[miningmx.com] — GREAT Basin Gold (GBG) CEO Ferdi Dippenaar is upbeat over improved operating results from the Burnstone mine, but RBC Capital Markets analyst Leon Esterhuizen has maintained his conservative outlook.
Esterhuizen visited the mine on December 12 and then put out a report which acknowledged some progress was being made in dealing with problems that hammered the September quarter results and sent the GBG share price into a tailspin.
On Monday, GBG published an operational update showing improvements in grade and ore development achieved in the first two months of the current December quarter.
These show a 29% rise in ore development to 2,259m (first two months of September quarter – 1,756m) and a 9% rise in contained average grade from stoping operations which hit 3.15g/t (2.89g/t).
Dippenaar commented, “we are making good progress with increasing the rate of ore development required to increase the number of stopes available for mining at Burnstone.
“The decision to increase the size of the mining blocks was the correct one with the resultant operational efficiencies already starting to show.
“Current stoping continues to confirm that the decision to use long hole stoping as preferred mining method was correct. In addition, concluding the debt facility provides the necessary flexibility to ensure that the delayed production build up can be funded.’
GBG has drawn down all the funds from the $150m facility agreed with Credit Suisse and Standard Chartered Bank.
Esternhuizen’s assessment was that; “the challenges that resulted in the slower-than-planned ramp-up are being addressed. Significant amounts of infill drilling have increased the understanding of the ore body and the team now has increased confidence in the near-term mine plan.
“The faulted mining block is being redeveloped and on-reef development rates have already started picking-up.”
But Esterhuizen has kept his “conservative guidance” in place which was that Burnstone will deliver 20% less than the revised gold production targets previously announced by Dippenaar of 135,000oz to be achieved during 2012 and 175,000oz during 2013.
According to him “patience is required and the execution risk remains high’.
“We believe it will take at least another quarter or two – especially with quarter one of calendar 2012 expected to be impacted by the usual slow startup following the Christmas break – before we could see a marked improvement in the operational performance,” he said.
“As with any ramp-up operation, the execution risk remains high in our view. We therefore maintain our conservative forecasts until there are clear signs that the mine is on track to meet its operational targets.
“Failure to deliver on these targets could strain the balance sheet due to the large debt burden, in our view.”
Esterhuizen said that management had attributed the production problems experienced at Burnstone mainly to “a lack of development caused by an unexpected fault which was encountered in the B2-Block and not the long hole stoping mining method”.
He added: “We also believe that there are a few other contributing factors, including a delay in completing the shaft infrastructure resulting in logistical constraints and low efficiencies on the trackless equipment.”
Esterhuizen said initial drill spacing in the B2-Block was too far apart to pick up the fault which “essentially halted development of this block while infill drilling was carried out”.
“This resulted in a significant reduction in the number of on-reef development ends and available stopes to mine while infill drilling was done to ensure the extent of the faulting was fully understood.
“The net result of this is a roughly 9-month delay in the build-up schedule.
“Äs development rates pick up – and more mining faces become available – mining flexibility should increase which should see the impact of unexpected faulting or other disruptions become less prevalent as stoping can then be moved into another available stope.
“Infill drilling and increased mining flexibility should therefore prevent similar faulting from having such a profound impact on production, in our opinion.’
SUFFICIENT CASH
Turning to GBG’s financial situation, Esternhuizen said the new debt facility “should be sufficient to complete the ramp-up at Burnstone as it is currently planned”.
He noted GBG expected to spend $50m in cash until Burnstone turned cash positive by the third quarter of financial 2012, which implied a $30m buffer available “to cover any unforeseen eventualities at the operations”.
“This growing debt burden will significantly increase the debt servicing obligations. Failure at Burnstone could therefore leave the company in a tight financial position, in our opinion.”
GBG shares traded at 800c on the JSE on Monday morning, remaining close to the 12-month of low 760c reached in November after sliding throughout 2011 from a high of R22.50 in January.
