Great Basin Gold – strongly positioned with increasing gold production in Nevada and South Africa

Great Basin Gold (TSE:GBG, AMEX:GBG, JSE:GBG) is an emerging gold producer that is increasing gold output from the Hollister Mine, located on the Carlin Trend in Nevada, USA  and the Burnstone Mine, located in the Witwatersrand goldfield in South Africa. The total gold equivalent ounces sold from both mines increased in the June quarter by 100% to 40,141 ounces, from 20,118 ounces in the prior quarter.

Revenues for the June quarter were $56.74 million, an increase of 115% over the $26.34 million reported in the prior quarter, and resulted in an operating profit of $6.28 million. The company realized a gold price of $1,413 per ounce during the quarter, and is expected to improve further as gold continues to soar higher.

The Hollister Mine recorded $49 million in revenue in the June quarter, on the sale of 34,522 ounces of gold. This included approximately 5,000 ounces of gold held by the refiner that was produced in the prior quarter.

The Esmeralda Mill treated 22,237 tonnes of ore, an increase from 21,634 tonnes in the prior quarter, and reported gold recoveries of 95%, and silver recoveries of 75%, which was a significant improvement.  This caused a drop of 9% in production costs to $611 per gold equivalent ounce. Hollister increased production of ore by 16% to 25,297 tonnes, and increased gold production by 39% to 28,075 ounces.

Drilling focused on the bonanza grades at the Blanket Zone and targets at southeast Gwenivere, which will be included in an updated mineral resource statement that is expected to be released soon. The company also identified a significant new style of broad mineralization called “spider web” breccias.

The Blanket Zone contains bonanza gold grade zones of over 5 ounces per ton (oz/t) that are linked to mineralized vein structures and tuffaceous stratigraphic horizons within the Tertiary volcanics. A circular ramp to fully access the Blanket Zone will be completed in the fourth quarter of 2011, allowing the completion of evaluation drilling, bulk sampling, and commencement of mining. 

The Esmeralda Mill, which is currently rated at 320 tons per day, processed ore with an average head grade of 1.35 oz/t or 43.40 g/t Au, reporting a 31% increase in grade over the prior quarter. Hollister is expected to produce a total of 110,000 gold equivalent ounces in 2011, at a cash cost of US$600 - $650 per ounce. An acid wash and carbon regeneration system should be completed shortly, and will assist with gold recovery and cost reduction.

The Hollister Mine is currently restricted to an annualized production rate of 275,000 tonnes, or 750 tonnes per day by its operating permit. The company is in the final stages of completing the processing of an Environmental Impact Statement that requests an increase in processing rates, with a decision expected by April of 2012.

The Burnstone Mine is now fully permitted, with the vertical shaft, metallurgical plant, decline, ventilation shaft, and surface and underground infrastructure fully operational. Capital requirements will now mainly involve development into mineralized ore zones.

Development of mineralized ore for the first stage of underground mining at Blocks B and C were hindered by geological faulting encountered in the mining area. This issue was not revealed by closely spaced drilling around the mining area and led to a 66% increase of waste rock.

This issue has now been largely addressed with mineralized ore from stopes expected to reach 77% of total material extracted from underground workings over the remainder of the calendar year. Currently, over 25 development ends are on reef, which now provides sufficient stoping areas to reach planned production levels.

The grade extracted from development material during the June quarter averaged 0.02 oz/t or 0.64 g/t Au, and the grade extracted from stoping material was 0.08 oz/t or 2.57 g/t Au, resulting in the recovery of 4,894 ounces of gold, at a cash cost of $1,447 per ounce. As development issues fade away, cash costs and grades are expected to improve significantly. 

Gold mineralization within the currently accessible stopes include 8 g/t Au in stope B2, 3.0 g/t Au in stope B3, 18.1 g/t Au in stope C, and 13.9 g/t Au in stope at Upper C. The mineralization within these stopes runs horizontally over widths of approximately 60 centimetres or 23.6 inches, which requires the deployment of a long-hole stoping method that extracts a width of approximately 60 – 70 centimetres or 27.6 – 31.5 inches over each stope, resulting in low dilution of mineralization.

The company had earlier forecast that head grades should settle at 0.14 oz/t or 4.5 g/t Au by the end of 2012, and currently predicts cash operating costs of $524 per ounce for a grade of 0.12 oz/t or 3.86 g/t Au, which indicates that cash operating costs should decline considerably over the coming quarters. 

Management is now forecasting the recovery of 16,500 ounces in the third quarter and 33,500 ounces in the fourth quarter, for a total of 60,000 of gold equivalent ounces for calendar 2011. The first quarter of calendar 2012 is expected to produce 52,000 of gold equivalent ounces.

Great Basin Gold also has two gold hedging programs in place as part of its financing arrangements, with the first program requiring the delivery of 1,250 ounces per month over the course of calendar 2011. This will be followed by the delivery of 90,000 ounces in 24 equal monthly installments of 3,750 gold ounces starting in January of 2012.  The program includes put options priced at US$850 and call options priced at US$1,705 per gold ounce.

The second hedging program will require the delivery of 117,500 gold ounces over a period of four years, commencing in January 2012. The company will be required to deliver 875 gold ounces per month, over a 12 month period. This will be followed by 3,000 gold ounces per month, over a 24 month period. The remaining 35,000 gold ounces will be delivered in 12 equal monthly deliveries of 2,916 gold ounces, starting January 30, 2015. The program includes put options priced at US$1,050 and call options priced at US$1,930 per gold ounce.

Both hedging programs have been structured in a way that allows the company the option of paying off the debt in full or part, at anytime and without penalty.

As Great Basin Gold has operating mines in both the United States and South Africa, the value of the US$, C$ and South African Rand will impact the company’s cash flow. The company carries working capital of $38 million and has a stand-by facility of $40 million, which is more than sufficient to meet the completion of development needs at Burnstone and Hollister. Total outstanding liabilities are $326.1 million, with $57.5 million of that amount due within the next 12 months.

The previous development issues that affected gold production at the Burnstone Mine can now be viewed as a positive, as those deferred production ounces are now being sold at much higher gold prices. The Company has also appointed Dana Roets as Chief Operating Officer. Roets was instrumental in developing and applying the Long Hole Stoping method that is being successfully applied at Burnstone that will underwrite the future profitability of the mine.

According to TD Ameritrade and Yahoo Finance, the average one year analyst price target for Great Basin Gold is $4.55 – triple the current share price…