At the end of 2013 I wrote about Golden Star Resources Ltd. (GSS, Financial)’s troublesome future and gave several reasons for my bearish stance towards the stock. A small market, high geopolitical risk in some of the countries the firm operates, along with overexpansion in times of fluctuating gold prices gave tune to the massive shedding of shares by investment gurus. Five months have past since I last considered Golden Star’s potential, and everything indicates the situation has not changed.
Guru Activity Shows a Clear Tendency
Steven Cohen (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Arnold Schneider (Trades, Portfolio), had already sold their entire holdings in the company by October 2013, indicating they had little faith in the gold miner’s recovery. By the end of the year, Jim Simons' (Trades, Portfolio) Renaissance Technologies took a similar decision, reducing its stake in the firm by 32%. This tendency towards the sale of Golden Star stock was duly noted by investors and analysts alike, and concurs with the company’s poor performance.
A Look at the Numbers
In an industry plagued by fluctuating metal prices, operating with lofty margins can be quite helpful. Yet Golden Star cannot afford such luxuries. With an operating margin of 0.1% and a net margin of -56.8% the firm is in a tight spot, especially when compared to the industry average. Unlike its industry peers’ median, which are of 2.26% and -0.09%, respectively, the Toronto-based gold miner is struggling to generate decent cash flow levels. Further metrics depict a even worse situation for shareholders: return on equity is currently at -370% and revenue growth is estimated to reach a poor 2.5%. Purchasing overpriced assets, relative to current gold prices, is surely one of the reasons for such grim figures, as financial losses have taken their toll on Golden Star.
The announcement of its 2013 full year, and fourth quarter earnings only helped to add to shareholders’ concerns. A 15% decline in revenue was expected by those who took the year-long drop in gold prices into consideration, yet the net loss of $311 million is worrisome. With such hefty losses, Golden Star will struggle to meet its short-term obligations, and thus will need to build further debt in order to stem payments. Yet while liquidity remains an issue, some good news did arise, as the company announced it intends to reduce operating costs below the $1,000 mark in 2014. Whether this will be enough to regain its foothold is doubtful considering recent events; however, it does remain a possibility and thus, a beacon of light for shareholders.
Poor Performance, Low Price
Apart from mounting debt levels and reduced margins, Golden Star has yet to produce positive cash flow levels, largely due to poor production and operational issues. Considering this scenario, the only upside to this stock seems to be its price. It is currently trading at $0.64 per share, at 0.4 times its trailing sales. This entails a significant price discount relative to industry peers’ average, which is currently at 1.63. However, the risks of investing in a small and troubled gold mining company such as Golden Star are clear, especially considering the existence of viable alternatives such as Barrick Gold Corporation (ABX, Financial). In the end, I choose to remain consistent with my past conclusion and consider Golden Star shares are something investors should stay away from, unless they intend to gamble on a losing horse.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
