Sam Coetzer breathes new life into Golden Star

Processing facilities at Golden Star Resources' Wassa gold mine in Ghana. Credit: Golden Star

Resources.

POSTED BY: TRISH SAYWELL JUNE 7, 2017 0

Sam Coetzer was senior vice president of Kinross Gold’s (TSX: K; NYSE: KGC) South

American operations when he got a call in 2011 from Christopher Thompson, chairman of the

board of an under-performing junior gold producer in Ghana called, Golden Star

Resources (TSX: GSC).

Thompson, a mining executive from Zimbabwe who prior to Golden Star had spent seven years

at the helm of Gold Fields (NYSE: GI), which he helped transform from a South African mining

company producing 2 million ounces of gold a year to a global producer of well over 4 million

ounces a year, wanted Coetzer’s opinion about Golden Star’s troubled operations in West Africa.

Coetzer, a South African mining engineer who over the course of his career had extensive

experience in underground mining (twelve years in South Africa, three in Fiji, and another five

in Canada at Placer Dome’s Musselwhite mine) agreed to take a look at it.

“Chris asked me to do some due diligence on the property and see if I saw what he saw and when

I did, it just jumped out at me,” Coetzer recalls of his first trip to the company’s Bogoso, Wassa

and Prestea mines on Ghana’s prolific Ashanti Belt.

What struck him first, he says, was that Golden Star was underperforming, despite a relatively

high gold price, mainly because of its cost structure.

The junior was processing refractory and non-refractory ore from open pits on its concessions

and producing between 300,000 and 340,000 ounces of gold a year at a costly US$1,300 per oz.

The second thing that surprised him was that the company controlled 85 kilometres of prime real

estate on the 250-km-long Ashanti gold belt — the largest land package of any mining company

on the belt, including the majors — and had three permitted and fully paid for processing plants

to boot: two conventional carbon-in-leach and one refractory using BIOX technology.

Perhaps its most intriguing attribute, however, was the past-producing Prestea underground

mine, which had, over the previous century, produced over 9 million ounces of gold at a head

grade of 11 grams gold per tonne.

A bird’s-eye view of Golden Star Resources’ Wassa gold mine in Ghana. Credit: Golden Star

Resources.

“I thought there were more legs in this company than what appeared on surface,” Coetzer tells

The Northern Miner. “It was a big land package, lots of infrastructure, good camps, but there was

a lack of planning, and not a strong use of local skills, and I thought there was more value I could

unlock in the company.”

The challenge of a major turnaround story appealed to him, too, and in March 2011, Coetzer

joined Golden Star as executive vice president and chief operating officer. He moved up to

president and CEO in January 2013.

Until Coetzer came along, Golden Star’s strategy from the time it had entered Ghana in 1999,

had been to mine non-refractory and refractory ore from open pits and satellite deposits within a

40-km radius on its three concessions: Bogoso, Prestea and Wassa.

“What I didn’t like about that business model was that although your costs are low during the

time you mine the pits, you constantly have to rehabilitate and relocate communities so you see

that cost a year or two later, and then you are surprised you never make the amount of money

you think you will,” he says.

One of the first things he did, Coetzer says, was “bring sophistication into the company” by

hiring Martin Raffield as senior vice president of project development and technical services.

Raffield has a PhD in geotechnical engineering from the University of Wales and started his

career in the deep gold mines of South Africa.

Coetzer was working in business development for Placer Dome, doing due diligence at the

company’s South Deep mine in South Africa, when he met Raffield for the first time. Coetzer

was so impressed that he recommended to Placer management that it transfer Raffield to their

Canadian operations, which it did. Raffield then worked at the Campbell mine and regularly

consulted for Coetzer at Musselwhite.

Coetzer was convinced that Raffield was the right person to help him shake up Golden Star and

put it back on track, and his instincts, he says, were correct.

“He single-handedly, within a year and a half, gave the board a great sense that we had more in

the company than we ever thought,” Coetzer says.

By 2012, Coetzer and Raffield decided that there was a better use for the company’s funds than

spending any more of them on the refractory business.

“The more we looked at it, and how much capital it would require, the more it didn’t make sense

to us,” Coetzer says.

After permitting new oxide permits at Prestea, Golden Star shut down the refractory business at

the pits on its Bogoso concession in the third quarter of 2015.

Coetzer and his team also completed two feasibility studies examining the viability of building a

new underground mine at Wassa to complement production from the deposit’s existing open-pit

mine, and assessing whether Golden Star should rehabilitate the aging workings at Prestea

underground and restart the operation.

The study on Wassa concluded that Golden Star could build an underground mine for initial

capex of US$39 million and the project would yield an after-tax net present value of US$176

million and an after-tax internal rate of return of 83%.

At Prestea, 40 km southwest of Wassa and about 16 km south of the company’s processing plant

at Bogoso, a feasibility study demonstrated that refurbishing the aging shafts and other

infrastructure, and extracting gold, initially from the West Reef zone, would be economic. West

Reef is a high-grade narrow vein deposit discovered in 2004 by Golden Star’s vice president of

exploration, Mitch Wasel.

The study found that at a gold price of US$1,150 per oz., Prestea underground would serve up an

after-tax internal rate of return of 42% and an after-tax net present value of US$124 million.

Initial capex estimates of US$63 million could be paid back in just under three years.

To finance both underground development projects, Golden Star entered into a $130 million

stream financing with Royal Gold (US-NASDAQ: RGLD) and a US$20 million term loan in

May 2015. In December of that year, the stream financing was increased by another US$15

million, with the option to increase it by a further $5 million if necessary.

Construction of Wassa underground kicked off in mid-2015 and the first stope, in the F shoot of

the ore body, was blasted in July 2016. Commercial production began in January this year after a

17-month construction period.

At Prestea, Golden Star blasted its first stope underground in the second quarter of 2017, and

expects to achieve commercial production in the third quarter of this year.

Today, Prestea underground is one of the highest grade development projects in West Africa

with a mineral reserve of 14 grams gold per tonne.

In addition, the company started producing gold from its oxide pits at Prestea in the third quarter

of 2015, an exercise designed to bridge the gap between the closure of the refractory operations

and first ore production from Prestea underground.

In total, the company produced a total of just under 58,000 ounces of gold from three sources of

ore in the first quarter — the highest quarterly production it has achieved since closing its

refractory operation. Cash operating costs came in at just under US$800 per oz.

Location map of Golden Star Resources’ Wassa gold mine in Ghana. Credit: gps-coordinates.net.

“Neither the open pits nor the underground operations are performing optimally at the moment,

as they’re both adapting to being a combined operation, and this has led to higher mining costs,”

Coezter conceded on a conference call announcing the results, adding that “two sources of high-

grade underground ore being fit into our processing plants should deliver significant changes in

our cost structure.”

The Toronto-based mining executive gets excited when talking about Prestea’s high-grade ore.

“Grade is everything,” he says. “Prestea is such a unique ore body. It’s been mined for decades –

it’s like something you’d see at Red Lake or Barberton in South Africa. You don’t often get

these kinds of ore bodies that have yielded so many ounces.”

This year is a transformative year for Golden Star as it marks the first time the company will

have production from four sources of ore — two open pits and two underground operations —

and will no longer be a non-refractory producer.

“That means our risk profile is dramatically lower and our transition to becoming a low-cost,

high-grade producer now will really take-off,” Coetzer said on the first quarter conference call.

“We still have some way to go, but it’s great to see how far our company has come in its

transformation.”

In addition, Golden Star has started mining ore from its high-grade Mampon open pits, about 65

km to the north of Wassa. Mampon ore will be blended with ore from the Prestea pits to extend

the mine life of Prestea’s open-pit operations well into the second half of 2017. Mampon has

reserves of 301,000 tonnes at 4.64 grams gold per tonne for 45,000 oz. contained gold.

In 2017, Golden Star expects to produce between 255,000 and 280,000 ounces of gold — an

increase of between 31% and 44% over 2016’s 194,054 ounces.

Of the total, 45,000 to 50,000 ounces of gold are expected to be produced from the Prestea

underground operation.

Cash operating costs in 2017 are forecast at US$780-860 per oz. and all-in sustaining costs will

be between US$970 and US$1,070 per oz.

Looking ahead, the company expects to boost total production by 60% between 2016 and 2019

and cut cash operating costs by 29%. Over the next five years, Golden Star forecasts

consolidated production to average 281,000 oz. gold per year at cash operating costs of US$695

per oz. and AISCs of US$903 per oz. produce 281,000 to around US$695 per oz.

The Northern Miner recently toured Golden Star’s Prestea and Wassa operations, about 150 km

west of Accra, Ghana’s capital city.

“I’m sleeping so much better since 2013 when nobody wanted to give us a dollar,” Coetzer joked

with mining analysts and investors during the two-day site visit in April. “What we’ve created

here is brilliant.”

Not only that, he says, but the company has been able to build two mines for US$40 million

each, “only because other people spent money here — not because I’ve spent money here,” he

says. “It’s phenomenal.”

At Wassa, Golden Star started mining the high grade B-shoot zone during the first quarter and

will begin to mine even higher grade and larger widths of gold mineralization using transverse

stoping in the third quarter. That is expected to result in a significant increase in production.

Production in the first quarter using sub-level longitudinal stoping began to ramp up strongly,

with a 40% increase in production compared to the fourth quarter of 2016.

“At Wassa we have 94% recoveries and easy ore and the infrastructure is phenomenal with a

main road all the way to Takoradi,” Coetzer says. “The underground conditions are really good.

You can actually cut things square. It’s like cutting granite with a blade.”

“By the end of this year, we’ll be up to 2,400 tonnes in the mine plan,” Raffield adds. “In fact,

we’re getting close to that at the moment. And the long-term plan is to carry on at 2,400 tonnes

underground for the next five years or so, that’s what we’re budgeting on at the moment, but our

conceptual plan is to push the underground up to about 4,000 tonnes, and possibly higher, as we

follow the ore down.”

At Prestea underground, the refurbishment work is in its final stages and the company has

hoisted over 9,000 tons of material to surface. The company has completed the upgrade of

winders, and has five alimaks on site, one of which was up about 60 metres or about halfway up

the first raise during the April site visit.

The raises at Prestea are 2.7 metres by 3 metres. “They’re big,” says Greg Scammell, Golden

Star’s underground superintendent. “It would be almost impossible to do that without the use of

an alimak.”

Alimaks are machines that climb vertically on rail that is anchored in the hanging wall.

Occupants ride up in a protected cage with a solid steel head-cover over them protecting them

from any sort of ground fall.

“The rate of achievable development is increased dramatically with an alimak because there is no

fatigue — the guys aren’t climbing, the machine is doing all the work,” Scammell says. “They’re

not carrying their hand-held drills. They’re not carrying their explosives. They’re just riding in

the machine … You can go up the raise no matter what the height is … and it has five breaking

systems, so they’re not going to fall out of the raise. It’s an incredibly safe piece of equipment.”

Prestea underground looks a lot different than it did in 2011, when Coetzer first visited the site

and ventured underground in the mine’s central shaft, which dates from around 1935 (as did

most of the mine’s electrical system, compressors and other equipment).

“The shaft condition was really bad. It was rusted. It was old, and we went down extremely

slowly,” he recalls. “It was very, very, scary going down.”

Golden Star has rehabilitated the shaft, at a cost of around US$2 million, and it now takes eight

minutes to descend to a depth of 900 metres.

Coetzer notes that Golden Star is well on its way to rehabilitating its reputation in the markets,

too.

“We are surrounded by a lot of noise on the street but we have a path,” he says. “The history of

the company as a refractory business has hung over it. We were put in the basement of many

investors, and as it has started emerging now, the first comment we get is: ‘Oh, you’re the

refractory guys.’ I know the psychology and the only way you beat it is by credibility, and so

eventually we’ll break through the barrier of that noise and be recognized for being something

new.”

In fact, he says, that has already started to happen.

“I get shareholders calling me now who would never have talked to me before. Banks in London

are calling me. A year ago, no one was calling me!”

In January, Golden Star raised $30 million in a bought deal financing and in March arranged a

US$25 million secured loan from Ecobank Ghana.

“If you had to write a book it would be the most amazing book to see all the things that happened

in such quick succession from what it was back then and how we put new life into it today,” he

says. “We had to touch every part of the company and I realized that very early on, and I had to

be realistic. We had to deal with environmental liabilities, a new mine plan, exploration, design

and feasibility studies. We had to fund it. We had to get shareholders and the market to believe in

us, and believe in it ourselves.”

A drill crew at Golden Star Resources’ Wassa gold mine in Ghana. Credit: Golden Star

Resources.

In terms of exploration upside, Coetzer says, both Wassa and Prestea have it in spades and the

company has earmarked $6.5 million this year for a 48,000-metre drill program.

Currently Prestea underground has reserves of 1.09 million tonnes grading 13.93 grams gold per

tonne for 490,000 ounces of gold and based on those reserves, the mine is anticipated to generate

production of 90,000 oz. gold a year over a 5.5 year mine life.

Prestea is hosted within Birimian phyllites and the mineralization is associated with the prolific

fault referred to as the Ashanti Trend. West Reef mineralization is hosted in a fault structure

parallel to the Main Reef. Gold occurs as free gold along carbonaceous partings within the quartz

veins or with pyrite and arsenopyrite.

At Wassa underground, measured and indicated resources tally 13.5 million tonnes grading 3.83

grams gold per tonne for 1.7 million oz. gold. Inferred resources add 15.6 million tonnes grading

4.20 grams gold for 2.1 million oz. gold. (The Wassa open-pit mine has measured and indicated

resources of 27.5 million tonnes grading 1.43 grams gold for 1.3 million oz. gold.)

The company believes there is potential to extend the mine life at Wassa underground through

exploration beyond the current seven years forecast in the feasibility study. “My hope,” Coetzer

says, “is that Wassa is a world-class ore body close to 10 million ounces.”

The Wassa deposit is hosted in Birimian meta-sedimentary and volcanic rocks and dating has

shown it is the oldest deposit in the Ashanti Belt. Initial gold mineralization has been affected by

two major folding events. Gold was remobilized during the first tight folding even and it is these

higher grade fold closures that are being mined underground.

Coetzer adds that Wassa underground is similar in some respects to the Musselwhite mine in

northwestern Ontario, where he worked from 1996 until 2000.

“I see a lot of resemblance between Musslewhite and Wassa,” he says. “Musselwhite had a

similar plunge and geometry to this ore body, and when we started off at Musselwhite in 1995,

we had seven years of mine life, and it’s still being mined in 2017.”

The 2017 exploration program at Wassa has three key areas of focus: The first is to test the B

shoot to the north, the second to test the B shoot extension to the south, and finally step-out

drilling on the 242 trend, which has been mined before from surface as part of the Wassa open

pit. The company will assess potential to mining 242 from underground, as well.

“Every time we step out by 200 metres, we tend to add roughly half a million ounces on this

whole deposit,” Mitch Wasel, Golden Star’s vice president exploration, says of Wassa. “I’ve

been told very firmly that we need to get a little bit more aggressive and step out a little further

… It’s a very well endowed deposit.”

“When you look at the rock it’s very competent, so we’re able to open and break these big

stopes,” he says. “The Wassa deposit is a little bit different than anything else we’ve seen in

West Africa. We’ve done a lot of dating on the sulphides, and this is probably one of the older

gold deposits you’ll find in West Africa.”

“We need to know if this is a massive ore body,” adds Coetzer. “The last hole we drilled was 70

metres at 6 grams a tonne. We need to follow that up.”

Golden Star is optimistic about exploration upside at Prestea, too. The last exploration at Prestea

underground was thirteen years ago, and before that, more than 40 years ago. Wasel found the

West Reef zone in 2004, but at the time his calls for more exploration dollars under previous

management fell on deaf ears.

“Mitch went down with a drill in 2004, when there was no ventilation and found that very high-

grade West Reef, and he had been trying to convince previous management to spend more

money on underground exploration, but my predecessors didn’t have much underground

experience,” Coetzer says. “Now the team we have has done both and is comfortable doing both

… and now that he’s allowed to look deeper, I think he’s going to be able to find additional ore.”

Coetzer believes Golden Star can at least double the size of the West Reef because of its plunge

and should be able to find more mineralization in the main reef and an area called, the South

Gap.

The first focus of exploration will be to delineate and extend the West Reef. If successful, that

would increase the supply of high-grade ore to the processing plant in the near term, increasing

production and giving the company the biggest bang for its buck.

The second focus at Prestea underground will be to test the Main Reef, which was the ore body

mined historically (about 80% of the mining at Prestea was in the main reef), and the third focus

will be to target the far south of the current workings in an area called the South Gap. The

objective of drilling at both Main and South gap is to find out if ore can be added to the mine life

in the medium term.

“There are a lot more targets on this mine,” Raffield says. “The half a million ounces that we’ve

got in the West Reef is not the end in our opinion … Our immediate strategy is to look for

extensions on the West Reef, then look for extensions on the Main Reef, and then start looking

for extensions outside of areas where we’re mining at the moment.”

“The targets we have aren’t just thumb-sucks,” adds Wasel, who has spent the last 24 years

working for Golden Star, six of them at the company’s Gross Rosebel discovery in Suriname

(later sold to Cambior), and 17 of them in Ghana. “We digitized all the material based on

historic mining and we’ve got significant targets.”

“We’re just scratching the surface in this camp,” Wasel continues. “We have all sorts of targets,

and it’s good to see that Sam and the board have finally given us some money to recommence

exploration … Now that the mine is generating cash flow we can get back into exploration again.

In some respects, Coetzer says, Golden Star’s journey to recovery reminds him of the early

struggles of Randgold Resources (LSE: RRS), whose CEO, Mark Bristow, a fellow South

African, had to reform in his early days at the company.

“Randgold didn’t get off the blocks overnight. It was a company that Mark had to build up. In

the beginning he had to battle the history of its predecessor, Rand Mines, and he had to change

the philosophy, and then he built a fabulous company,” he says. “People think it’s brand-new

companies that do very well, but there are companies that have modernized their mines, cleaned

them up, and added lots of value — Detour Lake Gold is another example.”

At the end of the first quarter, Golden Star had US$36.5 million in cash.

“We’re sitting on a fantastic land package, we’ve got great infrastructure and our focus will be to

just keep on growing,” Coetzer says. “This is the largest land package I’ve ever seen with three

plants sitting on it. We’ve been able to build two mines for US$40 million — only because other

people spent money here — not because I’ve spent money here.”

Golden Star is trading at 84¢ per share within a 52-week range of 67¢ and $1.46 per share.

Raj Ray of National Bank of Canada has a target price on the company of $1.85 per share, while

Nana Sangmuah of Clarus Securities has a $2.00 per share target price.

“We believe that Golden Star could stand to benefit from either improving investor interest or

potential M&A given its large resources of 7 plus million ounces, additional exploration upside

potential with the largest concession area (1,156 sq. km) among peers along the prolific Ashanti

gold belt, and significant mine and mill infrastructure,” Ray wrote in an April research note.

Golden Star “is a turnaround story with a lot of upside due to the leverage from improving

margins driven by lower cost, rising gold prices and improved execution,” he wrote in a research

note following the site visit.

“We highlight the similarity of Golden Star’s production growth, cost and free cash flow

generation profile over the next three years with that of Klondex and Semafo, and yet Golden

Star trades at a 50% discount to the average multiples for these stocks.”