In January, investors had two unsettling encounters with Gold Road Resources (ASX:GOR)
. First, they received a disappointing quarterly update early in the month regarding the performance of the company's 50% owned Gruyere gold mine in WA. Then, on Monday, the detailed data for the December quarter and the full financial year was released, delivering another blow.
The latter update was far from reassuring.
The initial January update revealed a decline in gold production at the Gruyere mine, causing the shares to plummet by over 9% in a single day. Investors were displeased with the explanation provided, citing delays in mining higher-grade ore areas and "Labour availability" issues, which affected the ore mining rate.
Furthermore, the update omitted crucial data on costs per ounce, a key measure of mine performance and profitability, which raised concerns among investors.
Unfortunately, the worst was yet to come. Gold Road revised its 2024 guidance downward and predicted a shocking increase in costs for the current year, following a concerning cost overrun in the three months leading up to December.
This grim news triggered a sharp drop in shares, initially exceeding 19% on Monday, before a gradual rebound reduced the decline to approximately 13% by midday.
With this decline, the year-to-date performance (January up to Monday) had dipped by more than 24%.
Gold Road jointly owns the mine with Gold Fields of South Africa, which manages the operation. It appears that something has gone seriously amiss in the mining operation and cost controls.
While Gold Road reiterated its production figures, cash on hand, and other data from January 3 without changes, the revelation of cost overruns in the final quarter of 2023 and the full year had a detrimental impact.
The crucial cost data disclosed on Monday revealed that the All In Sustaining Cost (AISC) for the December quarter had surged to $A1,973 per ounce, marking a disturbing 17% increase from the September quarter when 88,668 ounces were produced at an AISC of $A1,682 per ounce.
The annual production at Gruyere, as disclosed on January 3, reached 321,984 ounces, barely meeting the guidance of 320,000 to 350,000 ounces, and providing little confidence. However, it did surpass the 314,647 ounces produced in 2022.
The AISC for 2023 was $A1,662 per ounce (to Gold Road), just within the guidance range of $A1,540 to $A1,660 per attributable ounce. Nevertheless, this figure represented a worrisome 12% increase compared to 2022's figure of $A1,447 per ounce.
But the worst news, which fully explains the substantial sell-off on Monday, was the guidance for 2024 output from Gruyere. It has been revised downward to a range of 300,000 to 335,000 ounces (with 150,000 to 167,500 ounces attributable to Gold Road) at an AISC ranging from $A1,900 to $A2,050 per ounce.
While the output guidance is marginally better than 2022's figure of 300,000 to 340,000 ounces, the cost per ounce has surged by a significant 24%.
Gold Road explained the lower guidance and higher cost estimates for 2024, stating, "2024 will see increased material movement as per the life of mine plan, and also as a result of the operation needing to catch up on missed movement in 2023. AISC costs are modeled for the 2024 inflationary environment and contain the capital cost associated with increased waste movement and the remaining portion of the tailings dam lift which commenced late last year."
While this may be the explanation, the share price indicates that it was a shock to the market.
Gold Road did highlight some positive aspects, including its sales in the final quarter of 2023 totaling 37,037 ounces at an average price of $A3,040 per ounce, which was encouraging. The company also reported having no debt, $149 million in cash on hand, and $465 million in investments, including a 19.9% stake in De Grey, which owns the significant Hemi gold prospect in the Pilbara region.
However, these positives were insufficient to ease investors' concerns about Gruyere's transformation from a medium to low-cost mine into a potential headache in the span of a year.
A silver lining for Gold Road was its increased share of gold sales in 2023, rising by just over 5,000 ounces to 161,472 ounces, with the average gold price also seeing a 19% increase to $A2,924 per ounce. This should result in gross revenue from gold sales of around $A472 million for 2023, up from $A383 million in 2022. Nonetheless, 2024 is expected to be a challenging year for the company.