further moves appear necessary for the company to remain solvent,” Breichmanas cautions.

Great Basin’s principal South African subsidiary sought creditor protection on Sept. 18, and the entire company should submit an insolvency filing very soon.