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Golden Star To Shine Bright

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Stock can withstand Ghana electricity costs.

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It was announced last night that Ghana is raising electricity costs by 100%, which will push up cash costs at Golden Star (GSS) by about 10%.

Assuming the high end of its estimated increase in costs ($85), this would push up cash costs to $645 for 2008, assuming the original guidance was correct. At $1000 gold, that would reduce its NAV based on P&P reserves to $7.26.

Thus, there's still quite a bit of a cushion in the stock's price for this kind of thing, and I actually think it's probably buyable again right here, given the way it's getting hit. That's the difference between buying a mining stock that is priced for perfection and one that's already cheap.

Another way to look at this is that the last time that GSS traded below $3, as it is now, gold was $850-$860-ish. Today, spot gold is $925. So with the $60-$85 cost increase, it basically offsets the $75 gain in the price of gold since the May lows. Therefore, with GSS trading back to where it was when gold was on its lows, it's basically "fairly priced," based on the same set of assumptions and discounts that it was trading at in May and June.

Remember, this news wasn't the company's fault. It's not a reflection on management or the quality of the deposit. The only thing that changed here was the math with respect to the company's leverage to the gold price. With this news now fully discounted, future gold price increases will flow through to share price gains, which should be accelerated once the company ramps up production in the back half of the year.

There is also the small possibility that the company can get these power costs reduced since it's still actively lobbying the government in Ghana. As the CEO said:

"We are disappointed that the PURC appears to have specifically targeted the mining industry to carry the burden of the increased power generation costs. We intend to continue our discussions with the Government of Ghana regarding the increase and its impact on our operations and future investment plans while we review our options regarding production levels and spending plans."

However, I wouldn't assume any progress on this front just to be conservative.

This news will affect some other miners as well, like Red Back (RBI in Canada), who is also exclusively in Ghana. Gold Fields (GFI) and Newmont Mining (NEM) also have exposure to Ghana, but it's not a big portion of their production profiles. So I doubt it'll matter much to them.

As always with the gold mining business, a rising gold price solves all cost problems, and in my opinion it'll solve this one too.

It's still a little disappointing, however. There's no way around that fact, but that's the way it goes in the mining business sometimes.


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Position in GSS.

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