2012 both good and bad year for junior producer Lake Shore

Last year was the best of times and the worst of times for Lake Shore Gold Corp. as it put it’s Bell Creek Mine into commercial production but it incurred a net loss of $317.9 million.

Bell Creek gave the company two operating mines in the City of Timmins that produced 85,782 ounces of gold in 2012. The Timmins West Mine is the other producer.

Tony Makuch, president and CEO of Lake Shore, commented: “Last year was our peak year for capital investment, development and construction as we advanced the Timmins West Mine and kept our mill expansion on track for completion during the second quarter of 2013.

It was also a year in which we achieved our production guidance, reported average cash costs per tonne below expected levels and capital expenditures at the low end of our target range. Based on the progress achieved in 2012, we are now poised for strong production growth, sharply lower capital investment and improved operating costs in 2013.”

Explaining the huge net loss (77 cents per common share), the company said if one excluded “a non-cash impairment charge of $302.5 million and related deferred tax recovery of $2.1 million, net loss for 2012 was $17.5 million or four cents per common share, higher than the net loss in 2011 of $10.9 million or three cents per common share, due largely to higher depletion and depreciation expenses compared to 2011.

The $302.5 million non-cash charge relates to the write down of the company’s mining interests as a result of the impairment assessment performed by the company at Dec. 31, 2012.”

The company’s annual impairment assessment as required under International Financial Reporting Standards reduced the carrying value of its Timmins and Mexican assets as part of its fourth quarter and year-end 2012 results. The extent of the non-cash accounting charge was based on the estimated recoverable value of the assets in the current market environment, which is valuing mining and exploration assets at lower multiples than in recent years.

Makuch commented on Feb. 25: “Reducing the carrying value of our assets represents a non-cash accounting adjustment that largely reflects changes in market conditions and the difference between our book value and current market capitalization. Our focus is on increasing our market capitalization through a higher share price.

Our strategy to increase near-term value includes achieving at least 40% growth in production in 2013, to between 120,000 ounces and 135,000 ounces of gold, improving cash operating costs, reducing capital spending and, by the second half of this year, beginning to generate positive free cash flow.”

Stocks of both senior and junior gold producers were hammered during the past year as investors turned their backs on such companies.

At the Timmins West Complex, the company is in commercial production at the Timmins West Mine (including the Timmins Deposit and adjacent Thunder Creek Deposit) and is evaluating the Gold River Trend project, where an updated resource was released early in 2012, as well as the 144 exploration property.

On the east side of Timmins, the Bell Creek Complex hosts the company’s milling facility as well as the Bell Creek Mine, where commercial production commenced effective Jan. 1, 2012.

The company’s central mill has a current operating capacity of 2,000 tonnes per day and is processing ore from the Timmins West and Bell Creek Mines. An expansion of the mill to 3,000 tonnes per day from 2,500 is targeted during the second quarter of 2013.

The Bell Creek Complex also hosts a number of exploration properties, including Vogel, Marlhill, Wetmore and others.

The company’s third gold complex is the Fenn-Gib project, located approximately 60 kilometres east of Bell Creek along the eastern extension of the Destor Porcupine and Pipestone Fault Zones. Fenn-Gib is a potential large-scale, open-pit gold project with a significant resource and excellent potential for further growth.

Cash earnings from mine operations in 2012 were $53.7 million, an increase of approximately 70% from 2011. Fourth quarter 2012 cash earnings from mine operations totalled $14.3 million compared with $8.7 million for the same period in 2011. (In 2012, Timmins West Mine, including the Timmins Deposit and Thunder Creek, and Bell Creek Mine were in commercial production, while only Timmins Deposit was in commercial production in 2011)

• Reported cash operating costs per tonne in 2012 of $115, below target levels. On a per ounce basis, cash operating costs were US$996 in 2012 (including $30 relating to royalties). For the fourth quarter 2012, cash operating costs totalled $124 per tonne or US$990 per ounce (including $36 relating to royalties).

• During 2012, the company raised more than $220 million of capital to fund its growth by completing a royalty and equity investment transaction with Franco-Nevada Corporation for $50 million; completing a credit facility with Sprott Resource Lending Partners (Sprott) for $70 million, with $35 million from a gold-linked note drawn on July 16, 2012 and a $35 million standby line drawn subsequent to year end; and issuing Convertible Unsecured Debentures for an aggregate principal amount of $103.5 million. Of the funds raised, US$50 million was used to repay a credit facility with UniCredit Bank AG.

• Cash and gold bullion inventory at Dec. 31, 2012 totalled approximately $61 million, including $48.7 million of cash and the remainder in bullion inventory (valued at market prices).

• Effectively managed capital investment during peak investment phase of Timmins West Mine development and mill expansion projects with total investment of $160.7 million for projects and $9.1 million for exploration, in line with the company’s target for total capital investment of $170 to $175 million.

• Capital investment during the fourth quarter 2012 totaled $36.6 million, with $1.5 million invested in exploration.

• Completed 11,900 metres of mine development at its Timmins West and Bell Creek mines, as well as approximately 140,000 metres of delineation and infill drilling. Development and drilling during the year was completed to better define resources and outline mineralization in support of production growth and to optimize mine planning.

• Extended Timmins Deposit ramp to 790 Level and connected lower mine at Thunder Creek from 660 Level to 765 Level. Ramp at Bell Creek driven to 610 Level with drill drift established to support evaluation of the Bell Creek deposit at depth.

• Completed phase one of company’s mill expansion in December, increased processing capacity by 25% to 2,500 tonnes per day.