Lake Shore looks for another home run in 2015

Lake Shore Gold (TSX: LSG; NYSE-MKT: LSG) is checking off all the boxes when it comes to a junior producer with gold assets in a safe mining jurisdiction that is generating free cash flow, has manageable debt and an exciting growth potential, topped off by a good management team that delivers on its promises.

The junior exited 2014 with solid numbers from its two gold mines in Ontario, despite slumping gold prices. The Timmins West and Bell Creek generated 185,600 oz., up 38% from 2013, and above the firm’s target of 160,000 to 180,000 oz.

Operating costs and all-in sustaining costs both improved by 23% to US$592 per oz. and US$872 per oz., coming in well below the low-end of the cost guidance. 

Along with the record year for production and costs, the junior grew its year-end 2014 cash and bullion position by 80% to $61.5 million. This is after it paid off $45 million or most of its senior secured debt with Sprott Resource Lending Partnership, including $15 million for a gold-linked note and $30 million on a standby line of credit.

The junior made those repayments after its cash flow increased on the back of improved performances from both the Timmins West and Bell Creek mines. Lake Shore had free cash flow of $54 million in 2014, before the debt repayments, compared to a negative free cash flow in 2013, Haywood Securities analyst Kerry Smith notes.

Revenue in 2014 grew 33% to $256 million as higher sales offset lower gold prices. Lake Shore sold 183,300 oz. gold at an average $1,398 per oz. (US$1,269), compared to 135,600 oz. sold at $1,422 per oz. (US$1,377) a year earlier.

Net earnings totalled $23.6 million, versus a net loss of $233.5 million in 2013, where the firm booked a $225-million impairment charge. 

Adjusted 2014 earnings were $28.6 million, or 7¢ per share, compared to the adjusted loss of $3.6 million, or 1¢ per share in 2013.

Other highlights from 2014 include a 29% — or 174,500 oz. — increase in overall reserves at Timmins West and Bell Creek, after depletion. Combined reserves at the two mines now stand at 773,300 oz. gold from 5.5 million tonnes grading 4.4 grams gold.

On the exploration front, the firm made a discovery with its 144 Gap zone last October. The zone is located southwest of the Thunder Creek deposit, one of the two deposits on the Timmins West mine. “We think it is among the most exciting discoveries in our industry today,” Lake Shore CEO Tony Makuch said on a conference call. The firm has defined the 144 Gap zone to a minimum of 350 metres along strike and 350 metres down dip. This year it has budgeted $18 million to drill 120,000 metres on the zone, with a first resource estimate expected out in early 2016.

The momentum the company gained in 2014 is continuing into this year. “We are having a good first quarter of 2015. Production and grades are tracking positively. Costs are beating targets. We are generating solid free cash flow,” Makuch said. The company’s cash and bullion position has grown to $75 million. It expects to reach $100 million by year-end.

This year’s production guidance is 170,000 to 180,000 oz. gold, at all-in sustaining costs of US$950 to US$1,000 per oz. The flat year-over-year guidance is mainly due to a slightly lower-planned grade of 4.4 grams per tonne, compared to the budgeted 4.7 grams last year, which came in at 4.8 grams, Smith notes.

While remaining bullish on the stock, with a “buy” and $1.30 price target, the analyst notes the biggest risk related to Lake Shore is its debt. The firm intends to repay the remaining $3.5 million of its senior secured debt by the end of May, but still has $103.5 million in convertible debentures, due September 2017. If Lake Shore runs into problems funding that in a low gold-price environment, it may need to raise more equity, Smith cautions.

Lake Shore ended March 26 off nearly 2% at $1.08 per share, with a $470-million market capitalization.