Lake Shore Gold

This article is about Lake Shore Gold Corp. (LSG). Lake Shore Gold has a market capitalization of $135 million. The company operates two gold mines in Ontario: Timmins West and Bell Creek. It also owns the nearby Fenn-Gib exploration property.

The company's share price has fallen precipitously since its >$4 peak in 2011 to just $0.31 today. In light of this decline I believe that the shares offer enormous opportunity: given that Lake Shore Gold had net assets of $656 million as of the end of March, the shares currently trade at a mere 21% of the company's NAV.

The company has around 6.7 million ounces of gold resources, and it expects to be producing 140,000 ounces annually by the end of the year. If it can do this at its estimated $700/ounce cash cost (or around $1,050 including administrative expenses, taxes and royalties, mine repairs, and interest expenses), then at $1,290/ounce gold the shares would need to more than double in order to trade at a reasonable valuation of 10-times cash flow. This is opposed to a minimal downside risk of just 7.4% at the same 10 times cash flow multiple if we assume a higher production cost of $1,150/ounce and a lower - $1,250/ounce - gold price. If the gold price rises, then we can assume a far greater price appreciation in Lake Shore Gold shares.

Despite this high upside potential with limited downside risk, Lake Shore Gold is a relatively low risk gold miner. All of its properties are located in Ontario (with a couple minor ones in neighboring Quebec), which is typically a mining friendly jurisdiction. The company's producing mines are very close to one another, and it owns its own mill, so it can refine all of the ore from its operations with ease.

My only concern is the company's $150 million worth of debt. Lake Shore Gold has roughly $150 million in debt outstanding, with $125 million of this debt being non-callable long term debt that matures in September of 2017. The company should have no problem repaying the debt by 2017 if the price of gold remains above $1,250/ounce. However the company has high interest expenses relative to its sales: according to its first quarter financial statement it paid $5.6 million in interest expenses (given that interest is paid semi-annually this is $11.2 million per year). At 140,000 ounces of production $11.2 million adds roughly $80 to the cost of each ounce of gold produced, and my production cost estimates take this into consideration.

Ultimately at the current valuation Lake Shore Gold offers enormous upside potential with very little downside risk barring a precipitous drop in the price of gold. Furthermore, for gold bulls, the shares offer enormous leverage to the upside. Finally, these claims do not take into consideration the company's exploration potential, which is substantial, if non-quantifiable, given the location of its properties, which I describe presently.

Lake Shore Gold's Properties

Lake Shore gold's properties are all located in or near the Timmins Gold Region in Ontario.

(click to enlarge)

The company's properties are located on the Abitibi Greenstone Belt which boasts a whopping 200 million ounces of gold either mined in the past or in the form of resources held by mining companies today. Given that gold is often found around where it has been found in the past the company has enormous exploration potential to expand its resources and production beyond what I have discussed above. Let us look at the company's individual properties.

A: Timmins West

Lake Shore Gold's Timmins West property is its most valuable in terms of resources and production. It consists of two underground deposits: the Timmins Deposit and the Thunder Creek Deposit.

Timmins West has roughly 1.6 million ounces of gold: 800,000 of which are reserves (411,000 at the Timmins Deposit at 6 grams per tonne, and 387,000 at Thunder Creek at 4.5 grams per tonne). The following chart details this information. Keep in mind that Lake Shore Gold counts its reserves in its resource data.

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Tagged: Investing Ideas, Long Ideas, Basic Materials, Gold, Canada, Small-Cap Insight

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Tagged: Investing Ideas, Long Ideas, Basic Materials, Gold, Canada, Small-Cap Insight

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About the author: Ben Kramer-Miller

I am an independent investor. I write in order to clarify my own ideas in order to refine my investment strategies. My investment philosophy is guided by two major themes: long term secular trends and deep value.

Ben Kramer-Mi