On Tuesday, after market closed, listening to the fourth quarter conference call and reviewing the recent technical document for Bell Creek, we rate Lake Shore Gold Corp. (TSE:LSG) as “Sector Perform” and have downgraded our target price to $1.35 per share.
Minor net asset value changes; lower near-term CF. We have adj. unit cost estimates, exploration spending, and assumptions for Bell Creek with minimal influence to net asset value but a reduction to our near-term cash flows. LSG is spending $18 million in exploration in 2015 and we believe that number to surge if LSG outlines an economic ore body at 144.
LSG has guided to a solid first quarter with $13 million in FCF, derived from the revised cash (increased by eqv.) balance ( $75 million). Grade is anticipated to come in ahead of outlook of 4.4 g/t and then moderate throughout the year (4.2-4.6 g/t). Lake Shore is guiding to total 2015 capital expenditures (in addition to $18 million in exploration) of $45-$50 million. Lake Shore is expecting to end the year with cash in excess of $100 million.
Focus on 144. Management once again emphasized their excitement about 144. The firm has released a range of size and grade estimates (see our Daily Edge note from 24 February) but there is very little geological and drilling information to make a reasonable estimate of size and grade. A resource is anticipated by first quarter of 2016.
LSG continue to guide to 170-180Koz Au in F2015; with cash costs of $650-$700 per ounce and AISC of $950-$1000 per ounce. It should be noticed that exploration drilling at 144 is not included in LSG’s AISC. LSG’s head grade for 2014 increased to 4.8 g/t from 4.6 g/t because of mine sequencing. They believe 4.4 g/t in 2015, again because of mine sequencing. Cash costs and AISC for the year were $592 and $872. Both figures beat outlook of $675-$775 per ounce and $950-$1050 per ounce.
The lower per unit costs can be ascribed to higher grades, finished infrastructure and better by and large cost control in response to lower gold prices (initiated in first quarter of 2013). LSG plan to drill over 200km this year. 120km at 144 and the other 80 split between the two deposits. LSG increased its cash & bullion balance to $75 million as of March 25, from $61.5 million at year-end 2014. Prior to quarter end, LSG netted $14.4 million from a flow-through financing. The year-end balance for the tax-loss carry forwards was C$118 million, which is below we had estimated.
The tax-loses will be fully realized in the long term, thus there has been minimal influence to our net asset value per share forecast because of an surge in taxes in later years. Exploration expense skyrocketed this quarter (relative to previous quarters) as LSG began drilling 144 in third quarter of 2014 and recognizes it as an expense rather than capitalizing it. Depreciation was $6 million lower year-over-year because of lower carrying value of mining interests in 2014, following a large impairment charge in fourth quarter of 2013.
There was a $2.4 million write off associated to unamortized debt costs (from the Standby Line with Sprott) and $1.2 million prepayment fee that contributed to the posted net loss. These two items were removed from the adj. EPS.
The key catalyst remains exploration success at 144 gap. Commodity price, debt payment in 2017, depleting reserves and unsuccessful exploration risks are major risks to be considered while trading. Our risk assessment remains “Speculative”.