Rocky times for Great Basin Gold

Technical and infrastructure issues at Great Basin Gold’s (GBG-T, GBG-X) two principal gold projects hammered its revenues and put it deeply into the red in the second quarter, and the company now says it faces a “near-term liquidity crisis.”

A strategic review has been launched and president and CEO Ferdi Dippenaar has resigned, replaced on an interim basis by chief financial officer Lou Van Vuuren.

Deep losses — the company lost US$22 million, or 5¢ per share, on revenues of US$32.4 million — were caused largely by delays in on-reef ore development and water management problems at its Burnstone mine in South Africa, as well as delays in accessing higher-grade stopes at its trial mining project at Hollister in Nevada.  For the first six months of the year, Great Basin lost US$39.8 million on US$65.7 million in revenue, compared to a loss of US$21.4 million on revenues of US$83 million for 2011’s first half.

Potential strategic alternatives include asset sales, equity and bank financing, a merger or other business combination, royalty sales or metal streams, and recapitalization. Great Basin is also amplifying cost-reduction programs, and is trying to restructure its current term-loan facilities to improve near-term cash flow. It is working with lenders to try to restructure its current term-loan facilities to improve its cash flow, and is aiming to raise, through a combination of asset sales or new equity, a minimum of US$60 million to alleviate liquidity concerns.

The good news is that the company believes the issues at its operations in South Africa and Nevada that led to its poor second-quarter results “are substantially behind it,” and it forecasts combined production for the rest of 2012 in the range of 58,000 and 68,000 equivalent oz. gold. The board has also concluded that no impairment charge to the carrying value of the Burnstone mine (US$653 million) or the Hollister trial mining project (US$126 million) is warranted at the moment.

Lower-than-planned mining grades at the company’s Hollister property were among the challenges the company faced. During the second quarter, 23,720 tons were trial mined at the operation, yielding 14,857 equivalent oz. gold, down from 20,459 oz. in the first quarter. Management noted that while the tonnage mined during the second quarter was only “slightly below planned levels,” a lower mining grade of 0.63 equivalent oz. gold per ton resulted in lower recoveries.

“The high-grade nature of the Hollister orebody can lead to quarterly grade fluctuations, which are evident when comparing the average grade of 1.35 equivalent oz. gold per ton from production in second-quarter 2011, to the average grade of 0.63 equivalent oz. gold per ton in second-quarter 2012,” the company outlined in a news release.

To deal with decreasing grade trends, the company says it will focus on decreasing stope width and controlling dilution in the third quarter.

During the first half of the year, Hollister, about 80 km from Elko in the northeastern part of the Carlin Trend, also suffered from the lack of available working stopes and a high turnover rate.  

At Great Basin’s Burnstone mine in the South Rand area of the Witwatersrand gold fields in Mpumalanga province, about 80 km southeast of Johannesburg, technical and structural challenges included constrained development and stoping production levels owing to the service-water handling system’s failure to provide for mining areas in May and June.

A temporary solution was put in place by early June, and production and development levels in July returned to levels achieved at the end of 2011. But targeted levels for development and stoping for the quarter were not met, and the company says this will have a negative impact on production targets for the rest of 2012. Burnstone produced just 6,392 oz. gold in the second quarter, down from 6,671 oz. in the first quarter, and far below the 17,790 oz. forecast.

Burnstone recorded cash costs of US$2,325 per oz. for the quarter, up from US$2,182 per oz. in the first quarter, which were impacted by the low head grade of material delivered to the mill. The company says, however, that the low volumes from the delay in ramp-up are “not yet considered meaningful relative to post ramp-up, [steady] production cost estimates.” Management expects steady production by 2014.

Cost-cutting at Burnstone will include reducing off-site supervisory and premises costs, as well as improvements in labour and water handling — measures the company estimates could result in aggregate savings of US$2.5 million per month after a few months. Great Basin estimates production at Burnstone will reach 30,000 oz. gold this year, and between 90,000 and 100,000 oz. gold next year.

The 100%-owned mine started production in February 2011 and has an estimated lifespan of 26 years. It has proven and probable reserves of 6.4 million oz. gold, while measured and indicated resources stand at 12.6 million oz. gold.

The company attributed its lower revenues in the second quarter — down 44% year-on-year — primarily to a decrease in ounces sold from the company’s Nevada operations. During the second quarter of 2011 its Nevada operations sold a record amount of metal due to exceptionally high-grade material and the settlement for some ounces recovered in the first quarter of that year. In addition, higher cash and non-cash costs contributed to a loss from operations of US$20 million, compared with a profit of US$7 million in the same quarter in 2011. As of June 30, the company had a US$23-million working capital deficit.

At press time in Toronto Great Basin Gold was trading at 23.5¢ per share, within a 52-week range of 21¢ to $2.35. The company has 552 million shares outstanding.