SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________________to__________.
Commission file number 1-12284
GOLDEN STAR RESOURCES LTD.
(Exact name of registrant as specified in its charter)
Canada 98-0101955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10901 West Toller Drive, Suite 300
Littleton, Colorado 80127-6312
(Address of principal executive office) (Zip Code)
(303) 830-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes X No
--- ---
Number of Common Shares outstanding as of November 1, 2005: 142,887,394
1
EXPLANATORY NOTE
This Form 10-Q/A is being filed to amend Golden Star Resources Ltd.'s Quarterly
Report on Form 10-Q for the period ended September 30, 2005 in order to reflect
the restatement of our unaudited consolidated financial statements and
amendments to related disclosures as of September 30, 2005 and for the three
months ended September 30, 2005 and 2004. The restatements arose from
management's determination that Golden Star's 53% owned consolidated subsidiary,
EURO Ressources S.A., had incorrectly used hedge accounting for its forward gold
pricing derivatives established in January and August 2005.
Generally, no attempt has been made in this Form 10-Q/A to modify or update
other disclosures presented in the original report on Form 10-Q except as
otherwise required to reflect the effects of the restatement. This Form 10-Q/A
does not reflect events occurring after the filing of the original Form 10-Q or
modify or update those disclosures. Information not affected by the restatement
is unchanged and reflects the disclosure made at the time of the original filing
of the Form 10-Q with the Securities and Exchange Commission on November 3,
2005.
INDEX
Part I Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 6. Exhibits
Signatures
Exhibits
All amounts in this Report are expressed in United States ("US") dollars, unless
otherwise indicated. Canadian currency is denoted as "Cdn$". All numeric amounts
are in thousands unless noted otherwise.
Financial information is presented in accordance with accounting principles
generally accepted in Canada ("Cdn GAAP"). Differences between accounting
principles generally accepted in the US ("US GAAP") and those applied in Canada,
as applicable to Golden Star Resources Ltd., are explained in Note 21 to the
Consolidated Financial Statements.
References to "Golden Star", "we", "our", and "us" mean Golden Star Resources
Ltd., its predecessors and consolidated subsidiaries, or any one or more of
them, as the context requires.
NON-GAAP FINANCIAL MEASURES
In this Form 10-Q/A, we use the terms "total cash cost per ounce" and "cash
operating cost per ounce" which are considered Non-GAAP financial measures as
defined in SEC Regulation S-K Item 10 and should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with GAAP.
See Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations for a definition of these measures as used in this Form
10-Q/A.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q/A and the documents incorporated by reference in this Form 10-Q/A
contain forward-looking statements, within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, with respect to our
2
financial condition, results of operations, business, prospects, plans,
objectives, goals, strategies, future events, capital expenditures, and
exploration and development efforts. Words such as "anticipates," "expects,"
"intends," "forecasts," "plans," "believes," "seeks," "estimates," "may,"
"will," and similar expressions identify forward-looking statements.
Although we believe that our plans, intentions and expectations reflected in
these forward-looking statements are reasonable, we cannot be certain that these
plans, intentions or expectations will be achieved. Actual results, performance
or achievements could differ materially from those contemplated, expressed or
implied by the forward-looking statements contained or incorporated by reference
in this Form 10-Q/A.
These statements include comments regarding: the establishment and estimates of
mineral reserves and resources, recovery rates, production, production
commencement dates, production costs, cash operating costs, total cash costs,
grade, processing capacity, potential mine life, feasibility studies,
development costs, expenditures, exploration activities and expenditures,
funding for EURO Ressources S.A. ("EURO"), stripping rates at Bogoso/Prestea,
equipment replacement at Wassa, our expansion plans for Bogoso/Prestea and
related permitting and capital costs, cash requirements and sources, production
capacity, operating costs and gold recoveries.
The following, in addition to the factors described under "Risk Factors" in our
Form 10-K, as amended, for the year ended December 31, 2004, are among the
factors that could cause actual results to differ materially from the
forward-looking statements:
o unexpected changes in business and economic conditions;
o significant increases or decreases in gold prices;
o changes in interest and currency exchange rates;
o timing and amount of gold production;
o unanticipated grade changes;
o unanticipated recovery or production problems;
o effects of illegal miners on our properties;
o changes in mining and processing costs including changes to costs of
raw materials, supplies, services and personnel;
o changes in metallurgy and processing;
o availability of skilled personnel, materials, equipment, supplies and
water;
o changes in project parameters;
o costs and timing of development of new reserves;
o results of current and future exploration activities;
o results of pending and future feasibility studies;
o joint venture relationships;
o political or economic instability, either globally or in the countries
in which we operate;
o local and community impacts and issues;
o timing of receipt of and maintenance of government approvals and
permits;
o accidents and labor disputes;
o environmental costs and risks;
o competitive factors, including competition for property acquisitions;
and
o availability of capital at reasonable rates or at all.
These factors are not intended to represent a complete list of the general or
specific factors that could affect us. Your attention is drawn to other risk
factors disclosed and discussed in Item 1 of our 2004 Form 10-K as amended. We
undertake no obligation to update forward-looking statements.
3
1. FINANCIAL STATEMENTS
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
(Stated in thousands of US dollars except shares issued and outstanding)
(Unaudited)
------------------------------------------------------------------------------------------------------------------------
As of As of
September 30, December 31,
2005 2004
------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 23,897 $ 12,877
Short term investments (Note 2) 19,750 38,850
Accounts receivable 4,711 3,592
Inventories (Note 3) 25,718 15,366
Due from sale of property (Note 4) - 1,000
Future tax assets 3,252 1,542
Deposits (Note 5) 7,244 5,102
Prepaids and other 1,376 517
------------------------------------------------------------------------------------------------------------------------
Total Current Assets 85,948 78,846
RESTRICTED CASH (Note 15c) 3,372 3,351
LONG TERM INVESTMENTS (Note 6) 6,715 5,528
DEFERRED EXPLORATION AND DEVELOPMENT COSTS (Note 7) 10,151 7,452
PROPERTY, PLANT AND EQUIPMENT (Note 8) 75,096 28,653
MINING PROPERTIES (Note 9) 118,160 74,197
CONSTRUCTION IN PROGRESS (Note 10) 20,300 51,159
DEFERRED STRIPPING (Note 11) 3,160 1,357
LOAN ACQUISITION COSTS (Note 12) 1,047 -
OTHER ASSETS 1,707 1,617
------------------------------------------------------------------------------------------------------------------------
Total Assets $ 325,656 $ 252,160
========================================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 8,498 $ 7,010
Other accrued liabilities 22,392 9,203
Current debt (Note 13) 4,465 1,267
------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 35,355 17,480
LONG TERM DEBT (Note 13) 55,214 1,707
ASSET RETIREMENT OBLIGATIONS (Note 14) 10,487 8,660
FAIR VALUE OF DERIVATIVES (NOTE 12) 7,412 -
------------------------------------------------------------------------------------------------------------------------
Total Liabilities 108,468 27,847
MINORITY INTERESTS 6,867 6,353
COMMITMENTS AND CONTINGENCIES (Note 15) - -
SHAREHOLDERS' EQUITY
SHARE CAPITAL
First preferred shares, without par value,
unlimited shares authorized. No shares issued. - -
Common shares, without par value, unlimited
shares authorized. Shares issued and outstanding:
142,887,394 at September 30, 2005; 142,244,112 at
December 31, 2004 (Note 16) 343,952 342,494
CONTRIBUTED SURPLUS (Note 16) 5,518 2,040
DEFICIT (139,149) (126,574)
------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 210,321 217,960
------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 325,656 $ 252,160
========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
4
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands of US dollars except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------------------------
REVENUE
Gold sales $ 23,235 $ 12,327 $ 63,329 $ 47,107
Royalty income (Note 4) 952 783 3,071 1,748
Interest and other 561 335 1,322 941
--------------------------------------------------------------------------------------------------------------------------------
Total revenues 24,748 13,445 67,722 49,796
--------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Mining operations 20,060 10,236 52,026 29,551
Depreciation, depletion and amortization 4,639 1,895 10,552 6,084
Accretion of asset retirement obligations (Note 14) 172 167 540 489
--------------------------------------------------------------------------------------------------------------------------------
Total mine operating costs 24,871 12,298 63,118 36,124
Exploration expense 191 152 605 607
Corporate general and administrative and options expense 1,557 1,494 6,504 5,476
Corporate development expense 37 3,939 147 4,043
Loss on equity investments 75 219 185 219
Abandonments and impairments - - 1,083 -
Derivative mark-to market loss 5,486 - 7,412 -
Interest expense 853 5 1,705 17
Foreign exchange (gain)/loss (111) (391) 732 235
--------------------------------------------------------------------------------------------------------------------------------
Total expenses 32,959 17,716 81,491 46,721
--------------------------------------------------------------------------------------------------------------------------------
Income/(loss) before minority interest (8,210) (4,271) (13,769) 3,075
Minority interest (136) 13 (516) (1,024)
--------------------------------------------------------------------------------------------------------------------------------
Net income/(loss) before income tax (8,346) (4,258) (14,285) 2,051
Provision for future income taxes 1,689 - 1,710 -
--------------------------------------------------------------------------------------------------------------------------------
Net income/(loss) $ (6,657) $ (4,258) $ (12,575) $ 2,051
================================================================================================================================
Deficit, beginning of period (132,492) (122,907) (126,574) (129,216)
--------------------------------------------------------------------------------------------------------------------------------
Deficit, end of period $(139,149) $(127,165) $(139,149) $(127,165)
================================================================================================================================
Net income/(loss) per common share - basic (Note 19) $ (0.047) $ (0.030) $ (0.088) $ 0.015
Net income/(loss) per common share - diluted (Note 19) $ (0.047) $ (0.030) $ (0.088) $ 0.014
Weighted average shares outstanding (millions of shares) 142.8 141.1 142.5 137.0
--------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
5
GOLDEN STAR RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands of US dollars)
(Unaudited)
---------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: $ (6,657) $ (4,258) $ (12,575) $ 2,051
Net income/(loss)
Reconciliation of net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 4,710 1,861 10,623 6,084
Amortization of loan acquisition costs 30 - 105 -
Stock based compensation 98 86 900 1,095
Deferred stripping (1,920) (652) (1,803) (652)
Loss on equity investment 75 219 185 219
Abandonment and impairment of mineral - - 1,083 -
properties
Fair value of derivatives 5,485 - 7,412 -
Provision for future income taxes (1,690) - (1,710) -
Accretion of asset retirement obligations 172 167 540 489
Accretion of convertible debt 174 - 348 -
Minority interests 136 (13) 516 1,024
---------------------------------------------------------------------------------------------------------
613 (2,590) 5,624 10,310
Changes in assets and liabilities:
Accounts receivable 1,769 2,127 (1,119) (1,009)
Inventories (4,694) (407) (10,353) (2,325)
Deposits 830 - (127) -
Accounts payable and accrued liabilities 3,839 3,874 5,607 8,004
Other (410) (2,175) (317) (2,002)
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating 1,947 829 (685) 12,978
activities
---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Expenditures on deferred exploration and (1,719) (1,059) (3,782) (4,750)
development
Expenditures on mining properties (10,455) (6,073) (23,918) (12,343)
Expenditures on property, plant and equipment (6,279) (5,645) (25,372) (9,082)
Expenditures on mine construction in progress (13,084) (5,691) (19,123) (16,032)
Decrease in short term investments 22,750 - 19,100 -
Sale of property - - 1,000 1,000
Change in payable on capital expenditures 9,071 - 9,071 -
Deposits (161) - (2,415) -
Reclamation expenditures (176) (95) (468) (563)
Other 879 1,830 (1,627) (1,129)
---------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) investing 826 (16,733) (47,534) (42,899)
activities
---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of share capital, net of issue costs 877 5,508 1,177 14,758
(Note 16)
Debt repayments (Note 13) (1,087) (35) (1,972) (116)
Issuance of debt (Note 13) 3,000 - 58,330 -
Equity portion of convertible notes - - 2,857 -
Other (52) 81 (1,153) 794
---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,738 5,554 59,239 15,436
---------------------------------------------------------------------------------------------------------
Increase/(decrease) in cash and cash equivalents 5,511 (10,350) 11,020 (14,485)
Cash and cash equivalents, beginning of period 18,386 85,835 12,877 89,970
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents end of period $ 23,897 $ 75,485 $ 23,897 $ 75,485
---------------------------------------------------------------------------------------------------------
See Note 20 for supplemental cash flow information
The accompanying notes are an integral part of these consolidated financial
statements.
6
GOLDEN STAR RESOURCES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts in thousands of US dollars unless noted otherwise)
(Unaudited)
These consolidated financial statements and the accompanying notes are unaudited
and should be read in conjunction with the audited consolidated financial
statements and related notes thereto included in our annual report on Form 10-K,
as amended, for the year ended December 31, 2004, on file with the Securities
and Exchange Commission and with the Canadian securities commissions. Financial
information is presented in accordance with accounting principles generally
accepted in Canada.
In management's opinion, the unaudited consolidated financial statements for the
three months and nine months ended September 30, 2005 and September 30, 2004
contained herein reflect all adjustments, consisting solely of normal recurring
items, which are necessary for a fair presentation of financial position,
results of operations and cash flows on a basis consistent with that of our
prior audited consolidated financial statements.
In certain instances prior period amounts have been restated to reflect current
period presentation.
1. Description of Business
--------------------------
Through our subsidiaries and joint ventures we own a controlling interest in
three gold properties in southern Ghana in West Africa: the Bogoso/Prestea
property, which comprises the adjoining Bogoso and Prestea mining leases
("Bogoso/Prestea"), the Wassa property ("Wassa") and the Prestea Underground
property ("Prestea Underground").
Bogoso/Prestea and the Prestea Underground are owned by our 90% owned subsidiary
Bogoso Gold Limited ("BGL"). All of our gold production prior to April 2005 came
from Bogoso/Prestea. The Prestea Underground is located on the Prestea property
and consists of a currently inactive underground gold mine and associated
support facilities. BGL owns a 90% operating interest in the Prestea
Underground. We are currently conducting exploration and engineering studies to
determine if the underground mine can be reactivated on a profitable basis.
Through another 90% owned subsidiary, Wexford Goldfields Limited ("WGL"), we own
the Wassa gold mine located some 35 kilometers east of Bogoso/Prestea.
Construction and commissioning of Wassa's new processing plant and open pit mine
was completed at the end of March 2005 and the project was placed in service on
April 1, 2005.
We hold interests in an exploration joint venture in Sierra Leone in West Africa
and hold active exploration properties in Ghana, Cote d'Ivoire, Suriname and
French Guiana. We hold indirect interests in gold exploration properties in Peru
and Chile through an investment in Goldmin Consolidated Holdings, and in the
Democratic Republic of the Congo through an investment in Moto Goldmines
Limited. We also own a 57% interest in EURO Ressources S.A., ("EURO") a French
registered, publicly traded royalty holding company (formerly known as Guyanor
Ressources S.A.) which owns a royalty interest in Cambior Inc.'s Rosebel gold
mine in Suriname.
Our corporate headquarters are located in Littleton, Colorado. All of our
operations, with the exception of certain exploration projects, transact
business in US dollars and keep financial records in US dollars.
7
2. Short Term Investments
-------------------------
Short term investments are comprised of funds invested in AA or AAA rated
Auction Rate Certificates. The certificates are short term positions in long
term securities. The interest rate received is reset every 7, 28 or 35 days, and
the certificates can be liquidated for cash at each interest reset date.
3. Inventories
--------------
-------------------------------------------------------------------
As of As of
September 30, December 31,
2005 2004
-------------------------------------------------------------------
Stockpiled ore $ 5,564 $ 3,659
In-process 4,278 2,858
Materials and supplies 15,876 8,849
-------------------------------------------------------------------
Total inventories $ 25,718 $ 15,366
-------------------------------------------------------------------
4. Due From Sale of Property
----------------------------
In late 2001 we sold our interest in the Rosebel exploration property in South
America to Cambior Inc. ("Cambior"). In addition to a $5.0 million payment
received at closing in 2002, terms of the sale agreement provided that Cambior
would make three deferred payments of $1.0 million each plus Price Participation
Right (royalty) payments on the first seven million ounces of gold production.
The deferred payments were received in the first quarters of 2003, 2004 and 2005
respectively.
5. Deposits
-----------
Deposits represent advance payments mostly for capital equipment purchases made
by WGL and BGL.
6. Long Term Investments
------------------------
We hold a 22% interest in Goldmin Consolidated Holdings, a privately held gold
exploration company with a focus on South America. The investment is carried on
an equity investment basis at $1.2 million, and we recognized $0.1 million and
$0.2 million of equity losses in the three and nine months ended September 30,
2005, respectively.
We also hold approximately 10% of the outstanding common shares of Moto
Goldmines Limited ("Moto"), Canadian gold exploration and development company
publicly traded in Canada, with a focus on gold exploration and development in
the Democratic Republic of Congo. Our investment in Moto increased by $1.4
million to a total of $5.5 million during the second quarter of 2005 upon the
exercise of a portion of our Moto warrants. We hold additional Moto warrants
that if exercised would require the investment of an additional 4.25 million
Australian dollars. The fair value of our approximately 10% interest in Moto,
based on the market price of its shares on September 30, 2005, was $10.3
million, which exceeds our cost basis by $4.8 million.
8
7. Deferred Exploration and Development Costs
---------------------------------------------
Deferred Deferred
Exploration & Exploration &
Development Capitalized Development
Costs Exploration Acquistions Costs
as of 12/31/04 Expenditures Costs Impairments as of 9/30/05
---------------------------------------------------------------------------------------------------------------------
AFRICA
Akropong trend & other Ghana $ 2,443 $ 1,006 $ - $ - $ 3,449
Prestea property projects 2,067 277 - - 2,344
Mininko - Mali 1,033 50 - (1,083) -
Mano River - Sierra Leone 758 646 - - 1,404
Afema - Ivory Coast - 601 110 - 711
SOUTH AMERICA PROJECTS -
Saramacca - Suriname 394 332 - - 726
Bon Espoir - French Guiana 501 760 - - 1,261
Paul Isnard - French Guiana 256 - - - 256
--------------------------------- -------------- ------------- ------------ --------------- ----------------
TOTAL $ 7,452 $ 3,672 $ 110 $ (1,083) $ 10,151
--------------------------------- -------------- ------------- ------------ --------------- ----------------
8. Property, Plant and Equipment
--------------------------------
As of September 30, 2005 As of December 31, 2004
----------------------------------------------------------------------------------------------------
Property, Plant Property, Plant Property, Plant Property, Plant
and Equipment Accumulated and Equipment and Equipment Accumulated and Equipment
at Cost Depreciation Net Book Value at Cost Depreciation Net Book Value
-------------------------------------------------------------------------------------------------------------------------
Bogoso/Prestea $ 40,706 $ 7,320 $ 33,386 $ 27,722 $ 5,057 $ 22,665
Prestea Underground 2,003 - 2,003 238 - 238
EURO Ressources 1,456 1,446 10 1,969 1,951 18
Wassa 40,643 1,205 39,438 5,460 - 5,460
Corporate & Other 361 102 259 1,060 788 272
--------------------- -------------- --------------- -------------- -------------- ------------- ------------
TOTAL $ 85,169 $ 10,073 $ 75,096 $ 36,449 $ 7,796 $ 28,653
--------------------- -------------- --------------- -------------- -------------- ------------- ------------
9. Mining Properties
--------------------
As of September 30, 2005 As of December 31, 2004
-------------------------------------------------------------------------------------------------
Mining Mining
Mining Properties, Mining Properties,
Properties at Accumulated Net Book Properties at Accumulated Net Book
Cost Amortization Value Cost Amortization Value
---------------------------------------------------------------------------------------------------------------------
Bogoso/Prestea $ 45,786 $ 27,274 $ 18,512 $ 43,420 $ 23,113 $ 20,307
Prestea Underground 19,307 - 19,307 12,984 - 12,984
Wassa 50,141 2,922 47,219 9,653 - 9,653
Bogoso Sulfide 13,065 - 13,065 13,065 - 13,065
Mampon 14,895 - 14,895 13,676 - 13,676
Other 5,162 - 5,162 4,512 - 4,512
-------------------- ------------ ------------- -------------- ------------- ----------- ------------------
TOTAL $ 148,356 $ 30,196 $ 118,160 $ 97,310 $ 23,113 $ 74,197
-------------------- ------------ ------------- -------------- ------------- ----------- ------------------
9
10.Construction in Progress
---------------------------
Construction in Progress for the current periods consists of development and
construction costs of the Bogoso sulfide expansion project incurred since the
beginning of 2005. The Bogoso sulfide acquisition and feasibility study costs
incurred prior to 2005 are classified as a component of Mining Properties on the
Consolidated Balance Sheet. Balances in the comparable periods of 2004 represent
costs of the Wassa project.
11.Deferred Stripping
---------------------
We initiated a deferred waste stripping policy at the Plant-North pit on the
Prestea property in the third quarter of 2004 in response to the fact that
mining as Prestea has trended in recent years toward deeper pits with longer
lives and higher and more variable stripping ratios than in the past.
The amount of stripping costs to be capitalized is calculated each quarter by
determining the tonnes of waste moved in excess of the life-of-pit average strip
ratio and valuing the excess tonnage of removed waste at the average mining cost
per tonne during the period. Costs are recovered in periods when the actual
tonnes of waste moved are less than what would have been moved at the average
life-of-pit rate, such tonnes being valued at the rolling average cost of the
waste tonnage amounts capitalized.
The capitalized component of waste rock removal costs is shown on our
consolidated balance sheets in the line item titled "Deferred Stripping". The
cost impact is included in the Statements of Operations in the line item titled
"Mining operations". In periods when the strip ratio exceeds the pit average,
the costs of the excess stripping are excluded from our cost per ounce
calculations. In periods when the strip ratio is less than the pit average,
capitalized waste costs are added back to operating costs and included in cost
per ounce calculations.
Actual stripping ratios at the Plant-North pit were 2.3 to 1 during 2002, 3.4 to
1 during 2003, 5.5 to 1 for the first nine months of 2004, 5.9 to 1 for the
second half of 2004 and 6.1 to 1 during the first nine months of 2005. A total
of $1.4 million of Plant-North deferred waste stripping cost, which would have
been included in operating costs under our previous policy, was capitalized in
2004. During the first nine months of 2005, $1.8 million of deferred stripping
costs have been deferred.
Based on actual results in 2004 and our new January 1, 2005 mine plan we expect
to move 3.7 million tonnes of ore and 18.0 million tonnes of waste during the
overall life of the Plant-North pit and thus the expected strip ratio is 4.8 to
1. Current engineering forecasts indicate that the Plant-North pit should strip
waste below the 4.8 to 1 average rate during much of the fourth quarter and in
early 2006 through the end of the Plant-North pit's life and that the deferred
stripping costs will be brought back as expense by the time mining is concluded.
In March 2005 the Emerging Issues Task Force of the Financial Accounting
Standards Board issued statement 04-6 "Accounting for Stripping Costs Incurred
During Production in the Mining Industry" ("EITF 04-6") which precludes deferral
of stripping costs during a mine's production phase. EITF 04-6 requires that
deferred stripping costs be considered a variable production cost. The new
pronouncement is effective January 1, 2006 and transition provisions allow any
remaining balances in deferred stripping asset accounts to be closed directly to
retained earnings on January 1, 2006.
In Canada the Emerging Issues Committee ("EIC") has since issued a "Draft
Abstract of Issue Discussed" titled "D56 Accounting for Stripping Costs in the
Mining Industry" which concluded that deferred stripping could be retained as an
acceptable accounting method in Canada under certain circumstances. A final EIC
statement has not yet been issued.
10
12.Loan Acquisition Costs, Hedging and Derivatives
--------------------------------------------------
In the second quarter of 2005 approximately $0.9 million of loan acquisition
fees were incurred in obtaining the $50 million of convertible notes. This
amount was capitalized and is being amortized over the life of the notes. In
addition, as described immediately below, we also recorded loan acquisition
costs at EURO related to its January 2005 and August 2005 borrowings. As with
the convertible notes, the balance is being amortized to interest expenses over
the life of the loan. The net balance of loan acquisition costs was $1.0 million
as of September 30, 2005.
In January 2005, EURO, a majority owned subsidiary, entered into a series of
cash-settled forward gold pricing agreements that qualify as derivatives. These
agreements were entered into as part of a $6.0 million loan agreement (see Note
13a). EURO's derivatives are tied to a future stream of gold royalty payments
EURO expects to receive from a Canadian mining company. The cash-settled forward
gold pricing agreements provide that (a) when the average gold price for a
quarter exceeds $421 per ounce, EURO will pay to the counter party cash equal to
the difference between the quarter's average gold price per ounce and $421 per
ounce, times 5,700 ounces, and (b) when the average quarterly gold price is
below $421 per ounce, EURO will receive a cash payment from the counterparty
equal to the difference between $421 per ounce and the average gold price per
ounce times 5,700 ounces. The $421 per ounce figure was the spot gold price on
the date EURO entered into the derivative.The derivative agreements established
10 tranches of 5,700 ounces each which settle quarterly over ten quarters
beginning with the first quarter of 2005.
In August 2005, EURO entered into another 57,000 ounce gold forward position
related to a new $3.0 million debt agreement. The gold forward is spread over
ten quarters beginning in the last quarter of 2007 and has a fixed price of
$458.50 per ounce, which was approximately $18 per ounce over the spot price on
the date of the agreement.
In the first nine months of 2005 EURO recorded a $0.2 million derivative loss
upon settlement of the first three quarterly tranches. This amount was off-set
against royalty revenues._As of September 30, 2005, EURO's remaining derivative
contracts had a negative mark-to-market fair value of $6.5 million, and this
amount has been recognized as an expense in our consolidated statement of
operations.
To provide gold price and foreign exchange price protection during the 2005/2006
construction phase of the Bogoso sulfide expansion project we purchased a series
of gold put and call options and foreign exchange forwards. In the second
quarter of 2005 we purchased put options on 140,000 ounces of gold at an average
floor price of $409.75 paying approximately $1.0 million in cash for the
options. During the third quarter we purchased an additional 90,000 put options
locking in a $400 per ounce floor for each of the 90,000 ounces. Due to
increases in gold prices during the third quarter of 2005 the mark-to-market
value of the puts decreased by $0.5 million between June 30, 2005 and September
30, 2005. This decline in value was recognized in our statements of operation
for the third quarter of 2005.
During the third quarter we sold 90,000 ounces of call options with a strike
price of $525 per ounce. The revenues from sale of the call options exactly
offset the cost of the put options bought in the third quarter. Due to the
increase in gold prices since the call options were sold, the mark-to-market
value fell by $1.1 million by September 30, 2005 and this amount was recognized
in our statement of operations for the third quarter.
The foreign exchange Rand and Euro forward contracts were established without
cost, and had a fair value of $0.7 million at September 30, 2005, up from a
negative $0.4 million at the end of June 2005. The $1.1 million increase in the
mark-to-market value of these forward positions was recognized in our statement
of operations in the third quarter offsetting most of the loss in value
associated with the put and call options.
Year-to-date the net value of all derivatives had decreased by $7.4 million from
their original purchase value and this amount is reflected in the statement of
operations.
11
The following table summarizes our derivative contracts at September 30, 2005:
----------------------------------------------------------------------------------------------------------------------
At September 30, 2005 2005 2006 2007 Thereafter Total/ Average
----------------------------------------------------------------------------------------------------------------------
GOLD FORWARD CONTRACTS (EURO RESSOURCES)
----------------------------------------------------------------------------------------------------------------------
Ounces (thousands) 5.7 22.8 22.8 45.6 96.9
Average price per ounce 421 421 440 458 443
----------------------------------------------------------------------------------------------------------------------
Fair value ($ thousands) $ (6,533)
----------------------------------------------------------------------------------------------------------------------
GOLD PUTS (GOLDEN STAR)
----------------------------------------------------------------------------------------------------------------------
Ounces (thousands) 37.5 150.0 37.5 - 225.0
Average price per ounce 407 406 404 - 406
----------------------------------------------------------------------------------------------------------------------
Fair value ($ thousands) $ 420
----------------------------------------------------------------------------------------------------------------------
GOLD CALLS (GOLDEN STAR)
----------------------------------------------------------------------------------------------------------------------
Ounces (thousands) 15.0 60.0 15.0 - 90.0
Average price per ounce 525 525 525 - 525
----------------------------------------------------------------------------------------------------------------------
Fair value ($ thousands) $ (1,111)
----------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE FORWARDS (GOLDEN STAR)
----------------------------------------------------------------------------------------------------------------------
South African Rand (millions) 65.8 75.2 - - 141.0
Average rate (ZAR) 6.60 6.85 - - 6.73
----------------------------------------------------------------------------------------------------------------------
Fair value ($ thousands) $ 958
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Euros (millions) 1.5 2.5 - - 4.0
Average Rate (EUR) 1.24 1.25 - - 1.25
----------------------------------------------------------------------------------------------------------------------
Fair value ($ thousands) $ (138)
----------------------------------------------------------------------------------------------------------------------
The puts, calls and foreign exchange forward contracts are comprised of numerous
individual contracts each with a different settlement date.
13.Debt
-------
As of As of
September 30,2005 December 31, 2004
DEBT
---------------------------------------------------------------------
Current debt:
Bank loan - at EURO Ressources (Note a) 2,667 -
CAT equipment financing loans (Note b) $ 1,798 $ 1,267
---------------------------------------------------------------------
Total current debt $ 4,465 $ 1,267
---------------------------------------------------------------------
Long term debt:
Bank loan - at EURO Ressources (Note a) 5,666 -
CAT equipment financing loans (Note b) 2,057 1,707
Convertible notes (Note c) $ 47,491 $ -
---------------------------------------------------------------------
Total long term debt $ 55,214 $ 1,707
---------------------------------------------------------------------
12
(a) Bank debt - In January 2005, EURO drew down $6.0 million under a credit
facility from a bank and paid the funds to Golden Star as the first installment
on its purchase of the Rosebel royalty. The loan is repayable in nine equal
payments of $666,667. The first payment was made on July 29, 2005 and eight
subsequent payments will be made every three months thereafter along with
accrued interest. The interest rate for each period is set at LIBOR plus 2.5%
and EURO may choose a 1, 2 or 3 month interest period. The loan is
collateralized by the assets of EURO, including the Rosebel royalty. The lender
has no recourse to Golden Star.
In September 2005 EURO borrowed an additional $3.0 million from the same
commercial bank and forwarded the proceeds to Golden Star leaving an outstanding
balance due of $3.0 million (plus a future royalty). The interest rate on the
new debt is set at LIBOR plus 2.5% and EURO may choose a 1, 2 or 3 month
interest period. The $3.0 million is to be repaid by five quarterly payments of
$0.6 million each commencing October 31, 2007. EURO is seeking funding to allow
payment of the final $3.0 million owed to Golden Star by the end of 2005.
Interest on the outstanding balance is set at 6% which will rise to 12% if
payment is not made by the end of 2005.
(b) Equipment financing credit facility - We have established a $25 million
equipment financing facility between Caterpillar Financial Services Corporation,
BGL and WGL, with Golden Star as the guarantor of all amounts borrowed. The
facility provides credit for a mixture of new and used mining equipment. This
facility is reviewed annually and was renewed in April 2005. Amounts drawn under
this facility are repayable over five years for new equipment and over two years
for used equipment. The interest rate for each draw-down is fixed at the date of
the draw-down using the Federal Reserve Bank 2-year or 5-year swap rate plus
2.38% or a floating interest rate of LIBOR plus 2.38%. As of September 30, 2005,
$3.9 million was outstanding under this facility. The average interest rate is
approximately 5.9% on the used equipment loans and 6.2% for the new equipment
loans.
(c) Convertible notes - We sold $50 million of senior unsecured convertible
notes to a private investment fund on April 15, 2005. These notes, maturing on
April 15, 2009, were issued at par and bear interest at 6.85% with a conversion
price of $4.50 per common share. At the maturity date, we have the option, at
our discretion, to liquidate the outstanding notes with cash or by issuing
common shares to the note holders. If the notes are paid in common shares the
number of shares will be determined by dividing the loan balance by an amount
equal to 95% of the average price of the 20 trading day period ended five days
before the notes are due. Due to the conversion feature, approximately $47.1
million of the note balance was initially classified as a liability and $2.9
million was classified as equity and recorded as contributed surplus. Periodic
accretion will increase the liability to the full amount due (after adjustments
for converted notes) by the end of the note life. The periodic accretion is
classified as interest expense. A total of $1.0 million of interest on the
convertible notes was capitalized into the Bogoso sulfide expansion project
costs.
14.Asset Retirement Obligations
-------------------------------
Our Asset Retirement Obligations ("ARO") are equal to the present value of all
estimated future closure cost associated with reclamation, demolition and
stabilization of our Bogoso/Prestea and Wassa mining and ore processing
properties. Included in this liability are the costs of mine closure and
reclamation, processing plant and infrastructure demolition, tailings pond
stabilization and reclamation and environmental monitoring costs. While the
majority of these costs will be incurred near the end of the mines' lives, it is
expected that cash costs will be incurred in interim periods reclaiming areas
where mining has been completed, such costs being netted against the ARO
provision.
13
The changes in the carrying amount of the ARO during the first nine months of
2005 and 2004 were:
---------------------------------------------------------------
Nine months ended
September 30, 2005
---------------------------------------------------------------
Balance at December 31, 2004 $ 8,660
Accretion expense 540
Cost of reclamation work performed (468)
New AROs incurred during the period 1,755
---------------------------------------------------------------
Balance at September 30, 2005 $ 10,487
---------------------------------------------------------------
---------------------------------------------------------------
Nine months ended
September 30, 2004
---------------------------------------------------------------
Balance at December 31, 2003 $ 7,745
Accretion expense 489
Cost of reclamation work performed (563)
New AROs incurred during the period 647
---------------------------------------------------------------
Balance at September 30, 2004 $ 8,318
---------------------------------------------------------------
15. Commitments and Contingencies
---------------------------------
(a) Environmental Regulations and Asset Retirement Obligations -
The Plant-North pit at Prestea has been developed in stages with the development
of the final stage (Phase 3) commencing in August 2005. Initiation of Phase 3
mining was conditional on a number of mitigation measures identified in the
Environmental Impact Statement. On September 13, 2005, the Ghana Environmental
Protection Agency ("EPA") requested the suspension of mining of the Plant-North
Phase 3 pit until the following outstanding mitigation measures were completed:
o Relocation of the Prestea police to a new police station which we
built to replace the existing police station. Relocation was necessary
because of the old station's proximity to mining operations during the
Phase 3 development;
o Erection of a fence around the Phase 3 pit development;
o Construction of a bypass road to divert traffic away from the southern
end of the pit development and closure of the existing road; and
o Sensitization of the communities and vendors adjacent to the Phase 3
pit development.
We responded immediately to the EPA's notice by suspending all mining activity
in the Plant-North Pit Phase 3, although mining continued in the Phase 2 area of
the Plant-North pit in accordance with permits already received. Subsequently,
on September 28 all mining in the Plant-North pit was suspended on verbal
request of the EPA.
The mitigation measures requested by the EPA were completed on October 15, 2005.
The EPA was advised of the completion of the work and subsequently inspected the
work on October 19, 2005. On November 1, we received approval from the EPA to
recommence mining operations at the Plant-North pit. We expect to recommence
mining in the next few days following a series of informational meetings with
the Prestea community.
During the period of the suspension of mining in the Plant-North pit, processing
operations continued at the Bogoso processing plant using stockpiled ore. Mining
and processing operations at the Wassa mine and construction activities on the
Bogoso sulfide expansion project also continued without interruption.
14
The exact nature of other environmental control problems, if any, which we may
encounter in the future cannot be predicted, primarily because of the changing
character of environmental requirements that may be enacted within various
jurisdictions. ARO's, which include environmental rehabilitation liabilities for
reclamation and for closure costs, were $7.4 million at Bogoso/Prestea at
September 30, 2005, up from $6.0 million at December 31, 2004. ARO's at Wassa
totaled $3.1 million at September 30, 2005, up $0.4 million from $2.7 million at
the end of 2004.
(b) Environmental Bonding in Ghana - During 2004, the EPA requested that we
provide environmental reclamation bonds for both Bogoso/Prestea and Wassa. In
March 2005, we bonded $3.0 million to cover future reclamation obligations at
Wassa, with a $2.85 million letter of credit and $0.15 million of cash which was
deposited with the EPA. An $8.55 million letter of credit has been established
to cover our obligations for Bogoso/Prestea bonding. We have also deposited cash
totaling $0.5 million with the EPA for Bogoso/Prestea's bonding.
(c) Cash Restricted for Environmental Rehabilitation Liabilities - In 1999, we
were required, according to the acquisition agreement with the sellers of BGL,
to restrict $6.0 million of cash to be used for the ongoing and final
reclamation and closure costs at Bogoso. The withdrawal of these funds must be
agreed to by the sellers, who are ultimately responsible for the reclamation in
the event of our non-performance. Between 1999 and 2001 we were able to draw
$2.6 million of the restricted cash to cover our out-of-pocket cash reclamation
costs. There have been no disbursements of the restricted cash since 2001. Once
the BGL reclamation bond and cash are in place, we will seek to amend the
agreement with the original sellers of BGL and obtain their consent to allow us
to withdraw the remaining $3.4 million of restricted cash.
(d) Royalties -
(i) Dunkwa Properties: As part of the acquisition of the Dunkwa properties
in August 2003, we agreed to pay the seller a net smelter return royalty on
future gold production from the Mansiso and Asikuma properties. There will
be no royalty due on the first 200,000 ounces produced from Mampon which is
located on the Asikuma property. The amount of the royalty is based on a
sliding scale which ranges from 2% of net smelter return at gold prices at
or below $300 per ounce up to 3.5% for gold prices in excess of $400 per
ounce.
(ii) Government of Ghana: Under the laws of Ghana, a holder of a mining
lease is required to pay an annual royalty of not less than 3% and not more
than 12% of the total revenues earned from the lease area. The royalty is
payable on a quarterly basis. We currently pay a 3% annual royalty on gold
production from Bogoso/Prestea and Wassa production. The Government of
Ghana retains the right to increase the amount of the royalty to as much as
12% based upon a formula related to operating margins.
(e) Mano River Joint Venture - We entered into a joint venture agreement in late
2003 to invest up to $6 million over four years in the Mano River project in
Sierra Leone via an earn-in agreement with a junior exploration company, Mano
River Resources Inc. which holds a group of gold exploration properties in
Sierra Leone. The initial $6 million, if fully funded, would yield a 51%
interest in the joint venture. Further provisions of the joint venture agreement
provide the opportunity to acquire up to 85% of the joint venture by continued
long term funding. Spending in 2004 totaled $0.8 million, leaving $0.2 million
on our minimum commitment to the project. We have now spent $0.5 million on the
Mano River project during 2005, thereby meeting the minimum commitment. In
addition, agreement has been reached with our partner to extend the earn in
period by 12 months.
(f) Afema Project - On March 29, 2005 we entered into an agreement with Societe
d'Etat pour le Developpement Minier de la Cote d'Ivoire ("SO.DE.MI."), the Cote
d'Ivoire state mining and exploration company, to acquire their 90% interest in
the Afema gold property in south-east Cote d'Ivoire. A $0.1 million initial
payment to SO.DE.MI. gave us the right to carry out a six month detailed
technical due diligence program which was essentially completed by September of
2005. We now have the right to acquire 100% of SO.DE.MI.'s rights in the Afema
15
property for an additional $1.5 million. A six month extension has subsequently
been granted by SO.DE.MI. to allow Golden Star to carry out further due
diligence work and to analyze the large quantity of data collected during 2005
before making a decision on the $1.5 million payment. In addition to the
acquisition payments, we agreed to pay SO.DE.MI. a royalty on any future gold
production from the Afema property. The royalty is indexed to the gold price and
ranges from 2% of net smelter returns at gold prices below $300 per ounce to
3.5% of net smelter returns for gold prices exceeding $525 per ounce. If we
proceed with the $1.5 million payment to acquire full rights to the property the
purchase agreement requires us to spend an additional $3.5 million on
exploration work at Afema, subject to exploration success, over the following
three and a half years.
(g) Pending Legal Issues - Prestea Gold Resources Limited ("PGR"), our joint
venture partner in the Prestea Underground, entered receivership in March 2003.
The joint venture agreement between BGL and PGR specified that if either party
to the joint venture were to go into receivership any remaining interest held in
the partnership by the insolvent partner would immediately vest with the solvent
partner. While PGR's official liquidator affirmed that the vesting of this
interest in BGL was proper under the terms of the joint venture agreement, the
transfer and vesting of PGR's ownership was challenged in an action brought
before the High Court in Accra, Ghana against the official liquidator by
Merchant Bank (Ghana) Ltd, in its capacity as a judgment creditor of PGR. The
action was commenced on February 28, 2005 and sought an order of the court to
compel the official liquidator to take control of PGR's residual interest in the
joint venture and to have the interest valued with the ultimate goal of making
proceeds available for distribution among all the creditors of PGR.
The judgment creditor's claim was based on the assertion that the vesting of the
residual interest in BGL under the joint venture agreement was either illegal
and void and/or that such vesting should necessarily go with the assumption by
BGL of all PGR's obligations owed to third parties, including those unrelated to
the joint venture.
In June 2005, the High Court issued a finding in favor of the Merchant Bank
(Ghana) Ltd. While the ruling transferred PGR's ownership position to the
liquidator, it did not require BGL to assume any of PGR's obligations.
Nevertheless, in subsequent periods following the vesting of PGR's ownership
position in BGL, continued project spending by BGL diluted PGR's original
ownership position to less than 10% by September 30, 2005. The joint venture
agreement further specifies that if either partner allowed itself to be diluted
to 10% or less, the residual value would immediately convert into a 2.5% net
profit interest in potential future earnings from the Prestea Underground mine.
While the court's ruling has effectively given the 2.5% net profits interest to
the bankruptcy trustee, the trustee still must establish the fair value of the
interest and then find a buyer. At a recent bankruptcy hearing none of the
creditors were willing to fund a valuation study.
We are also engaged in routine litigation incidental to our business. No
material legal proceedings, involving us or our business are pending, or, to our
knowledge, contemplated, by any governmental authority. We are not aware of any
material events of noncompliance with environmental laws and regulations.
(h) St. Jude Acquisition - On September 27, 2005 we signed a pre-merger
agreement with St. Jude Resources Ltd. whereby we would acquire all of the
outstanding shares of St. Jude on the basis of 0.72 of a Golden Star common
share for every St. Jude common share. Completion of the transaction is
conditional on the execution of a definitive agreement, approval of St. Jude
shareholders and, requisite regulatory and court approvals as well as
satisfaction of other customary conditions.
The terms of the transaction resulted in a purchase price of Cdn$3. 10 per St.
Jude share (based on the closing price of Golden Star on the TSX on September
26, 2005) representing a premium of 38% to the 20 day average closing price of
St. Jude common shares on the TSX Venture Exchange. Upon completion of the
transaction, St. Jude shareholders will own approximately 19% of Golden Star on
a fully diluted basis.
16
St. Jude's principal assets are the Hwini-Butre and Benso Gold projects at the
southeastern end of the Ashanti gold belt region in Ghana. St. Jude has publicly
reported that Hwini-Butre and Benso combined have total near surface
attributable measured and indicated mineral resources of approximately 15.1
million tonnes at an average grade of 2.71 grams per tonne. In addition, St.
Jude has other exploration projects in Ghana, Burkina Faso and Niger.
16.Share Capital and Contributed Surplus
----------------------------------------
Changes in share capital during the nine months ended September 30, 2005 were:
------------------------------------------------------------------------------
Shares Amount
------------------------------------------------------------------------------
Beginning balance as of December 31, 2004 142,244,112 $ 342,494
Common shares issued:
Option exercises 212,940 570
Warrant exercises 385,000 718
Bonus shares and other 45,342 170
------------------------------------------------------------------------------
Ending balance as of September 30, 2005 142,887,394 $ 343,952
------------------------------------------------------------------------------
Changes in contributed surplus during the nine months ended September 30, 2005
were:
------------------------------------------------------------------------------
Amount
------------------------------------------------------------------------------
Beginning balance as of December 31, 2004 $ 2,040
Option expense (net of forfeitures) 734
Reclass to share capital for fair value of options exercised (113)
Issuance of convertible note - equity component 2,857
------------------------------------------------------------------------------
Ending balance as of September 30, 2005 $ 5,518
------------------------------------------------------------------------------
17.Stock Based Compensation
---------------------------
(a) Stock Options - We have one stock option plan, the Second Amended and
Restated 1997 Stock Option Plan (the "GSR Plan"), and options are granted under
this plan from time to time at the discretion of the Compensation Committee,
except with respect to grants to non-employee directors, which are granted by
the Board of Directors as a whole. Options granted are non-assignable and are
exercisable for a period of ten years or such other period as stipulated in a
stock option agreement between Golden Star and the optionee. Under the GSR Plan,
we may grant non qualified options to employees, consultants and directors of
the Company or its subsidiaries for up to 15,000,000 shares of common stock, at
an exercise price not less than the market price of our stock on the date of
grant. Options typically vest over periods ranging from immediately to four
years from the date of grant. Vesting periods are determined at the discretion
of the Compensation Committee or the Board of Directors.
A total of 514,000 options were granted during the first nine months of 2005
versus 855,000 in the same period of 2004. There were no options granted during
the third quarter of 2005.
17
In the nine months ended September 30, 2005, we recognized approximately $0.8
million of expense related to stock options, which includes approximately $0.1
million of expense related to EURO, as discussed below.
----------------------------------------------------------------------------
Options Weighted-Average
(000's) Exercise Price (Cdn$)
----------------------------------------------------------------------------
Outstanding as of December 31, 2004 5,271 $ 3.17
Granted 514 4.58
Exercised (213) 2.64
Forfeited (515) 5.54
----------------------------------------------------------------------------
Outstanding as of September 30, 2005 5,057 $ 3.10
----------------------------------------------------------------------------
The fair value of options granted during the nine months ended September 30,
2005 was estimated at the grant date using a Black-Scholes option-pricing model
with the following assumptions:
-----------------------------------------------------------------------------------------------------
Three months ended September 30, Nine months ended September 30,
-------------------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------
Expected volatility NA NA 34.9% 36.4% to 3 6.5%
Risk-free interest rate NA NA 3.1% to 3.5% 3.7% to 4.1%
Expected lives NA NA 3.5 to 5 years 3.5 to 5 years
Dividend yield NA NA 0% 0%
-----------------------------------------------------------------------------------------------------
(b) Stock Bonus Plan - In December 1992, we established an Employees' Stock
Bonus Plan (the "Bonus Plan") for full-time and part-time employees (whether or
not a director) of Golden Star or any of our subsidiaries who has rendered
meritorious services which contributed to the success of Golden Star or any of
its subsidiaries. The Bonus Plan provides that a specifically designated
committee of the Board of Directors may grant bonus common shares on terms that
it might determine, within the limitations of the Bonus Plan and subject to the
rules of applicable regulatory authorities. The Bonus Plan, as amended, provides
for the issuance of 900,000 common shares of which 491,162 common shares have
been issued as of September 30, 2005 including 41,758 shares issued at Cdn$4.58
per share and 3,584 shares issued at $2.79 per share during the first nine
months of 2005. No bonus shares were issued in the first nine months of 2004.
(c) EURO Option Grants - In March 2005, EURO granted 400,000 options to purchase
EURO shares. The options have a strike price of Cdn$0.36. Their fair value was
estimated, using a Black Scholes model, at Cdn$0. 17 each. Compensation expense
of $0.06 million was recognized in the consolidated statement of operations for
this grant. The Black Scholes model assumed a 3.81% risk free rate, a five year
life, 50% volatility and no dividends.
18
18.Operations by Geographic Area
--------------------------------
The following geographic data includes revenues based on product shipment origin
and long-lived assets based on physical location:
Africa
----------------------------
For the three months North
ended Bogoso/ South America
and as at September 30, Prestea Wassa Other America Corporate Total
------------------------------------------------------------------------------
2005
Revenues $12,856 $10,500 $ - $1,058 $ 334 $24,748
Net Income/(Loss) 1,667 (3,660) (1,331) (2,654) (679) (6,657)
Total Assets 131,575 98,512 45,531 7,684 42,354 325,656
------------------------------------------------------------------------------
2004
Revenues $12,363 $ - $ - $ 24 $ 1,058 $13,445
Net (Loss) (37) (45) (149) (481) (3,546) (4,258)
Total Assets 78,586 61,664 28,105 2,220 77,694 248,269
------------------------------------------------------------------------------
Africa
----------------------------
For the nine months North
ended Bogoso/ South America
and as at September 30, Prestea Wassa Other America Corporate Total
------------------------------------------------------------------------------
2005
Revenues $ 43,806 $19,690 $ - $ 3,177 $ 1,049 $ 67,722
Net Income/(Loss) 5,278 (6,336) (1,331) (2,263) (7,923) (12,575)
Total Assets 131,575 98,512 45,531 7,684 42,354 325,656
------------------------------------------------------------------------------
2004
Revenues $ 47,156 $ - $ - $ 75 $ 2,565 $ 49,796
Net Income/(Loss) 9,948 (137) (149) (1,196) (6,415) 2,051
Total Assets 78,586 61,664 28,105 2,220 77,694 248,269
------------------------------------------------------------------------------
19.Earnings per Common Share
----------------------------
The following table provides reconciliation between basic and diluted
earnings/(loss) per common share:
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------
2005 2004 2005 2004
---------------------------------------- ---------- --------- -------- ---------
Net income/(loss) $ (6,657) $ (4,258) $(12,575) $ 2,051
---------------------------------------- ---------- --------- -------- ---------
-------------------------------------------------------------------------------------
Weighted average number of common shares
(millions) 142.8 141.1 142.5 137.0
Dilutive securities:
Options 1.8 3.1 1.9 3.7
Warrants - 2.0 - 3.2
---------------------------------------- ---------- --------- -------- ---------
Weighted average number of diluted
shares 144.6 146.2 144.4 143.9
-------------------------------------------------------------------------------------
Basic earnings/(loss) per share $ (0.047) $ (0.030) $ (0.088) $ 0.015
Diluted earnings/(loss) per share $ (0.047) $ (0.030) $ (0.088) $ 0.014
---------------------------------------- ---------- --------- -------- ---------
19
Earnings per share on a US GAAP basis are found in Note 21 below.
20. Supplemental Cash Flow Information
-------------------------------------
Three months Nine months
ended September 30, ended September 30,
2005 2004 2005 2004
--------------------------------------------------------------------
Minority interest - - - 2,400
Mining property - - - (2,400)
--------------------------------------------------------------------
There were no cash payments for income taxes in the first nine months of 2005
and 2004. Cash payments for interest were $1 .1 million and nil in the first
nine months of 2005 and 2004 respectively. The increase over 2004 is principally
related to the convertible notes and Caterpillar equipment loans.
20
21.Generally Accepted Accounting Principles in Canada and the United States
---------------------------------------------------------------------------
The following Golden Star consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States.
(a) BALANCE SHEET IN US GAAP
As of As of
BALANCE SHEETS - US GAAP September 30, December 31,
2005 2004
----------------------------------------------------------------------
ASSETS
----------------------------------------------------------------------
Current assets:
Cash and cash equivalents $23,897 $12,877
Short term investments 19,750 38,850
Accounts receivable 4,711 3,592
Inventories 25,718 15,366
Due from sale of property - 1,000
Future tax assets 3,252 1,542
Deposits 7,244 5,102
Other current assets 1,376 517
----------------------------------------------------------------------
Total current assets 85,948 78,846
Restricted cash 3,372 3,351
Long term investments (Note d2) 10,335 4,132
Deferred exploration and development costs (Note d2) - -
Property, plant and equipment (Note d1) 74,382 28,653
Mining properties (Notes d1 and d3) 84,115 52,586
Mine construction in progress (Note d1) 20,300 49,430
Deferred stripping (Note d7) 3,160 1,357
Loan acquisition costs 1,047 -
Other assets 1,707 1,617
----------------------------------------------------------------------
Total assets $284,366 $219,972
----------------------------------------------------------------------
LIABILITIES
----------------------------------------------------------------------
Current liabilities $34,688 $17,480
Long term debt (Note d6) 58,390 1,707
Asset retirement obligations 10,487 8,660
Fair value of derivatives 7,412 -
Other liabilites - -
----------------------------------------------------------------------
Total liabilities 110,977 27,847
----------------------------------------------------------------------
Commitments and contingencies - -
Minority interest (notes d2 and d3) 4,286 3,899
SHAREHOLDERS' EQUITY
----------------------------------------------------------------------
Share capital (Note d5) 340,982 339,524
Contributed surplus 2,660 2,040
Accumulated comprehensive income and other (Note d4) 6,147 1,316
Deficit (180,686)(154,654)
----------------------------------------------------------------------
Total shareholders' equity 169,103 188,226
----------------------------------------------------------------------
Total liabilities and shareholders' equity $284,366 $219,972
----------------------------------------------------------------------
21
(b) STATEMENTS OF OPERATIONS - US GAAP
Three months Nine months
ended ended
STATEMENT OF OPERATIONS - US GAAP September 30, September 30,
----------------------------------------------------------------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------
Net income/(loss) under Cdn GAAP $(6,657) $(4,258) $(12,575) $ 2,051
----------------------------------------------------------------------------------------------------------
Deferred exploration expenditures expensed per US GAAP (note d2) (5,920) (3,337) (9,495) (9,890)
----------------------------------------------------------------------------------------------------------
Loss at Wassa mine in the first quarter of 2005 (note d1) 182 - (5,543) -
----------------------------------------------------------------------------------------------------------
Write-off of deferred exploration projects (Note d2) - - 1,083 -
----------------------------------------------------------------------------------------------------------
Other 150 - 370 -
----------------------------------------------------------------------------------------------------------
Net (loss) under US GAAP before minority interest (12,245) (7,595) (26,160) (7,839)
----------------------------------------------------------------------------------------------------------
Minority interest, as adjusted (note d2 and d3) 71 52 127 752
----------------------------------------------------------------------------------------------------------
Net income/(loss) under US GAAP $(12,174) $(7,543) $(26,033) $(7,087)
----------------------------------------------------------------------------------------------------------
Other comprehensive income -gain/(loss) on marketable
securities (Note d4) 3,938 - 4,831 -
----------------------------------------------------------------------------------------------------------
Comprehensive income/(loss) $ (8,236) $(7,543) $(21,202) $(7,087)
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Basic net income/(loss) per share under US GAAP $ (0.085) $(0.055) $(0.183) $(0.052)
----------------------------------------------------------------------------------------------------------
Diluted net income/(loss) under US GAAP $ (0.085) $(0.055) $(0.183) $(0.052)
----------------------------------------------------------------------------------------------------------
Revenues for the first nine months of 2005 were $74.6 million under US GAAP, or
$6.7 million higher than under Cdn GAAP, the difference being attributed to
first quarter 2005 revenues at Wassa which was put in service in the first
quarter of 2005 for US GAAP but was not put in-service until the second quarter
for Cdn GAAP.
(c) STATEMENTS OF CASH FLOW - US GAAP
Three months ended Nine months ended
September 30, September 30,
STATEMENTS OF CASH FLOW - US GAAP -----------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------------------
Cash provided by/(used in):
Operating activities $4,280 $(2,174) $(7,004) $2,955
Investing activities (1,507) (13,730) (41,215) (32,876)
Financing activities 2,738 5,554 59,239 15,436
---------------------------------------------------------------------------------
Increase/(decrease) in cash and cash
equivalents for the period
Cash and cash equivalents beginning of the 5,511 (10,350) 11,020 (14,485)
period 18,386 85,835 12,877 89,970
---------------------------------------------------------------------------------
Cash and cash equivalents end of the period $23,897 $75,485 $23,897 $75,485
---------------------------------------------------------------------------------
(d) Notes
(1) Under US GAAP new production facilities are placed in service once the
facility has been constructed and fully tested to the point where it can be
shown that it is capable of producing its intended product. Under Cdn GAAP new
production facilities are placed in service when output reaches a significant
portion of the facility's design capacity. As such, the new Wassa mine and
processing operation was placed in service on January 1, 2005 for US GAAP
purposes and was placed in service on April 1, 2005 for Cdn GAAP purposes. All
operating expenses, including ARO accretion, depreciation, depletion and
amortization and work in process inventory adjustments were recognized in the
statement of operations for US GAAP during the first quarter of 2005 while such
costs were capitalized net of revenues generated for Cdn GAAP.
(2) Under US GAAP, exploration, acquisition and general and administrative costs
related to exploration projects are charged to expense as incurred. Under Cdn
GAAP, exploration, acquisition and general and administrative costs related to
exploration projects are capitalized. In each subsequent period, the
exploration, engineering, financial and market information for each exploration
project is reviewed by management to determine if any of the capitalized costs
22
are impaired. If found impaired, the asset's cost basis is reduced in accordance
with Cdn GAAP provisions. In addition, minority investments in companies whose
major business is mineral exploration are deemed for US GAAP to be equivalent to
exploration spending.
(3) Under US GAAP, the initial purchase cost of mining properties is
capitalized. Pre-acquisition costs and D] subsequent development costs incurred,
until such time as a final feasibility study is completed, are expensed in the
period incurred. Under Cdn GAAP, the purchase costs of new mining properties as
well as all development costs incurred after acquisition are capitalized and
subsequently reviewed each period for impairment. If found impaired, the asset's
cost basis is reduced in accordance with Cdn GAAP provisions.
(4) Under Cdn GAAP gains and losses on marketable equity securities are reported
in the foot notes. Under US GAAP gains and losses on marketable equity
securities are reported in the Other Comprehensive Income section of the
statement of operations.
(5) Numerous transactions since the Company's organization in 1992 have
contributed to the difference in share capital versus the Cdn GAAP balance,
including: (i) under US GAAP, compensation expense was recorded for the
difference between quoted market prices and the strike price of options granted
to employees and directors under stock option plans while under Cdn GAAP,
recognition of compensation expense was not required; (ii) in May 1992 our
accumulated deficit was eliminated through an amalgamation (defined as a
quasi-reorganization under US GAAP); - under US GAAP the cumulative deficit was
greater than the deficit under Cdn GAAP due to the past write-offs of certain
deferred exploration costs; and (iii) gains recognized in Cdn GAAP upon
issuances of subsidiaries' shares are not allowed under US GAAP.
(6) For US GAAP purposes, 100% of the $50.0 million of convertible notes issued
in the second quarter of 2005 was classified as a liability. Under Cdn GAAP, the
fair value of the conversion feature is classified as equity and the balance is
classified as a liability. Under Cdn GAAP, the liability portion is accreted
each period in amounts which will increase the liability to its full amount as
of the maturity date and the accretion is recorded as interest expense.
(7) In March 2005, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued statement 04-6 "Accounting for Stripping Costs Incurred
During Production in the Mining Industry" ("EITF 04-6") which precludes deferral
of stripping costs during a mine's production phase. EITF 04-6 requires that
deferred stripping costs be considered a variable production cost. The new
pronouncement is effective January 1, 2006 and transition provisions allow any
remaining balances in deferred stripping asset accounts to be closed directly to
retained earnings on January 1, 2006. In Canada the Emerging Issues Committee
("EIC") has since issued a "Draft Abstract of Issue Discussed" titled "D56
Accounting for Stripping Costs in the Mining Industry" which concludes that
deferred stripping could be retained as an acceptable accounting method in
Canada under certain circumstances. A final EIC statement has not yet been
issued.
22. Restatement
---------------
Our September 30, 2005 Form 10-Q, was originally filed in November 2005 under
the assumption that the EURO cash-settled forward gold price agreements
qualified for hedge accounting. As such, the original Form 10-Q deferred
recognition of mark-to-market losses under these agreements during the first
three quarters of 2005 as gold prices increased. In early 2006 a review of our
hedge accounting assumptions determined that the EURO cash-settled forward gold
price agreements did not qualify for hedge accounting because i) it could not be
established that the fair value of the agreements was nil at inception and ii)
the documentation of the transaction and proposed accounting method was
insufficient to meet GAAP requirements.
In this Form 10-Q/A, EURO's cash-settled forward gold price agreements have been
treated as derivatives and marked-to-market at the end of the relevant period.
The fair value at the end of September 2005 has been determined to be a loss of
$7.4 million, and this amount was recognized as an expense, with a $7.4 million
liability recognized for the potential future payment of this amount. The losses
provide future French tax benefits, and thus a tax asset and tax provision have
also been recognized which offset approximately 33% of the increased expense.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
accompanying unaudited consolidated financial statements and related notes. The
financial statements have been prepared in accordance with accounting principles
generally accepted in Canada ("Cdn GAAP"). See Note 21 to the accompanying
consolidated financial statements for a reconciliation to accounting principles
generally accepted in the United States ("US GAAP"). This Management's
Discussion and Analysis of Financial Condition and Results of Operations
includes information available to November 1, 2005.
In this Form 1 0-Q/A we use the terms "Total operating cost per ounce", "total
cash cost per ounce" and "cash operating cost per ounce".
Total operating cost per ounce is equal to "Total mine operating costs" as found
on our consolidated statements of operations divided by the ounces of gold sold
in the period. Total mine operating costs include all mine-site operating costs,
including the costs of mining, processing, maintenance, work in process
inventory changes, mine-site overhead, production taxes and royalties, mine site
depreciation, depletion, amortization, asset retirement obligations and
by-product credits, but do not include exploration costs, corporate general and
administrative expenses, impairment charges, corporate business development
costs, gains and losses on asset sales, interest expense, mark-to-market gains
and losses on derivatives, foreign currency gains and losses, gains and losses
on investments and income tax.
Total cash cost per ounce is equal to "Mining operations" costs, as found on our
consolidated statements of operations divided by the number of ounces of gold
sold during the period.
Cash operating cost per ounce is equal to "total cash costs" for the period less
production royalties and production taxes, divided by the number of ounces of
gold sold during the period.
The following table shows the derivation of these measures and a reconciliation
of "total cash cost per ounce" and "cash operating cost per ounce".
Derivation of Total Mine For the three months ended For the three
Operating Cost September 30, 2005 months
----------------------------------- ended September 30,
2004
-----------------
Wassa Bogoso/Prestea Total Total
---------------------------------------------------------------------------------------
Mining operations $11,461 $ 8,599 $20,060 $10,236
---------------------------------------------------------------------------------------
Mining related depreciation,
depletion & amortization 2,429 2,210 4,639 1,895
---------------------------------------------------------------------------------------
Accretion of asset retirement
obligations 47 125 172 167
---------------------------------------------------------------------------------------
Total mine operating costs $13,937 $10,934 $24,871 $12,298
---------------------------------------------------------------------------------------
Ounces sold 24,312 29,346 53,658 30,755
---------------------------------------------------------------------------------------
Derivation of Costs per Ounce:
---------------------------------------------------------------------------------------
Total mine operating cost per
ounce - GAAP ($/oz) 573 372 464 400
---------------------------------------------------------------------------------------
Less depreciation, depletion &
amortization ($/oz) 100 75 86 62
---------------------------------------------------------------------------------------
Less accretion of asset
retirement obligation ($/oz) 2 4 3 5
---------------------------------------------------------------------------------------
Total cash cost ($/oz) 471 293 374 333
---------------------------------------------------------------------------------------
Less royalties and production
taxes ($/oz) 11 13 12 14
---------------------------------------------------------------------------------------
Cash operating cost ($/oz) 460 280 362 319
---------------------------------------------------------------------------------------
24
Derivation of Total Mine For the nine months ended September For the nine
Operating Cost 30, 2005 months ended
------------------------------------ September 30, 2004
---------------------
Wassa (1) Bogoso/Prestea Total Total
----------------------------------------------------------------------------------------
Mining operations $21,566 $ 30,460 $ 52,026 $ 29,551
----------------------------------------------------------------------------------------
Mining related depreciation,
depletion & amortization 4,128 6,424 10,552 6,084
----------------------------------------------------------------------------------------
Accretion of asset retirement
obligations 142 398 540 489
----------------------------------------------------------------------------------------
Total mine operating costs $25,836 $ 37,282 $ 63,118 $ 36,124
----------------------------------------------------------------------------------------
Ounces sold 45,063 101,709 146,772 116,763
----------------------------------------------------------------------------------------
Derivation of Costs per Ounce:
----------------------------------------------------------------------------------------
Total operating cost per ounce
- GAAP ($/oz) 573 367 430 309
----------------------------------------------------------------------------------------
Less depreciation, depletion &
amortization ($/oz) 92 63 72 52
----------------------------------------------------------------------------------------
Less accretion of asset
retirement obligation ($/oz) 3 4 4 4
----------------------------------------------------------------------------------------
Total cash cost ($/oz) 478 299 354 253
----------------------------------------------------------------------------------------
Less royalties and production
taxes ($/oz) 13 12 13 16
----------------------------------------------------------------------------------------
Cash operating cost ($/oz) 465 287 341 237
----------------------------------------------------------------------------------------
(1) The Wassa mine was placed in service on April 1, 2005 and thus includes only
six months of operational data to September 30, 2005.
These calculations of total cash cost per ounce and cash operating cost per
ounce are in compliance with an industry standard for such measures established
in 1996 by the Gold Institute, a non-profit industry group.
We use total cash cost per ounce and cash operating cost per ounce as key
operating indicators. We monitor these measures monthly, comparing each month's
values to prior period's values to detect trends that may indicate increases or
decreases in operating efficiencies. These measures are also compared against
budget to alert management to trends that may cause actual results to deviate
from planned operational results. We provide these measures to our investors to
allow them to also monitor operational efficiencies of our mines. We calculate
these measures for both individual operating units and on a consolidated basis.
Total cash cost per ounce and cash operating cost per ounce should be considered
as non-GAAP financial measures as defined in SEC Regulation S-K Item 10 and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with GAAP. There are material limitations
associated with the use of such non-GAAP measures. Since these measures do not
incorporate revenues, changes in working capital and non-operating cash costs,
they are not necessarily indicative of operating profit or cash flow from
operations as determined under GAAP. Changes in numerous factors including, but
not limited to, mining rates, milling rates, gold grade, gold recovery, and the
costs of labor, consumables and mine site general and administrative activities
can cause these measures to increase or decrease. We believe that these measures
are the same as, or similar to the measures of other gold mining companies, but
may not be comparable to similarly titled measures in every instance.
All figures and amounts in this Item 2 are shown on a 100% basis, which
represents our current beneficial interest in gold production and revenues. Once
all capital has been repaid, the Government of Ghana would receive 10% of the
dividends distributed from the subsidiaries owning the Bogoso/Prestea and Wassa
mines.
OUR BUSINESS
Description of Business
Through our subsidiaries and joint ventures we own a controlling interest in
three gold properties in southern Ghana in West Africa: the Bogoso/Prestea
property, which comprises the adjoining Bogoso and Prestea mining leases
("Bogoso/Prestea"), the Wassa property ("Wassa") and the Prestea Underground
property ("Prestea Underground").
25
Bogoso/Prestea and the Prestea Underground are owned by our 90% owned subsidiary
Bogoso Gold Limited ("BGL"). All of our gold production prior to April 2005 came
from Bogoso/Prestea. The Prestea Underground is located on the Prestea property
and consists of a currently inactive underground gold mine and associated
support facilities. BGL owns a 90% operating interest in the Prestea
Underground. We are currently conducting exploration and engineering studies to
determine if the underground mine can be reactivated on a profitable basis.
Through another 90% owned subsidiary, Wexford Goldfields Limited ("WGL"), we own
the Wassa gold mine located some 35 kilometers east of Bogoso/Prestea.
Construction and commissioning of Wassa's new processing plant and open pit mine
was completed at the end of March 2005 and the project was placed in service on
April 1, 2005.
We hold interests in an exploration joint venture in Sierra Leone in West Africa
and hold active exploration properties in Ghana, Cote d'Ivoire, Suriname and
French Guiana. We hold indirect interests in gold exploration properties in Peru
and Chile through an investment in Goldmin Consolidated Holdings, and in the
Democratic Republic of the Congo through an investment in Moto Goldmines
Limited. We also own a 57% interest in EURO Ressources S.A., ("EURO") a French
registered, publicly traded royalty holding company (formerly known as Guyanor
Ressources S.A.) which owns a royalty interest in Cambior Inc.'s Rosebel gold
mine in Suriname.
Our corporate headquarters are located in Littleton, Colorado. All of our
operations, with the exception of certain exploration projects, transact
business in US dollars and keep financial records in US dollars.
TRENDS AND EVENTS DURING THE FIRST NINE MONTHS OF 2005
St. Jude Acquisition
On September 27, 2005 we signed a pre-merger agreement with St. Jude Resources
Ltd. whereby we would acquire all of the outstanding shares of St. Jude on the
basis of 0.72 of a Golden Star common share for every St. Jude common share.
Completion of the transaction is conditional on the execution of a definitive
agreement, approval of St. Jude shareholders and requisite regulatory and court
approvals as well as satisfaction of other customary conditions.
The terms of the transaction resulted in a purchase price of Cdn$3. 10 per St.
Jude share (based on the closing price of Golden Star on the TSX on September
26, 2005) representing a premium of 38% to the 20 day average closing price of
St. Jude common shares on the TSX Venture Exchange. Upon completion of the
transaction, St. Jude shareholders will own approximately 19% of Golden Star on
a fully diluted basis.
St. Jude's principal assets are the Hwini-Butre and Benso gold projects at the
southeastern end of the Ashanti gold belt region in Ghana. St. Jude has publicly
reported that Hwini-Butre and Benso combined have total near surface
attributable measured and indicated mineral resources of approximately 15.1
million tonnes at an average grade of 2.71 grams per tonne. In addition, St.
Jude has other exploration projects in Ghana, Burkina Faso and Niger.
Temporary Mining Suspension at Bogoso/Prestea's Plant-North Pit
The Plant-North pit at Prestea has been developed in stages with the development
of the final stage (Phase 3) commencing in August 2005. Initiation of Phase 3
mining was conditional on a number of mitigation measures identified in the
Environmental Impact Statement. On September 13, 2005, the Ghana Environmental
Protection Agency ("EPA") requested the suspension of mining of the Plant-North
Phase 3 pit until the following outstanding mitigation measures were completed:
26
o Relocation of the Prestea police to a new police station which we
built to replace the existing police station. Relocation was necessary
because of the old station's proximity to mining operations during the
Phase 3 development;
o Erection of a fence around the Phase 3 pit development;
o Construction of a bypass road to divert traffic away from the southern
end of the pit development and closure of the existing road; and
o Sensitization of the communities and vendors adjacent to the Phase 3
pit development.
We responded immediately to the EPA's notice by suspending all mining activity
in the Plant-North pit Phase 3, although mining continued in the Phase 2 area of
the Plant-North pit in accordance with permits already received. Subsequently,
on September 28 all mining in the Plant-North pit was suspended at the EPA's
request.
The mitigation measures requested by the EPA were completed on October 15, 2005.
The EPA was advised of the completion of the work and they subsequently
inspected the work on October 19, 2005. On November 1, we received approval from
the EPA to recommence mining operations at the Plant-North pit. We expect to
recommence mining in the next few days following a series of informational
meetings with the Prestea community.
During the mining suspension at Plant-North, processing operations continued at
the Bogoso processing plant using stockpiled ore. Mining and processing
operations at the Wassa mine and construction activities on the Bogoso sulfide
expansion project also continued without interruption.
Advance Stripping for the Sulfide Project
One of three fleets of mining equipment at Bogoso/Prestea has been moved to the
Ablifa deposit on the southern end of the Bogoso property to begin mining a
small oxide deposit following which this fleet will commence stripping of the
Buesichem sulfide pit. The oxide ore mined from Ablifa will be fed to the Bogoso
plant.
Wassa Start-Up
Following the completion of construction and commissioning in the first quarter
of 2005, the Wassa mine was placed in service on April 1, 2005. The Wassa
processing plant has since processed 1,776,631 tonnes of ore, averaging 9,708
tonne per day, and has shipped and sold 45,063 ounces of gold. The plant's
design capacity is 10,000 tonnes per day. Prior to the April 1 in service date,
revenues were netted against operating costs and resulting balance was
capitalized. Wassa generated a net loss of $6.3 million for the six months since
its in service date on April 1.
Bogoso/Prestea Operations
Operations at Bogoso/Prestea were profitable during the three months and nine
months ended September 30, 2005, with operating earnings of $1.7 million and
$5.3 million respectively.
Bogoso/Prestea continued to process hard transition and non-refractory sulfide
ores from the Plant-North pit at Prestea during the first nine months of 2005,
and we expect that the Bogoso processing plant will continue to process
Plant-North pit transition and non-refractory ores through the remainder of 2005
and into early 2006 with recovery rates, gold production rates and cash
operating costs similar to those experienced in the first nine months of 2005.
27
Sale of Convertible Notes
On April 15, 2005 we sold $50 million of senior unsecured convertible notes (the
"Notes") maturing on April 15, 2009, to a private investment fund. The Notes
were issued at par and bear interest at 6.85%. The Notes are convertible to
common shares at a fixed conversion price of $4.50 per share, a 48% premium to
the closing price of the common shares on April 5, 2005. Proceeds from the sale
of the Notes are being used for the sulfide expansion project at Bogoso and for
general corporate purposes. A registration statement for the shares issuable
upon conversion of the Notes was filed with the U.S. Securities and Exchange
Commission in July and became effective in August.
Put and Call Options
We have purchased gold put options ("puts") during 2005 to provide down-side
gold price protection for a portion of our operational cash flows during the
Bogoso sulfide expansion project construction period. We have also sold call
options ("calls") to offset the cost of a portion of the puts.
A put gives us the right, but not the obligation, to sell gold to a counter
party on a specified future date at a contractually agreed upon strike price.
Each put also has a specified expiry date. The put's strike price is set at a
point below the spot market price on the date the put is established. The closer
the put strike price is to the spot market price, the higher the cost of the
put. We paid an average of $7.10 per ounce for the puts purchased in the second
quarter of 2005 locking in an average strike price of $409.75 per ounce when the
spot market price was between $427 and $429 per ounce.
A put, in effect, becomes an insurance policy that guarantees us a minimum gold
price on ounces covered by the puts. With the puts established in the second
quarter of 2005 we have guaranteed that we will receive at least $409.75 per
ounce for 140,000 ounces. If, on the expiry date, the spot market price is above
the put strike price we will allow the put to expire unused.
A call obligates us to sell gold at a specified future date to a counter party
at a contractually agreed upon price. If the spot market gold price exceeds the
call strike price we will receive only the lower call strike price on ounces
covered by the calls. We sell calls to and receive payment from the counter
party. If the counter party declines to exercise the call (i.e. the spot market
price of gold is below the calls strike price) the calls expire unused.
In the third quarter of 2005 we bought an additional 90,000 puts and at the same
time sold 90,000 calls. The strike prices of the calls and the puts were set so
that the revenue on the sale of the calls exactly offsets the cost of the puts,
and thus no cash was required in the transactions. The strike price of the puts
was set at $400 per ounce and the calls at $525 per ounce.
Puts acquired in the second quarter of 2005 expire as follows: 27,500 ounces in
2005, 90,000 in 2006 and 22,500 in 2007. Puts and calls acquired in the third
quarter of 2005 expire at a rate of 5,000 per month between October 2005 and
March 2007.
Derivative accounting rules require that at the end of each period, the
remaining unexpired puts and calls be revalued at their mark-to-market value
(the price we could sell the puts for or the price at which we could buy back
the call options). The initial mark-to-market value of the puts was equal to the
price we paid for them. The mark-to-market value at the end of the third quarter
had dropped because gold prices went up during the quarter making it less likely
that the floor price established by the puts would provide a future benefit to
us. The decrease in the mark-to-market value of the puts as of September 30,
2005, has been recorded in our Statement of Operations.
28
If the gold price were to fall in the future, the mark-to-market value of the
puts would increase since it would be more likely that the floor price mechanism
in the puts would provide an economic benefit to us. In such a case we would
recognize a quarterly gain equal to the increase in the mark-to-market value of
the puts since the end of the prior period.
The value of the call options are also marked to market each period in a manner
similar to the put options. The only difference is that the mark-to-market value
would be based on the price we would have to pay to the counter party to buy the
call options back.
Rand and Euro Forwards
During 2005 we have established forward contracts for South African Rand and for
Euros. We have taken this action to limit the potential impact of unfavorable
foreign currency fluctuations on the cost of equipment and services we expect to
acquire from South African and European vendors during the construction phase of
the Bogoso sulfide expansion project.
At September 30, 2005 we held forward positions that allow us to buy 141.0
million South African Rand at an average exchange rate of 6.7232 Rand per the
dollar. Approximately half of the positions expire in the fourth quarter of 2005
and the balance expires in the first half of 2006. We also held at September 30,
2005 forward positions that allow us to buy 4.0 million Euros at an average
exchange rate of 0.8027 Euros per the dollar. Approximately 20% of the Euro
forwards expire in the fourth quarter of 2005 and the balance expire in the
first five months of 2006.
Acquisition of the Afema Property
On March 29, 2005 we entered into an agreement with Societe d'Etat pour le
Developpement Minier de la Cote d'Ivoire ("SO.DE.MI."), the Cote d'Ivoire state
mining and exploration company, to acquire their 90% interest in the Afema gold
property in south-east Cote d'Ivoire. Under the terms of this agreement, the
Cote d'Ivoire government would retain a 10% interest in this property.
A $0.1 million initial payment to SO.DE.MI. gave us the right to carry out a six
month detailed technical due diligence program prior to exercising the option to
acquire 100% of SO.DE.MI.'s rights in the Afema property by the payment of an
additional $1.5 million. The six months due diligence program has since been
extended to twelve months, at our request, to allow additional time for review
and analysis of the data collected during 2005. The option exercise date is now
March 2006. In addition to the acquisition payments, we agreed to pay SO.DE.MI.
a royalty on any future gold production from the Afema property. The royalty is
indexed to the gold price and ranges from 2% of net smelter returns at gold
prices below $300 per ounce to 3.5% of net smelter returns at gold prices
exceeding $525 per ounce.
The Afema property covers an area of 2,012 square kilometers of the Sefwi Belt
meta-volcanics and the Kumasi Basin meta-sedimentary rocks which extend into the
Cote d'Ivoire. In Ghana, this `belt-basin' contact hosts the multi-million ounce
Chirano and Bibiani gold deposits. In the 1990s approximately 125,000 ounces of
gold were produced from oxide ores on the Afema property from several small open
pits along a 12 kilometer strike-length.
To date we have spent $0.7 million on due diligence and exploration, including
the $0.1 million initial payment. As part of our due diligence we have
consolidated the historical work on the property and have carried out a regional
gold in soil geochemical program taking 12,500 samples. If we proceed with the
$1.5 million payment to acquire full rights to the property the purchase
agreement requires us to spend an additional $3.5 million on exploration work at
Afema, subject to exploration success, over the following three and a half
years.
29
Environmental Reclamation Bonds
During 2004, the Ghana EPA requested that we provide environmental reclamation
bonds for both Bogoso/Prestea and Wassa. In March 2005, we bonded $3.0 million
to cover future reclamation obligations at Wassa, with a $2.85 million letter of
credit and $0.15 million of cash which was deposited with the EPA. An $8.55
million letter of credit has been established to cover our obligations for
Bogoso/Prestea bonding. We have also deposited cash totaling $0.5 million with
the EPA for Bogoso/Prestea's bonding.
EURO Ressources Restructuring
On January 8, 2005 EURO, a 57% owed subsidiary (formerly called Guyanor
Ressources S.A.), drew down, under a loan agreement, $6.0 million from a
commercial bank and paid the full amount to Golden Star as the first installment
for the purchase of the Rosebel Participation Right (royalty) which was
purchased from Golden Star for $12.0 million (plus a royalty based on future
Rosebel gold production) in December 2004. In September 2005 EURO borrowed an
additional $3.0 million from the same commercial bank and forwarded the proceeds
to Golden Star leaving an outstanding balance due of $3.0 million (plus the
future royalty). EURO is seeking funding to allow payment of the final $3.0
million owed to Golden Star by the end of 2005. Interest on the outstanding
balance is set at 6% which will rise to 12% if the payment is not made by the
end of 2005. Covenants in the January 2005 loan agreement preclude EURO from
acquiring any additional debt without the bank's approval.
Since the Rosebel royalty revenues received by EURO from Cambior fluctuate with
gold prices the bank required that EURO enter into a cash-settled forward gold
price agreement with the bank designed to eliminate a portion of the potential
impact of gold price fluctuations on expected future Rosebel royalty revenues.
The forward agreements specify that beginning with the first quarter of 2005 and
every three months thereafter until July 30, 2007, when the average gold price
for the prior quarter is less than $421 per ounce, the bank will pay in cash to
EURO an amount equal to the difference between the average gold price and $421
times 5,700 ounces. In quarters where the average gold price exceeds $421 per
ounce EURO will pay cash to the bank in an amount equal to the difference
between the average gold price and $421 times 5,700 ounces. The 5,700 ounces is
a notional amount agreed to by EURO and the bank. Neither EURO nor the bank are
required to deliver gold under the agreement. The net effect of the agreement is
that EURO receives a net royalty revenue on the first 57,000 ounces of gold
mined at the Rosebel mine each quarter based on $421 per ounce gold price
regardless of the actual gold price. In August 2005, in conjunction with the
$3.0 million loan drawn in September, EURO entered into agreements for another
5,700 ounces per quarter from October 30, 2007 to January 29, 2010 at a price of
$458.50 per ounce. The August agreements are structured exactly as the first
agreements described above except for the higher agreed sales price.
EURO has recorded a $6.5 million year-to-date loss on its outstanding
cash-settled forward agreements as of September 30, 2005. The loss is a factor
of the increase in the price of gold since December 31, 2004. In addition gold
prices averaged $427, $427 and $439 per ounce during the first, second and third
quarters of 2005 resulting in EURO making payments to the bank of $38,000,
$36,000 and $0.1 million respectively in the three quarters of 2005. The cash
payments were netted from royalty revenues. Since quarterly gold prices exceeded
$421 (the forward sales price per the agreement) EURO's royalty revenues were
higher by the same amount thereby offsetting the payments to the bank.
In April, EURO received its first royalty payment from Cambior Inc. As required
by its loan agreement with the commercial bank which made the $6.0 million loan
in January, all royalty proceeds are initially deposited with the bank. Funds
are subsequently disbursed to EURO on an as-needed basis. Excess funds retained
by the bank are classified as restricted cash on the Golden Star consolidated
balance sheet.
30
Gold Prices
Gold prices have generally trended upward during most of the last four years,
from a low of just under $260 per ounce in early 2001 to a high of $475 per
ounce in October 2005. Much of the price increase has been attributed to a
decrease in the value of the US dollar versus other major foreign currencies
over the past few years. Our realized gold price for shipments during the first
nine months of 2005 averaged $436 per ounce compared to $403 per ounce average
price received in the first nine months of 2004.
Illegal Mining
In February 2005, Ghana Government authorities resolved formally, with the
support of the Chamber of Mines and other stakeholders, that illegal mining
would not be tolerated and accordingly notice was given by the Ghana Government
to illegal miners nationwide that they were to cease all illegal mining
operations. In particular, the Ghana Government singled out illegal miners who
are operating on our Bogoso/Prestea property and has undertaken to use Ghana
Government security agencies to remove them if they do not voluntarily depart.
The notice given by the Ghana Government to the illegal miners has expired and
therefore, we expect that the Ghana Government will, in the near future,
undertake appropriate steps to resolve the situation .
Separately, the Ghanaian Minister for Lands, Forestry and Mines has commenced an
initiative to simplify the process for persons to become legitimate small scale
miners and to identify suitable areas for legitimate small scale mining. Several
areas, which are outside our property holdings, have been designated by the
Ghana Minerals Commission for such purposes. The Ghana Government and its
agencies have also carried out educational programs for the illegal miners and
the nearby communities relating to the negative social, health and environmental
impacts of illegal mining. The program also makes illegal miners aware of the
Ghana Government's small scale mining initiative and educates them on
environmental and safety issues.
We are working closely with the Ghana Government security agencies to reduce
tensions in the area and to reduce the risk of an escalation of the situation
and possible injury to people and damage to property. Unfortunately, the actions
proposed by the Ghana Government have caused unrest in the community at Prestea
resulting in a number of protests and demonstrations during which violence has
been threatened and during which illegal miners have entered our pits where they
damaged property and removed ore.
Due to security concerns and the Company's policy of avoiding unnecessary
confrontation, we have limited access to many of the areas where the illegal
mining is occurring. As a result we have not been able to update estimates made
in the fourth quarter of 2004 of gold illegally removed from our property. In
addition, we have not been able to carry out a comprehensive survey of the
environmental degradation caused by the illegal miners.
RESULTS OF OPERATIONS
Third Quarter of 2005 Compared to the Third Quarter of 2004
Summary - Third Quarter 2005
During the three months ended September 30, 2005, we incurred a net loss of
$(6.7) million or $(0.047) per share on revenues of $24.7 million, versus a net
loss of $(4.3) million or $(0.030) per share on revenues of $13.4 million during
the three months ended September 30, 2004. Gold revenues were $10.9 million
higher than in the same period of 2004 due mostly to production from our new
Wassa mine and from higher realized gold prices. Mine operating costs were $12.6
million higher, due mostly to production costs at the Wassa mine which was
placed in service on April 1, 2005.
The net loss in the third quarter of 2005 was $2.4 million more than in the same
quarter of 2004. While the loss in the third quarter of 2004 was impacted by a
$3.9 million non-operating corporate development charge related to the IAMGold
31
acquisition effort, a $5.5 million derivative mark-to-market loss adversely
impacted the third quarter of 2005. From an operating perspective the current
quarter was adversely impacted by operating losses at Wassa, and a $0.9 million
increase in interest expense primarily on the convertible notes and on the EURO
loans. These higher costs and losses were partly offset by $1.9 million of
operating earnings at Bogoso/Prestea. Unit costs were lower at Bogoso/Prestea
than in the same quarter of 2004 and gold prices were higher. Realized gold
prices averaged $433 per ounce for the third quarter of 2005, an 8% increase
from the $401 per ounce realized in the same quarter of 2004.
---------------------------------------------------------------------------------------------------
CONSOLIDATED Three months ended Nine months ended
FINANCIAL RESULTS September 30, September 30,
---------------------------------------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------------------------------------
Gold sold (oz) 53,658 30,755 146,772 116,763
Average price realized ($/oz) 433 401 431 403
---------------------------------------------------------------------------------------------------
Cash flow from operations (in $ 1,947 829 (685) 12,978
thousands)
---------------------------------------------------------------------------------------------------
Total revenues (in $ thousands) 24,748 13,445 67,722 49,796
---------------------------------------------------------------------------------------------------
Net income/(loss) (in $ thousands) (6,657) (4,258) 12,575 2,051
Net income/(loss) per share - basic ($) (0.047) (0.030) (0.088) 0.015
---------------------------------------------------------------------------------------------------
Bogoso/Prestea Operations - Third Quarter 2005
During the quarter ended September 30, 2005 Bogoso/Prestea generated operating
profits after-tax of $1.7 million. The income was based on sales of 29,346
ounces of gold during the third quarter of 2005, down five percent from 30,755
ounces in the same period of 2004. While plant throughput and gold recovery were
higher in the third quarter of 2005 than in the same period of 2004, the grades
was lower resulting in lower gold output and shipments than in the same period
of 2004.
----------------------------------------------------------------------------------------------------
BOGOSO/PRESTEA Three months ended September 30, Nine months ended September 30,
-------------------------------------------------------------------
OPERATING RESULTS 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------
Ore mined (t) 426,617 284,910 1,350,764 972,210
Waste mined (t) 3,569,876 1,648,640 8,263,097 5,442,000
Ore processed (t) 397,815 374,114 1,167,368 1,309,839
Grade processed (g/t) 4.20 4.53 4.45 3.84
Recovery (%) 56.6 56.0 59.1 68.7
Gold sold (oz) 29,346 30,755 101,709 116,763
Cash operating cost ($/oz) 280 319 287 237
Royalties ($/oz) 13 14 12 16
Total cash cost ($/oz) 293 333 299 253
----------------------------------------------------------------------------------------------------
Lower operating costs versus the same period in 2004 resulted in lower unit
costs. Cash operating costs dropped to $280 per ounce, down from $319 per ounce
in the third quarter of 2004, and total cash costs averaged $293 per ounce, down
from $333 per ounce in the third quarter of 2004.
The Bogoso processing plant processed an average of 4,324 tonnes or ore per day
at an average grade of 4.20 grams per tonne, as compared to 4,066 tonnes per day
at 4.53 grams per tonne in the same period in 2004. During the quarter gold
recovery improved marginally to 56.6% from 56.0% in the third quarter of 2004.
Wassa Operations - Third Quarter 2005
The Wassa mine was placed in service on April 1, 2005 after completing its
commissioning and testing phase in the first quarter. Wassa shipped and sold
24,312 ounces of gold during the third quarter, receiving an average price of
$442 per ounce. Plant throughput averaged 10,467 tonnes per day at an average
32
grade of 0.86 grams per tonne with a recovery of 87.7%. Feed to the Wassa plant
consisted of approximately 775,668 tonnes of pit ore averaging 0.94 grams per
tonne and 205,339 tonnes of heap leach materials which averaged 0.60 grams per
tonne.
---------------------------------------------------------------------------------------------------
WASSA OPERATING RESULTS Three months ended September 30, Six months ended September 30,(1)
----------------------------------------------------------------
(After April 1, 2005 start up) 2005 2004 2005 2004
---------------------------------------------------------------------------------------------------
Ore mined (t) 692,142 - 1,380,385 -
Waste mined (t) 2,430,764 - 4,416,597 -
Heap leach material processed (t) 205,339 - 348,603 -
Grade of leach material processed 0.60 - 0.67 -
(g/t)
Pit ore processed (t) 757,668 - 1,428,028 -
Grade of pit ore processed (g/t) 0.94 - 0.98 -
Total processed (t) 963,007 - 1,776,631 -
Average grade processed (g/t) 0.86 - 0.91 -
Recovery (%) 87.7 - 88.7 -
Gold sold (oz) 24,312 - 45,063 -
Cash Operating Cost ($/oz) 460 - 465 -
Royalities ($/oz) 11 - 13 -
Total Cash Cost ($/oz) 471 - 478 -
---------------------------------------------------------------------------------------------------
(1) Since the Wassa mine was not placed in service until April 1, 2005,
the production figures for the period ended September 30, reflect only
six months of operations.
Higher than expected operating costs and lower than expected gold production
combined to yield cash operating costs of $460 per ounce for the third quarter.
The higher cash operating costs per ounce (relative to the expected life of mine
average) are a result of less gold being produced than planned largely as a
result of lower plant throughput than planned and lower than average grades
being processed. The lower plant throughput was a result of construction
activity in August and September to rectify design defects in the crushed ore
stockpile feeders and the heap leach reclaim system. The lower than average
grades are representative of the near surface oxide material currently being
mined, and grades are expected to increase with depth as mining continues. In
addition, our reconciliations since April indicate that we are getting more
dilution than planned with 43% more ore being mined than indicated by the
resource model at a grade 13% lower than the unaudited resource model. Our
engineering studies had assumed 0% increase in tonnage at a 5% reduction in
grade relative to the unaudited resource model.
Although metallurgical recovery continues to be marginally below expectation we
believe this is a function of the low grades currently being processed and that
as the grade mined increases deeper in the pits, the recovery will also
increase.
Generally the cost structure at Wassa has been above what we expected. From
September on we anticipate that commissioning our own mining equipment to
replace the hired mining equipment will improve the cost structure. We therefore
anticipate that once gold production is increased to the expected levels the
cash operating costs will also meet expectations.
Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September
30, 2004
Summary - Nine Months ended September 30, 2005
During the nine months ended September 30, 2005, we incurred a net loss of
$(12.6) million or $(0.088) per share on revenues of $67.7 million, versus net
income of $2.1 million or $0.015 per share on revenues of $49.8 million during
the first nine months of 2004. While gold revenues were $16.2 million higher
than in the same period of 2004, due mostly to production from our new Wassa
mine and from higher realized gold prices, operating costs were $27.0 million
higher, also due mostly to costs from Wassa. The major factors contributing to
the $14.6 million swing from a net income position in the first nine months of
2004 to a net loss in the first nine months of 2005 include a $7.4 million
33
mark-to-market loss on derivatives mostly related to EURO's cash-settled forward
gold pricing contracts, a $4.7 million reduction in operating income at
Bogoso/Prestea, a current year $6.3 million operating loss at Wassa, a $1.1
million impairment write-off of an exploration project, $0.6 million of EURO
restructuring costs and a $1.7 million increase in interest expense. These
higher costs were Formatted: Not Highlight partly offset by $1.3 million
increase in royalty income. There was also a $3.9 million reduction in corporate
development charge versus the first nine months of 2004. Realized gold prices
averaged $431 per ounce for the first nine months of 2005, a 6.9% increase from
the $403 per ounce realized in the same quarter of 2004.
Bogoso/Prestea Operations - Nine Months ended September 30, 2005
Bogoso/Prestea generated $5.3 million of after-tax operating income on sales of
101,709 ounces of gold during the first nine months of 2005, down from $9.9
million of after-tax operating income on sales of 116,763 ounces in the same
period of 2004. The major factors contributing to the lower earnings and lower
gold output versus a year earlier were lower plant through-put and lower gold
recovery, both of which were adversely impacted by the metallurgical
characteristics of the deeper, harder non-refractory sulfide Plant-North ores
processed in 2005 versus the shallower and softer oxide and non-refractory
sulfide ores milled in 2004.
The lower gold output and higher mine operating costs resulted in a significant
increase in unit costs from the same period of 2004. Cash operating costs for
the nine months averaged $287 per ounce, compared to $237 per ounce in the first
nine months of 2004, and total cash costs averaged $299 per ounce, up from $253
per ounce in 2004.
The Bogoso processing plant processed an average of 4,276 tonnes per day at an
average grade of 4.45 grams per tonne, as compared to 4,798 tonnes per day at
3.84 grams per tonne in the same period in 2004. Gold recovery dropped to 59% in
2005 from 69% in 2004.
Wassa Operations - Nine Months ended September 30, 2005
Since the Wassa project was not in service in the first quarter of 2005,
operating results discussed below are for the six months ended September 30,
2005.
Wassa generated $6.3 million of after-tax operating loss on sales of 45,063
ounces of gold during the six months ended September 30, 2005. Cash operating
costs for the six months averaged $465 per ounce and total cash costs averaged
$478 per ounce. The Wassa processing plant processed an average of 9,708 tonnes
per day at an average grade of 0.91 grams per tonne with a gold recovery of
88.7%.
Prior to early June when we connected to the national power grid, plant
operations were impacted by the limited availability and high cost of power from
our diesel fueled, owner-operated powerhouse which resulted in the plant
operating at less than its designed capacity. This, in combination with the
lower grade in the upper levels of the Wassa open pit, contributed to lower
overall production in the second quarter. The lower than expected gold
production and high power costs contributed to high cash operating costs during
the second quarter which averaged $472 per ounce. In the third quarter, gold
output suffered from lower than expected processing rates and lower than
expected ore grades as discussed above in the quarterly analysis.
The employment of new, larger mining equipment in the fourth quarter is expected
to reduce mining costs per ounce. We are also working to stabilize the plant
through-put at rates above 10,000 tonne per day and still expect increases in
head grades as mining accesses higher grade ores deeper in the pit. These
factors are expected to yield lower unit mining costs in the near future.
34
EXPANSION PROJECTS
Bogoso Sulfide Expansion Project
Construction for the Bogoso sulfide expansion project commenced mid-year
following the receipt of environmental permits and Board approvals in June 2005.
The project is designed to expand the existing Bogoso processing plant facility
by adding a sulfide processing plant with a nominal capacity of 3.5 million
tones per year of refractory sulfide ore. The sulfide plant will utilize the
BIOX bio-oxidation process.
We estimate that the total capital cost of the project, including the expansion
of the mining fleet, to be approximately $115 to $125 million, and we expect a
15 to 18 month construction period, ending in late 2006.
Construction work has proceeded according to plan with the concrete work
benefiting from a late start to the wet season in Ghana. Stainless steel for the
tanks has been procured and delivered to site and work to build the tanks has
commenced. Ordering of long lead time items and detailed design is also well
advanced. The project is currently on time and on budget.
The existing 1.5 million tones per year Bogoso oxide processing plant will be
unaffected by the sulfide expansion project and will provide operating cash flow
during the construction and commissioning of the expansion. With the continued
availability of the Bogoso oxide plant, a decision was made in early 2005 not to
proceed with development of a separate oxide ore processing facility at Bondaye,
south Prestea. Instead we intend to transport oxide ore from Bondaye, and other
locations north and west of Bogoso, to the Bogoso oxide plant. Operation of the
oxide and sulfide processing plants in a single centralized complex is expected
to streamline the management structure and result in reduced general and
administrative costs and other fixed costs which should offset the cost of
transporting oxide ores.
The design and construction of the expansion project is being managed by GRD
Minproc on an engineering, procurement and construction management basis. Work
has proceeded under a letter of agreement entered into in February 2005, while a
contract is expected to be finalized in the fourth quarter.
At year-end 2004 we had estimated proven and probable sulfide reserves, based on
a $360 per ounce gold price, at Bogoso/Prestea (including Mampon) of 21.2
million tones at an average grade of 2.89 grams per tonne for total contained
gold of 1.97 million ounces. Following completion, gold production from the
sulfide processing plant is expected to average approximately 270,000 ounces per
annum and to range between 260,000 and 290,000 ounces per annum at an average
cash operating cost between $250 and $270 per ounce. Commercial production is
expected to be achieved in late 2006. Gold recoveries from the BIOX process are
expected to average 86% and vary between 78% and 88%.
As at December 31, 2004 we had proven and probably oxide and non-refractory
reserves, based on a $360 per ounce gold price, at Bogoso/Prestea (including
Mampon) of approximately 10.7 million tones at an average grade of 2.93 grams
per tonne for total contained gold of 1.0 million ounces. The oxide plant at
Bogoso is expected to produce gold at its historical rate of between 100,000 and
150,000 ounces per annum at a cash operating cost between $200 and $250 per
ounce.
The oxide plant at Bogoso is expected to produce gold at its historical rate of
between 100,000 and 150,000 ounces per annum at a cash cost between $200 and
$250 per ounce.
EXPLORATION
We spent approximately $10.8 million on exploration activities in Ghana during
the first nine months of 2005 including $2.0 million at Wassa, $2.5 million at
the Prestea Underground, $3.9 million on sulfide targets at Bogoso/Prestea and
approximately $2.4 million on exploration projects outside the immediate
Bogoso/Prestea and Wassa areas. In addition we spent $1.3 million in South
35
America and $1.8 million in other areas of Africa outside Ghana bringing total
September 2005 year to date exploration spending to $13.9 million. Exploration
costs in 2006 are expected to decrease as the intensive drilling at Bogoso and
Prestea to convert sulfide resources to reserves tails off.
Ghana
Drilling at Bogoso beneath the Chujah and Dumase inferred pits intersected
mineralized zones of economic thickness and tenor which should push our
optimized pits deeper, and further drilling in these areas was conducted this
quarter to confirm the continuity of the mineralization; results are pending.
Drilling to infill the inferred resource within the $400 inferred pits at Chujah
and Dumase thus far have confirmed the previously interpreted grades and
thicknesses supporting the possible upgrade of the resources to indicated.
Drilling of possible underground targets at Prestea beneath and to the south of
the Plant-North open pit has confirmed there are zones with grades and widths
which could be exploited from underground mining, but further drilling and
engineering studies need to be conducted to determine whether this would be
economically viable.
Pumping underground has been upgraded and we are making good progress dewatering
lower levels of the underground and expect to dewater the 30 Level in the fourth
quarter, which will allow as to commence drilling beneath the 30 level.
On the Dunkwa concession north of Bogoso, exploration involved drilling of the
Aniamote prospect, deeper drilling of the down plunge extensions of the high
grade Mampon mineralization and geological modeling and preliminary resource
estimation of the Mampon open pit mineralization. Evaluation of the drilling
results will continue into the fourth quarter, and the new resource estimates
will be validated and checked for inclusion in the 2005 year-end resource
statements. Metallurgical samples shipped last quarter have arrived in Australia
and are currently being analyzed.
The initial resource drilling program at the Pampe and Riyadh concessions on the
Akropong trend to the west of Bogoso was completed this quarter. Geological
interpretations and grade estimations have been initiated and will be sent to
SRK, our resource consultants, for validation during the fourth quarter. A
second phase of drilling has been planned and will be used to update the
resource estimates in the first quarter of 2006. Results from the first resource
estimation will form the basis for our feasibility study on the viability of
treating this mineralization through our Bogoso processing plant.
The exploration effort at Wassa during the third quarter concentrated on testing
the southern extensions of the South Akyempim deposit. Reverse circulation
drilling on 100 meter spaced drilling fences intersected zones of mineralization
averaging 18 meters true width and grading approximately 2.4 g/t gold. Drilling
at South Akyempim is expected to continue in the fourth quarter.
Two of our reconnaissance license applications were approved by the Ghana
Minerals Commission, the Adubrim and Breman Asikuma reconnaissance licenses,
totaling approximately 85 and 4,000 square kilometers respectively. Wide spaced
soil geochemistry surveys were initiated at Adubrim and a more regional laterite
and stream geochemistry program was implemented over Breman Asikuma. Work on
both these concessions is ongoing and should be completed in early 2006.
Other African Projects
We hold a 10% interest in Moto Goldmines Limited ("Moto"). Moto controls the
approximate 4,700 square kilometer Moto concessions located in the north east of
the Democratic Republic of Congo which has seen historical production in excess
of 11 million ounces. Moto's recent drilling program confirmed and expanded the
gold resource around the areas previously mined. Based upon this work Moto's
independent resource consultants have reported estimated total resources of 65.8
million tonnes at an average grade of 2.9 g/t for a total of 6.1 million ounces
of gold.
36
In Sierra Leone a regional soil sampling program designed to identify new
targets on the three Mano River joint venture project areas was completed in the
second quarter and samples were dispatched for assay. Final assay results were
received near the end of the third quarter and are still being assessed. In the
meantime, it has been agreed with our joint venture partner, Mano River
Resources Inc, that the earn-in period will be extended by 12 months.
Work conducted at Afema during the third quarter included an intensive soil
sampling program focused on the Bibiani-Chirano-Afema structural corridor where
it cuts through the Afema property, with over 12,000 samples being collected and
analyzed for gold and a multi-element suite. Results are still being assessed
but we believe that significant gold and pathfinder element anomalism is present
along this structure. A six month extension of time on the option period was
negotiated with the property owners.
South American Projects
A further analysis of the drill results from the Saramacca property was carried
out during the third quarter and various options for future work on the property
are being considered.
At Bon Espoir, which is located in French Guiana north of our Paul Isnard
Property in a geological setting interpreted by us as having many similarities
to the Ashanti Trend of Ghana, a soil sampling program was completed during
July. Some 32.2 kilometers of baseline and 120 kilometers of cross lines were
cut, with soil sampling completed on 26 cross lines spaced 1600 meters apart on
100 meter centers. The assay results have identified zones of anomalous
low-level gold and arsenic along the main structural break that hosts the
Wayamaga prospect drilled by previous owners of the Bon Espoir permit.
Consideration is being given to a follow-up infill sampling program during the
fourth quarter of 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short term investments balance stood at $43.6
million at September 30, 2005, compared with approximately $51.7 million at the
end of 2004. Operating activities consumed approximately $0.7 million of cash
during the first nine months of 2005. The $0.7 million of cash used in
operations in the first nine months compared to $13.0 million of operating cash
flow provided by operations in the same period of 2004. While gold revenues were
higher than in the first nine months of 2004, on higher shipments and higher
gold prices, higher operating costs and the cash used for working capital at
Wassa and Bogoso/Prestea were the major factors contributing to the decrease in
operating cash flow. The higher operating costs versus a year earlier were
mostly due to the change in ore type as explained in the Bogoso/Prestea
Operations section above.
Capital projects consumed $47.5 million of cash during the first nine months of
2005, up from $42.9 million in the same period of 2004. Completion of the Wassa
plant, power line construction at Wassa, additional mining equipment and work on
the Bogoso sulfide expansion project and exploration spending were the major
areas of capital investment in the quarter. During the first nine months of 2005
we received $1.0 million of cash from Cambior Inc. as the third and final
installment on its 2001 purchase of our interest in the Rosebel property.
Stock option and warrant exercises provided $1.2 million of cash during the
first nine months of 2005, and new debt contributed $61.2 million. Repayments of
Caterpillar Financial loans consumed $1.3 million of cash. At September 30,
2005, working capital stood at $47.6 million, versus $61.4 million at the end of
2004.
37
On April 15, 2005 we sold $50 million of senior unsecured convertible notes
maturing on April 15, 2009, to a private investment fund. The funds are now
being used for the sulfide expansion project at Bogoso and for general corporate
purposes.
In January 2005, EURO drew down $6.0 million under a loan facility from a bank
and paid the funds to Golden Star as the first installment on its purchase of
the Rosebel royalty. The loan is repayable by EURO in nine equal payments of
$666,667 beginning July 29, 2005 and every three months thereafter. The interest
rate is set at LIBOR plus 2.5%. In September EURO borrowed an additional $3.0
million from the same bank and sent the cash to Golden Star as the second
installment on its purchase of the Rosebel royalty. The loan is repayable by
EURO in five equal quarterly payments of $600,000 beginning on October 31, 2007.
The interest rate is set at LIBOR plus 2.5%.
In April 2005 we renewed a $25 million equipment financing credit facility from
Caterpillar Financial Services. The facility provides credit for a mixture of
new and used mining equipment. A total of $2.2 million was drawn under this
facility in the first nine months of 2005. We expect to draw additional funding
from this facility in the fourth quarter of 2005 as new mining equipment is
delivered.
Outlook
We expect Bogoso/Prestea will continue to generate positive operating cash flows
through 2005 but will require additional capital to cover costs of the Bogoso
sulfide expansion project. We expect that Wassa will be able to fund its own
operating expenses during the remainder of 2005 but will draw on the Caterpillar
Finance loan facility to pay for new mining equipment.
Our analysis of expected cash flows over the next 12 to 15 months indicates cash
on hand at September 30, 2005, plus projected cash flow from operations and
proceeds of expected equipment financing will likely be insufficient to fund
completion of the Bogoso sulfide expansion project. We are negotiating with two
financial institutions to establish a $30 million revolving line of credit and
will, if necessary, pursue other potential financing sources including asset
sales and issuance of equity to meet financing requirements created by factors
including unanticipated declines in gold production, unanticipated increases in
cash operating costs, unanticipated increases in capital estimates, unfavorable
favorable currency exchange rates and lower gold prices.
LOOKING AHEAD
Our main objectives for the next twelve months include:
o Completion of mining of Prestea Plant-North pit;
o Permitting and commencement of oxide mining from the Akropong trend
west of Bogoso, to provide oxide ore to the Bogoso plant following
exhaustion of the Prestea Plant-North ores;
o Commencement of sulfide mining at Bogoso;
o Completion of construction at the Bogoso sulfide expansion project by
the end of 2006;
o Achievement of targeted production rates and costs at Wassa;
o Continued evaluation of the Prestea Underground potential;
o A continued high level of exploration efforts;
38
o Completion of the St. Jude acquisition; and
o Continuation of efforts to identify and pursue acquisition and growth
opportunities in Ghana and elsewhere.
We expect gold production at Bogoso/Prestea during 2005 to total approximately
130,000 ounces at an average cash operating cost of about $290 per ounce and
production of approximately 70,000 ounces for the nine months at Wassa at a cash
operating cost of approximately $440 per ounce, bringing total consolidated 2005
production to approximately 200,000 ounces at an average cash operating cost of
$343 per ounce.
As more fully disclosed in the Risk Factors in our 2004 Form 10-K, as amended,
numerous factors could cause our estimates and expectations to be wrong or could
lead to changes in our plans. Under any of these circumstances, the estimates
described above could change materially.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements reflect the application of Cdn GAAP, which is different
in certain material respects from US GAAP. The accounting policies reflected
therein are generally those applied by similarly situated mining companies in
Canada. Our accounting policies under Cdn GAAP are described in Note 1 of our
consolidated financial statements as found in our 2004 Form 10-K, as amended.
Preparation of our consolidated financial statements requires the use of
estimates and assumptions that can affect reported amounts of assets,
liabilities, revenues and expenses. Accounting policies relating to asset
impairments, depreciation and amortization of mining property, plant and
equipment, and site reclamation/closure accruals are subject to estimates and
assumptions regarding reserves, gold recoveries, future reclamation costs,
future gold prices and future mining activities.
Decisions to write off, or not to write off, all or a portion of our investment
in various properties, especially exploration properties subject to impairment
analysis, are based on our judgment as to the actual value of the properties and
are therefore subjective in most cases. We have written off substantially all of
our pre-1999 investments in exploration properties based upon our assessments of
the amounts recoverable from those properties. Additional exploration properties
and joint venture interests have been found to be impaired and were written off
in 2003 and 2004 and in the first quarter of 2005. We continue to retain title
to certain properties after impairment write-offs as future events and
discoveries may ultimately prove that they have significant value.
Listed below are the accounting policies and estimates that we believe are
critical to our financial statements due to the degree of uncertainty regarding
the estimates or assumptions involved and the magnitude of the asset, liability,
revenue or expense being reported.
o Ore stockpiles: Stockpiles represent coarse ore that has been
extracted from the mine and is available for further processing.
Stockpiles are measured by estimating the number of tons added and
removed from the stockpile, the number of contained ounces based on
assay data, and the estimated recovery percentage based on the
expected processing method. Stockpiles are valued based on mining
costs incurred up to the point of stockpiling the ore including
applicable depreciation, depletion and amortization relating to mining
operations. Costs are added to a stockpile based on current mining
costs and removed at the average cost per recoverable ounce of gold in
the stockpile. Stockpiles are reduced as material is removed and fed
to the mill. A 10% adjustment of the stockpile value, based on
stockpile levels in recent periods, would change the carrying value of
the stockpile inventory by approximately $0.3 to $0.5 million and
change operating costs by the same amount.
o Impairment Charges: We periodically review and evaluate our long-lived
assets for impairment when events or changes in circumstances indicate
that the related carrying amounts may not be recoverable from
39
continued operation of the asset. An asset impairment is considered to
exist if the sum of all estimated future cash flows, on an
undiscounted basis, are less than the carrying value of the asset. The
determination of expected future cash flows requires numerous
estimates about the future including gold prices, operating costs,
gold recovery, reclamation spending, ore reserves and capital
expenditures. A review of Bogoso/Preseta's expected future cash flows
as of December 31, 2004 indicated that there is no impairment at gold
prices in excess of $369 per ounce and at Wassa there is no impairment
at gold prices greater than $320 per ounce.
o Mining properties: Mine properties recorded on our financial records
are amortized using a units-ofproduction method over proven and
probable reserves. Reserve estimates, which serve as the denominator
in units of production amortization calculations, involve the exercise
of subjective judgment and are based on numerous assumptions about
future operating costs, future gold prices, continuity of
mineralization, future gold recovery rates, spatial configuration of
gold deposits, and other factors that may prove to be incorrect. A 10%
adjustment in estimated reserves could result in an approximately
$0.75 million annual change in amortization expense.
o Asset retirement obligation and reclamation expenditures: Accounting
for reclamation obligations requires management to make estimates at
each mining operation of reclamation and closure costs to be incurred
in the future in order to complete the reclamation and environmental
remediation work mandated by existing laws and regulations. Actual
costs incurred in future periods could differ from amounts estimated.
Additionally, future changes to environmental laws and regulations
could increase the extent of reclamation and remediation work
required. Based upon our current situation, we estimate that a 10%
increase in total future reclamation and closure costs would result in
an approximately $1.4 million increase in our asset retirement
obligations.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements.
SUMMARY OF QUARTERLY RESULTS
Summary of Quarterly Results
($ millions, except per share data) 2003
Quarter
2005 Quarter Ended 2004 Quarter ended Ended
Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 30 Dec. 31
--------------------------------------------------------------------------------------------------------
Revenues 24.7 24.9 18.0 15.2 13.4 16.5 19.9 17.7
Net earnings/(losses) (6.7) (3.7) (2.2) 0.6 (4.3) 1.1 5.2 7.9
--------------------------------------------------------------------------------------------------------
Net earnings/(losses) attributable to common shareholders per share
Basic (0.047) (0.026) (0.016) 0.004 (0.030) 0.008 0.039 0.063
Diluted (0.047) (0.026) (0.016) 0.004 (0.030) 0.008 0.035 0.059
--------------------------------------------------------------------------------------------------------
OUTSTANDING SHARE DATA
As of November 1, 2005 we had outstanding 142,887,394 common shares, options to
acquire 5,057,451 common shares, warrant to acquire 8,448,334 common shares and
convertible notes which are convertible into 11,111,111 common shares.
40
TABLE OF CONTRACTUAL OBLIGATIONS
Contractual Obligations Payment due by period (thousands)
(as of September 30, 2005) ----------------------------------------------------------------------
Less than 1 More than
Total year 1 to 3 years 3 to 5 years 5 years
-----------------------------------------------------------------------------------------------------------------
Long term debt (a) $ 62,201 $ 4,411 $ 5,896 $ 51,894 $ -
------------------------------------------- ----------- ----------- -------------- ----------- -------------
Interest on long term debt 14,478 4,032 7,806 2,640 -
------------------------------------------- ----------- ----------- -------------- ----------- -------------
Operating lease obligations 531 163 328 40 -
------------------------------------------- ----------- ----------- -------------- ----------- -------------
Other long term liabilities reflected on
the balance sheet under GAAP (b) 15,915 3,492 2,439 3,513 6,472
------------------------------------------- ----------- ----------- -------------- ----------- -------------
Total $ 93,125 $ 12,098 $ 16,469 $ 58,087 $ 6,472
------------------------------------------- ----------- ----------- -------------- ----------- -------------
(a) Includes $50.0 million of convertible notes maturing in 2009. Golden
Star has the right to repay the $50.0 million in cash or in common
shares. The presentation shown above assumes payment is made in cash
and also assumes no conversions of the debt to common stock by the
note holders prior to the maturity date.
(b) Other long term liabilities represent asset retirement obligations.
Asset retirement obligations include several estimates about future
reclamation costs, mining schedules, timing of the performance of
reclamation work and the quantity of ore reserves which in turn
determine the ultimate closure date, which in turn impacts the
discounted amounts of future asset retirement liabilities. The
discounted value of these projected cash flows is recorded as "Asset
retirement obligations" on the balance sheet of $10.5 million as of
September 30, 2005. The amounts shown above are undiscounted to show
full expected cash requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk includes, but is not limited to, the following
risks: changes in interest rates on our investment portfolio, changes in foreign
currency exchange rates, commodity price fluctuations and equity price risk.
Interest Rate Risk
From time to time we invest excess cash in high quality short-term debt
instruments. The rates received on such investments may fluctuate with changes
in economic conditions. As a result, our investment income may fall short of
expectations during periods of lower interest rates. We estimate that, given the
cash balances expected during the next twelve months, a 1% change in interest
rates would result in a $0.3 to $0.5 million change in annual interest income.
We have both fixed rate and variable rate debt. At September 30, 2005 we had
approximately $9.0 million of variable rate debt which carries an interest rate
of LIBOR plus 2.5%. We estimate that a 1% increase in the interest rate on the
variable rate debt would result in a $0.1 million change in annual interest
expense. We have not entered into any agreements to hedge against unfavorable
changes in interest rates, but may in the future actively manage our exposure to
interest rate risk.
Foreign Currency Exchange Rate Risk
While our major operating units transact most of their business in US dollars,
many purchases of labor, operating supplies and capital assets are denominated
in Euros, British pounds, Australian dollars, South African Rand and Ghanaian
Cedis. As a result, currency exchange fluctuations may impact the costs incurred
at our operations. Gold is sold throughout the world based principally on the US
dollar price, but portions of our operating expenses and some of our capital
purchases are incurred in currencies other than the US dollar. The appreciation
of non-US dollar currencies against the US dollar increases production costs and
the cost of capital assets in US dollar terms at mines located outside the US,
which can adversely impact our net income and cash flows. Conversely, a
depreciation of non-US dollar currencies usually decreases production costs and
capital asset purchases in US dollar terms.
41
The value of cash and cash equivalent investments denominated in foreign
currencies also fluctuates with changes in currency exchange rates. Appreciation
of non-US dollar currencies results in a foreign currency gain on such
investments and a decrease in non-US dollar currencies results in a loss.
While in the past we have not utilized market risk sensitive instruments to
manage our exposure to foreign currency exchange rates, during 2005 we have
entered into forward purchase contracts for South African Rands and Euros to
hedge expected future purchases of capital assets in South Africa and Europe
associated mostly with the Bogoso sulfide expansion project.
Commodity Price Risk
We are engaged in gold mining and related activities, including exploration,
extraction, processing and reclamation. Gold is our primary product and, as a
result, changes in the price of gold could significantly affect our results of
operations and cash flows. According to current estimates, a $10 change in our
average realized price of gold would result in a $2 million to $3 million change
in pre-tax earnings and cash flows over the next 12 months.
Beginning in the second quarter of 2005 we have purchased puts to lock in
minimum prices for portions of our annual gold sales in 2005, 2006 and 2007. As
of September 30, 2005 we have purchased put options for 230,000 ounces of future
gold production during 2005, 2006, and early 2007 to establish a floor price for
operating cash flows during the construction period of the Bogoso sulfide
expansion project. In the third quarter of 2005 we sold 90,000 $525 per ounce
call options to offset the cash costs of the put options purchased in the
quarter.
Since the Rosebel royalty revenues received by EURO from Cambior fluctuate with
gold prices a recent debt agreement required that EURO enter into a cash-settled
forward gold price agreement with the lender designed to eliminate a portion of
the potential impact of gold price fluctuations on expected future Rosebel
royalty revenues.
The forward agreement specifies that beginning April 20, 2005 and every three
months thereafter until July 30, 2007, when the average gold price for the prior
quarter is less than $421 per ounce, the bank will pay in cash to EURO an amount
equal to the difference between the average gold price and $421 times 5,700
ounces. In quarters where the average gold price exceeds $421 per ounce EURO
will pay cash to the bank in an amount equal to the difference between the
average gold price and $421 times 5,700 ounces. The 5,700 ounces is a notional
amount agreed to by EURO and the bank. Neither EURO nor the bank are required to
deliver gold under the agreement. The net effect of the agreement is that EURO
receives a net royalty revenue on the first 57,000 ounces of gold mined at the
Rosebel mine each quarter based on $421 per ounce gold price regardless of the
actual gold price.
In August 2005, in conjunction with the $3.0 million loan drawn in September,
EURO entered into agreements for another 5,700 ounces per quarter from October
30, 2007 to January 29, 2010 at a price of $458.50 per ounce. The second August
agreements are structured as the first agreements described above for the higher
agreed sales price.
Gold prices averaged $427, $427 and $439 per ounce during the first, second and
third quarters of 2005 resulting in EURO making payments to the bank of $38,000,
$36,000 and $0.1 million respectively in the three quarters of 2005. Since
quarterly gold prices exceeded $421 (the forward sales price per the agreement)
EURO's royalty revenues were higher by the same amount thereby offsetting the
payments to the bank.
42
We are experiencing significant price increases in certain operating consumables
including fuel, cyanide, tires, and other chemical reagents used in our
processing plants. Fuel prices have risen from $0.60 per liter in September 2004
to $0.85 in September 2005 and we have seen a 43% increase in the price of
cyanide. The price paid for several other consumables, including truck tires,
have risen 20% to 40% in the past 12 months.
Equity Price Risk
We have in the past and may in the future seek to acquire additional funding by
sale of common shares. Movements in the price of our common shares have been
volatile in the past and may also be volatile in the future. As a result, there
is a risk that we may not be able to sell new common shares at an acceptable
price should the need for new equity funding arise.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
As discussed in Note 22 to the consolidated financial statements, it was
determined that as of December 31, 2005 management did not maintain effective
controls over the presentation and documentation of certain
derivatives.Specifically, Golden Star did not prepare and maintain sufficient
documentation to support the designation and effectiveness of hedge accounting
for certain gold price future contracts entered into by its subsidiary, EURO
Ressources S.A., during 2005. This control deficiency resulted in the
requirement for the restatement of our consolidated financial statements for the
quarters ended March 31, June 30 and September 30, 2005 and an audit adjustment
to the 2005 annual consolidated financial statements. Because of the existence
of the deficiency in question at year-end, management concluded that the
Company's internal control over financial reporting was ineffective as of
December 31, 2005.
As of September 30, 2005, an evaluation was carried out under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of Golden Star's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934). Based on the evaluation and as a result of the material weakness
discussed above, management has concluded that as of September 30, 2005 our
disclosure controls and procedures were not effective.
Changes in Internal Control over Financing Reporting
Changes to our internal control over financial reporting to address the material
weakness described above were implemented subsequent to the quarter ended
September 30, 2005. There was no change in our internal control over financial
reporting that occurred during the quarter ended September 30, 2005 that has
materially affected, or is reasonably likely to materially affect our internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
2.1 Pre-merger Agreement dated September 27, 2005 between Golden Star
Resources Ltd. and St. Jude Resources Ltd. (incorporated by reference
to Exhibit 10.1 to Form 8-K filed September 29, 2005).
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
43
32.1 Certificate of Principal Executive Officer pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
32.2 Certificate of Principal Financial Officer pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GOLDEN STAR RESOURCES LTD.
Registrant
By: /s/ Peter J. Bradford
----------------------------
Peter J. Bradford
President and Chief Executive
Officer Date: April 14, 2006
By: /s/ Allan J. Marter
----------------------------
Allan J. Marter
Senior Vice President and Chief Financial
Officer Date: April 14, 2006
45
EXHIBIT INDEX
2.1 Pre-merger Agreement dated September 27, 2005 between Golden Star
Resources Ltd. and St. Jude Resources Ltd. (incorporated by reference
to Exhibit 10.1 to Form 8-K filed September 29, 2005).
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.
1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
46