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Lake Shore Gold released its preliminary costs for the third quarter of 2014 on Thursday, and the improvements reported were well received. The miner has done more than just pull through difficult market conditions this year — its share price is up 114 percent year-to-date despite the lackluster gold price.
Lake Shore recorded Q3 preliminary all-in sustaining costs of US$862 per ounce of gold sold, a respectable improvement of 16 percent year-over-year. Furthermore, the company is looking to beat its overall cost targets for the year, estimating that nine-month costs (also $862) are 9 percent better than the lower range of its 2014 cost targets, set at $950 to $1,050.
Company President and CEO Tony Makuch was certainly not out of line in stating that Lake Shore is “a low cost producer” that has a “significant advantage” in the current price environment. Overall, Makuch is proud of the company’s accomplishments in 2014, and said “[t]he fact that our unit costs continue to come in better than both our targets and the average market estimates for 2014 is a credit to the work of our operations team and their ongoing focus on productivity and efficiency.”
Thursday’s report follows Lake Shore’s release of positive exploration results from work at its Bell Creek mine at the end of September.
A very good year
Thursday’s good news has not gone unnoticed by analysts. While Kerry Smith of Haywood Securities expressed no surprise at the positive improvements, the analyst did state in a research note, “Lake Shore has been having a good year — strong operational performance has allowed the Company to generate significant free cash flow, with cash and bullion rising to approximately $67 million at September 30, 2014.” He also notes that Lake Shore is on track to beat its 2014 production guidance.
Further, Smith mentions in the note that costs were higher for the third quarter compared to Q2 costs, though that was “primarily due to lower grade[s].” Similarly, M Partners told Resource Investing News that although overall grades fell 15 percent quarter-to-quarter, Lake Shore put forward a strong operational performance, and operating costs only went up 7 percent in comparison.
In a research note for M Partners, Derek Macpherson states that those “[r]elatively low costs should protect margins and help insulate Lake Shore from weak commodity prices.” The report estimates that even if gold prices decline to US$1,055 for two years, Lake Shore will break even without making any adjustments to current mine plans. That’s an important consideration for investors in the current market.
Macpherson also suggests that the company is undervalued, meaning investors could be getting in at a discount. He explains, “[w]e believe Lake Shore’s ability to generate FCF [free cash flow] in the current gold price environment is not reflected by relative valuations.”
What’s next?
Overall, Smith has a “buy” rating on the company with a target price of $1.40. Macpherson, who is slightly more optimistic, has set a 12-month target price of $1.65 and also believes Lake Shore is a “buy.”
In terms of what investors can expect next from Lake Shore, the company’s Q3 financial results are set to come out following market close on October 29. Macpherson also sees results from Lake Shore’s ongoing exploration program at Bell Creek as a potential catalyst, while Smith’s note highlights the importance of the company’s ongoing debt repayments to Sprott Asset Management.
At close of day on Thursday, shares of Lake Shore were trading at $1.03.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
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Lake Shore Gold Shows Potential to Expand Bell Creek Reserves