Lake Shore rises on strong Q1 production

Shares in Lake Shore Gold (TSX: LSG; NYSE-MKT: LSG) rose after the Timmins, Ont.-focused gold firm posted another strong quarter after its Bell Creek mill expansion late last year.  

During the three months ended in March, Lake Shore generated 44,600 oz. gold — nearly double the amount it produced in the same period last year.

Lake Shore’s CEO Tony Makuch noted the company could carry the momentum it experienced during the end of last year into 2014, with first-quarter production exceeding expectations. 

Matthew Utting, the company’s vice-president of investor relations, says Lake Shore had expected to produce 40,000 oz. “But we got 44,600 oz., so we were a couple thousand ounces above, and that is just a function of us continuing to be successful in managing grade, and things like that.” 

Mill feed during the quarter totalled 283,000 tonnes at an average grade of 5.1 grams gold per tonne, with 96.6% gold recoveries. 

While recoveries were similar to the year-ago period, average grade increased 34% and throughput rose 44% on the back of the mill expansion. 

The company began expanding its 2,000-tonne-per-day mill to 3,000 tonnes per day in late 2011, completing 50% of the expansion in December 2012 and the rest in September 2013. 

Haywood Securities analyst Kerry Smith, who has a $1.10 price target and a “hold” rating on the stock, noted that Lake Shore has spent $160.7 million on mill expansion and $80 million on mine development over the past two years.

Utting says the multi-year capital investments were necessary to develop the company’s Bell Creek and Timmins West gold mines and its Bell Creek mill to a production rate that could support over 3,000 tonnes per day and produce 160,000 to 180,000 oz. gold a year. With the higher production level, Lake Shore will keep generating positive free cash flow, which it began doing in the fourth quarter of 2013.

In that quarter, Lake Shore churned out a record 51,700 oz. from 321,800 tonnes milled at a 5.2-gram-per-tonne head grade. “It was a tremendous quarter for us, and it was the first quarter since we completed our mill expansion, and was a little bit unique,” Utting notes. He says it was unique because while commissioning the mill expansion, the company lost a few weeks of production in the third quarter and built up stockpiles that it processed in the fourth quarter, along with the mine production. This resulted in a 3,500-tonne-per-day run rate, which was not sustainable, along with a record quarterly production.  

Lake Shore says throughput could average 3,300 tonnes per day this year. Utting adds that the first quarter is consistent with that, given the four-day scheduled maintenance shutdown in March. 

Total gold poured in the first quarter equalled 45,700 oz., with gold sales of 42,900 oz. at an average US$1,294 per oz. 

The company will release its financial results in early May. Lake Shore is forecasting full-year production of 160,000 to 180,000 oz. and cash costs of US$675 to US$775 per oz., with all-in sustaining costs of US$950 to US$1,050 per oz. 

“We are confident we will achieve our guidance for the year on our cash front, and we should see [first-quarter] numbers that support that,” Utting says, adding that the company is also in line to meet its production target.

Given the positive cash flow, Lake Shore was able to repay $3.7 million in debt and make a $3.2-million interest payment on its convertible debenture during the March quarter. It intends to repay $20 million to $25 million of its debt this year.  

Lake Shore resumed drilling earlier this year to replenish the mined ounces at its operations and evaluate its projects near those mines — which it hasn’t done for years since focusing on the mill expansion. Utting says that the drilling “is pretty exciting for us too.” 

On the production results Lake Shore shares jumped 6¢ to close April 4 at 80¢. The company ended the quarter with $41 million in cash and bullion.