A look at Lake Shore Gold’s maiden 144 Gap Zone Opportunity
On March 12th, Toronto-based Lake Shore Gold (TSX: LSG) released their annual reserve updates. Lake Shore Gold, as brief summary, owns and operates two gold mines in the Timmins Gold Camp of northern Ontario. The company operates the Timmins West Mine, and on the east side of the Camp, the company operates the Bell Creek Mine, which is in the advanced stages of exploration.
In their reserve update, Lake Shore Gold announced a 29% total increase in ore reserves at their two mines. The mines had increased in total reserve from 598,800 ounces of gold last year to 773,300 ounces this year, as Lake Shore Gold described in its March 12th press release:
Reserves at Timmins West Mine grew 4% to 509,700 ounces (3,691,000 tonnes at an average grade of 4.3 grams per tonne) from the previous estimate of 492,200 ounces (3,332,000 tonnes at an average grade of 4.6 grams per tonne). Reserves at Bell Creek Mine more than doubled from the previous estimate, increasing to 263,600 ounces (1,792,000 tonnes at an average grade of 4.6 grams per tonne) from 106,600 ounces (706,900 tonnes at an average grade of 4.7 grams per tonne).
The fact that the new reserves promises to extend the mine life of Bell Creek, as well as increase production potential for the company is all good news for Lake Shore Gold, a company that arguably has enjoyed a consistent run of positive results.
Lake Shore Gold is a miner that is currently generating free cash flow, and, beyond that, has executed a successful operational turnaround dating back to Q4 2013.
Once a chronic underperformer, in Q3 2013, Lake Shore Gold completed a central mill expansion, which some analysts consider the start of the company’s turnaround. In addition to its 50% throughput expansion, that same year, Lake Shore Gold successfully restructured its then $35 mm debt to Sprott Resource Corp. (TSX: SCP.TO), which the company is on track to repay by Q1 2015.
Fast-forward to Q3 2014 and you still have a company enjoying successful exploration returns. In Q3 2014, Lake Shore Gold announced successful results from its 48-hole drilling at its Timmins West Mine. Following that, at year’s end in 2014, Lake Shore Gold released its 2014 cash costs, which at US$595/oz (AISC of US$875/oz) came in significantly better than its company guidance of US$675-US$775/oz (AISC of US$950-US$1,050/oz).
Some analysts covering the company have gained confidence in Lake Shore Gold’s performance and have changed their guidance accordingly.
In December 2013, one broker updated Lake Shore Gold’s stock from SELL to HOLD. In June 2014, two of the three banks covering the company revised their position to HOLD, with one bank remaining at SELL.
Daniel Earle, a resource analyst at TD Securities, has covered Lake Shore Gold since August 2008. In June 2013, recognizing the importance of Lake Shore Gold’s mill expansion completion and the company’s potential operational turnaround, Mr. Earle upgraded his recommendation of Lake Shore to a BUY, with a $0.70 target.
In August 2013, Daniel Earle wrote the following coverage on Lake Shore Gold:
… the company is well positioned to achieve production guidance this year and together with a forecasted decline in capex over the second-half of the year, we believe sustainable free cash flow can be realized starting in Q4/13, marking a major turning point in the company's history, in our view.
Operating with free cash flow and enjoying mines that are exceeding reserve estimates is positive. However, what should be particularly worthwhile to note is Lake Shore Gold’s 144 Gap Zone, a relatively new discovery roughly 500 meters away from the company’s operations at the Thunder Creek mine.
Initial exploration of the 144 Gap Zone, which the company began last year, had Lake Shore Gold uncovering as much as 7.18 g/t Au over 24 metres, besides a number of other strong hits.
Further exploration of the zone this year only added to exploration success. After completing another 10 holes at the 144 Gap Zone and one wedge hole, Lake Shore Gold reported thick, high-grade mineralization at the zone, stating in their press release published on February 24th:
Today's results confirm the presence of a significant area of thick, high-grade gold mineralization within the 144 Gap Zone. This high-grade core is open for continued expansion along strike, to the west and towards surface with additional drilling and has excellent potential for conversion to resources.
With positive exploration results from the 144 Gap Zone, Lake Shore Gold will continue its efforts in the zone, writing in their press release:
The additional information provided from today's results further supports our view that the 144 Gap Zone is a very special area of mineralization and provides valuable information that is helping us to position our underground drill platform into the area. With six drills working on surface, our exploration drift advancing towards completion during the third quarter, and underground drilling expected to commence by mid-year, we are working towards establishing an initial resource at the 144 Gap Zone for the end of 2015.
These positive results have attracted attention among analysts. Some sources in the media claim that the 144 Gap Zone will increase Lake Shore Gold’s production by roughly 1 million ounces; others feel that’s too aggressive of an estimate.
Daniel Earle in his coverage on Lake Shore Gold on February 24th noted the positive drill results at the 144 Gap Zone and indicated its impact as being “slightly positive”.
How much the 144 Gap Zone will increase mine life for Lake Shore Gold is at this point uncertain. However, it is important to note that the exploration findings at 144 continue the stream of positive news at Lake Shore Gold, a company that by all accounts continues to run an efficient operation.