Lake Shore battles to win back investor favour

Lake Shore Gold (LSG-T) continues to push for redemption after falling out of investor favor back in the spring of 2011. That initial slump in market cap came after it failed to meet production expectations from its two Timmins based mines.

Since the fall, its share price has moved sideways within an 80¢ to $1.15 range for much of 2012. Before the fall, its shares were trading for north of $4.00.

The latest quarterly results show a company that continues to grapple with operating issues, but also one with bigger plans for the future.

Lake Shore produced 20,939 oz. of gold over quarter, roughly 14% less than it produced the quarter previous from its two mines in the Timmins area: Timmins West and Bell Creek.

The drop came largely courtesy of an average grade of 3.5 grams per tonne — considerably less than the average grade of its key deposits.

“We recognize we were disappointing in terms of overall average grade coming in at 3.5 grams,” Lake Shore’s president and CEO Tony Makuch said on a conference call, “and that had some impact on the company, but it was still a strong quarter in many ways.”

He pointed to record mine and mill throughput, lower costs per tonne, improved efficiencies and progress on mill expansion as signs of those strengths.

Cash operating costs were actually up 8% to US$985 per oz. largely due to the decline in head grade, but operating cash costs did fall slightly to $105 per tonne from $124 per tone in the previous quarter.

Lake Shore says it is still on track to produce over 85,000 oz. of gold at operating costs of US$875 per oz., which is at the higher end of its operating cost guidance of US$825 to US$875.

Makuch pointed out that the company has managed to keep capital spending connected to its mill expansion in line with its estimates despite external cost pressures being experienced industry wide.

Lake Shore is in the midst of expanding its Bell Creek Mill to 3,000 tonnes per day by mid 2013. From there it plans to do another phase and expand the mill to 5,500 tonnes per day. The mill at Bell Creek process ore from both Bell Creek itself and from the Timmins West mine roughly 42-km east of the plant.

Timmins West supplied 2,500 tonnes per day of throughput while Bell Creek provided 500 tonnes. Mill freed from Timmins West has averaged 3.66 grams per tonne, which is 30% below the reserve grade of 5.21 grams per tonne.

“While the company has done a great job on the exploration front, the operational ramp-up has been less stellar,” Haywood Securities analyst Kerry Smith wrote in his research report on the company. “Lake Shore now has to deliver more than a few quarters of consistent operational performance and cash flow before investors acknowledge that the company has turned the corner.”

Smith attributes the Lake Shore’s issues with getting mill-feed grade to reserve and resource grade levels to a lack of stoping flexibility due to insufficient underground development.

“We need to get the development done and get a lot of resources out in front of us then we can properly sequence it and bring in stopes at a blended grade,” Makuch explained. “We don’t’ have any significant a high grade stopes. We do, however, have higher grade areas that we need to have and as soon as we lose any of those it does have a significant impact on grade.”

Makuch says that the company’s aggressive capital development and drilling program will help it to gain the flexibility it needs.

A preliminary economic study on Timmins West released earlier this year, outlined peak production of 160,000 oz. per year from year’s three to nine of its 10 year mine life at cash costs of US$625 per oz. The average mill feed grade is anticipated to be 5.2 grams gold.

Lake Shore has spent roughly $132 million of the $175 million budgeted for capex to support higher mining rates. The mill is now at 2,300 tonnes per day and Lake Shore says it expects to be at 2,500 tonnes per day by late November.

With an improved balance sheet the funding for such expansion plans are well within reach.

Lake Shore reported cash and cash equivalents of $83.5 million for the quarter and the company has another $35 million available through its undrawn facility with Sprott.

That should be enough capital to cover costs in 2012 and 2013 while it builds up more cash, so it can repay $103.5 million in convertible debt that comes due in September of 2017.