Lake Shore Gold (TSX:LSG): Why It’s Likely to Outperform

Gravitas Financial analyst Alex Cutulenco explains why he’s taken a shine to shares of Lake Shore Gold Corp. (TSX: LSG), pointing to the company’s operating results, balance sheet, as well as a potential upside surprise for 2015.

Alex Cutulenco | August 27, 2015:Lake Shore Gold Corp. (TSX: LSG) is a Canadian mining company, primarily involved in the production of gold at its two wholly-owned properties, Timmins West and Bell Creek, located in northern Ontario, Canada. Founded in 2002, Lake Shore Gold began as a junior explorer, acquiring the Timmins Gold Project in 2003, and eventually releasing positive assay results in 2004, with aninitial Indicated resource of 1.4 million tonnes at a cut grade of more than 10 g/t. Commercial production was declared at the Timmins West and Bell Creek Mines effective January 1, 2012.

Figure 1: Map of Lake Shore Gold’s properties

Great operating results, and a healthy balance sheet

Following several years of commercial production beginning in 2012, the Company announced record annual gold production of 185,600 ounces for fiscal 2014. Comparatively speaking, this production is:

• More than the 182k ounces produced by Alacer Gold, a company 2x larger with a market cap of $829MM
• Almost half of Detour Gold’s production of 457k, a company 5x larger with a market cap of $2.3 billion
• And only a fraction of Goldcorp’s 2.7 million ounces of annual production, a company 33x larger with a market cap of $15.4 billion

Taken as a ratio, these figures paint a vivid picture as to what investors pay per ounce of annual gold production, with Lakeshore trading at a low multiple in comparison to its industry peers.

Figure 2: Industry Comparison – Price to Annual Gold Production

What’s even more impressive about Lake Shore is its costs of operation. For 2014, cash operating costs and all-in sustaining costs for the year averaged US$592 and US$872 per ounce sold, respectively, a positive margin over the multi-year low gold price of US$1,125.

Other highlights include a current cash balance of $81.4MM, an increase from $33.1MM at the beginning of 2014, as well as repayment of the company’s debt, dropping to $106.4MM currently from $139.6MM at the beginning of 2014. Deleveraged books and a sound cash balance are instrumental during poor market conditions, therefore managing debt payments should not be a problem.The Company could also use current funds to proceed with ongoing exploration and development at its Fenn-Gib project, as well as the 144 Gap Zone discovery, 144 North, 144 South, and the Gold River Trend project.

Possible upside for 2015

The Company’s third gold complex is the Fenn-Gib project, located approximately 60 kilometers east of Bell Creek. Fenn-Gib is an advanced-stage exploration project, which hosts a large, near-surface, potential open-pit resource with excellent prospects for further growth. Current estimates for this project include an Indicated resource of 40.8 million tonnes at a grade of 1.0 g/t.

In addition, in May 2015, the Company announced that based on its exploration success at the 144 Gap Zone, it was increasing its exploration program in the area in 2015 from $18.0 million to $25.0 million.

Lake Shore has been on our radar for some time now, highlighted as a top junior gold performer for 2015.

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