[Update] Great Basin’s great descent

Great Basin Gold (GBG-T, GBG-X) continues to tumble as it’s placed under a delisting review by the Toronto Stock Exchange, following the market response to the suspension of the company’s Burnstone gold mine in South Africa.

After market close 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 to have been reached 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 Great Basin has 30 days to regain compliance with the listing requirements or it will 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 said it is seeking to finance $30 million to $40 million to cover Burnstone’s immediate closure costs, as well as care and maintenance costs of $1.2 million a month.

Great Basin’s interim CEO Lou Van Vurren stated the mine’s closure is “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 into a success ultimately,” Great Basin’s head of investor relations and communications, Michael Curlook, told 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 faced 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.

What happened, basically, was the Hollister mine was contributing cash flows to supporting Burnstone, which is in late development stage, said Curlook. But, during the first half of 2012, 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 supply of service water.

The Hollister mine yielded 14,857 gold-equivalent oz., 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 oz. of gold- equivalent oz. and sold 20,473 oz. at cash costs of $1,473 oz., greatly missing market expectations.

Breichmanas had forecast production of roughly 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 help steer through the financial uncertainty, Great Basin replaced former president and CEO Ferdi Dippenaar with then chief financial officer Low Van Vuuren, and formed a special committee to review the company’s assets in mid-August.

The committee aims to raise at least $60 million through a mix of asset sales or new equity.

In early September, Breichmanas noted Great Basin may be forced to consider selling its Hollister mine, given its attractive jurisdiction and relatively high grade to add more money to its coffers.

However, the results of the review are still pending and have yet to address the company’s liquidity issues.

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