Gammon increases gold production by 27% in 2008

2009-01-12 09:16 ET - News Release

Mr. Rene Marion reports

GAMMON GOLD REPORTS BEST EVER QUARTER FOR GOLD & SILVER PRODUCTION PLUS BEST EVER CASH COST PERFORMANCE. GAMMON ALSO PROVIDES GUIDANCE FOR 2009 WHICH TARGETS UP TO 33% AND 55% IMPROVEMENT IN GOLD AND SILVER PRODUCTION RESPECTIVELY OVER 2008

Subject to the year-end independent external audit and annual accounts finalization, Gammon Gold Inc. has released a record operating quarter.

Unaudited consolidated highlights

Fourth quarter 2008:

• Gold production of 43,768 ounces;

• Silver production of 1,649,893 ounces;

• Gold equivalent production of 64,889 ounces (at a 79:1 gold-to-silver ratio) (73,458 adjusted gold equivalent ounces at the 56:1 gold-to-silver ratio realized in fourth quarter 2007);

• Cash costs of $439 per gold equivalent ounce (at a 79:1 gold-to-silver ratio) ($388 per adjusted gold equivalent ounce at the 56:1 gold-to-silver ratio realized in fourth quarter 2007).

2008 full year:

• Gold production of 154,428 ounces;

• Silver production of 5,778,874 ounces;

• Gold equivalent production of 251,510 (at a 59:1 gold-to-silver ratio) (266,006 adjusted gold equivalent ounces at the 52:1 gold-to-silver ratio realized in 2007);

• Cash costs of $539 per gold equivalent ounce (at a 59:1 gold-to-silver ratio) ($510 per adjusted gold equivalent ounce at the 52:1 gold-to-silver ratio realized in 2007).

Note: Results for the fourth quarter 2008 and full year 2008 cash cost per gold equivalent ounce are anticipated to decrease further from the current reported results due to the pending reversal of a portion of the adverse mark-to-market valuation adjustment previously recognized by the company in third quarter 2008, reflecting improved precious metal and foreign exchange market conditions relative to third quarter 2008. Revisions to cash costs will be provided in its management's discussion and analysis for the year ended Dec. 31, 2008.

2009 guidance:

• Gold production from 185,000 to 205,000 ounces;

• Silver production from 8.17 million to 8,945,000 ounces;

• Gold equivalent production from 290,000 to 320,000 ounces (at a 78:1 gold-to-silver ratio) (from 333,000 to 367,000 adjusted gold equivalent ounces at a 55:1 gold-to-silver ratio assumed in the company's news in Stockwatch March 31, 2008, three-year guidance);

• Cash costs from $410 to $445 per gold equivalent ounce (at a 78:1 gold-to-silver ratio) (from $360 to $390 per adjusted gold equivalent ounce at the 55:1 gold-to-silver ratio assumed in the company's news in Stockwatch March 31, 2008, three-year guidance).

Unaudited consolidated fourth quarter 2008 production and cash costs:

• Gold production of 43,768 ounces (59-per-cent improvement over fourth quarter 2007);

• Silver production of 1,649,893 ounces (45-per-cent improvement over fourth quarter 2007);

• Gold equivalent production of 64,889 ounces at a 79:1 gold-to-silver ratio (35-per-cent improvement over fourth quarter 2007);

• Adjusted gold equivalent production of 73,458 ounces (53-per-cent improvement over 2007 using the same gold-to-silver ratio of 56:1 realized in fourth quarter 2007);

• Cash costs of $439 per gold equivalent ounce at the realized 79:1 gold-to-silver ratio (35-per-cent improvement over fourth quarter 2007);

• Cash costs of $388 per adjusted gold equivalent ounce at the 56:1 gold-to-silver ratio realized in fourth quarter 2007 (43-per-cent improvement over Q4 2007).

Total cash costs for fourth quarter 2008 of $439 per gold equivalent ounce represent the company's best ever quarterly cash cost performance and was achieved despite the unfavourable gold-to-silver ratio of 79:1 during the quarter.

The success achieved to date in improving productivity and operational efficiencies is also reflected in the strength of the company's positive operating cash flow performance which has increased by $6.3-million (233 per cent) over the same period in 2007. This positive momentum is expected to carry forward into 2009 as the company continues to benefit from the continuing processing expansion at Ocampo and its targeted operational effectiveness initiatives.

Unaudited consolidated 2008 full year performance

Two thousand eight was an impressive year for the Ocampo mine where the productivity challenges experienced during the 2007 commissioning have been largely addressed. Concurrent to the turnaround plan, the company took advantage of 2008's improved gold and silver prices to launch an aggressive expansionary program to further leverage the productivity gains realized to date.

Key to the company's further expansion program is the multiple-phased mill processing facility expansion at Ocampo that will more than double the 2007 realized mill processing rate. This additional capacity has only just begun to positively contribute to the improvements achieved in 2008 and will favourably augment Gammon's production profile in 2009 and beyond.

The success of the turnaround strategy is evident in the full-year results achieved in 2008 as compared with 2007:

• Gold production of 154,428 ounces (27-per-cent improvement over 2007);

• Silver production of 5,778,874 ounces (15-per-cent improvement over 2007);

• Gold equivalent production of 251,510 ounces at the realized 59:1 gold-to-silver ratio (15-per-cent improvement over 2007);

• Adjusted gold equivalent production of 266,006 ounces at the gold-to-silver ratio of 52:1 realized in 2007 (22-per-cent improvement over 2007);

• Cash costs of $539 per gold equivalent ounce at the realized 59:1 gold-to-silver ratio (20-per-cent improvement over 2007);

• Cash costs of $510 per adjusted gold equivalent ounce at the 52:1 gold-to-silver ratio realized in 2007 (24-per-cent improvement over 2007).

The chart depicts the 2008 gold equivalent production and cash costs performance (at the realized gold-to-silver ratio of 59:1) as compared with the company's three-year guidance provided on March 31, 2008 (incorporating an assumed gold-to-silver equivalency ratio of 55:1). This comparison demonstrates that the company's production and cash cost results were in line with the full year guidance ranges if not for the adverse change in the gold equivalent ratio in the latter part of the year. As previously mentioned, it should be noted that the total-cash-cost-per-ounce charts do not reflect the pending reduction in total cash costs from the reversal of a portion of the adverse mark-to-market valuation adjustment previously recognized by the company in third quarter 2008.

Relative to 2007, operating cash flow improved by $89-million (262 per cent) to $55-million with the majority of this improvement being attributable to the positive operational performance results realized from the combined turnaround and expansionary programs.

"Despite only commissioning the phase I mill expansion at the Ocampo mine in mid-November, we are particularly encouraged by the positive operational performance in the fourth quarter, which has resulted in the company reporting some of its best-ever performance results. Cost reductions are being achieved at our Ocampo mine as we realize the benefits of many initiatives, principally the phase I mill expansion, optimized cyanide consumption levels and a reduction in the open pit stripping ratio. We anticipate seeing further improvements in operating costs at Ocampo once we complete the phase II mill expansion and fully connect to the electrical grid power network to eliminate the need for costly diesel fuelled power generation," stated Rene Marion, chief executive officer of Gammon Gold. "Two thousand eight was the first full year where the new management team was in place, collectively meeting numerous milestones throughout the year. Although Ocampo delivered excellent results in 2008, the full impact of the benefits has not yet been fully reflected, thereby positioning 2009 as a great year for further, realizable growth. While many companies have been forced to delay expansionary projects due to liquidity constraints, the vast majority of the Gammon's expansionary capital program has been completed and financed internally which positions the company well in terms of its financial footing."

Operations

Unaudited fourth quarter 2008 Ocampo production and cash costs:

• Gold production of 33,877 ounces (73-per-cent improvement over fourth quarter 2007);

• Silver production of 1,176,427 ounces (58-per-cent improvement over fourth quarter 2007);

• Gold equivalent production of 48,922 ounces at the realized gold-to-silver ratio of 78:1 (48-per-cent improvement over fourth quarter 2007);

• Adjusted gold equivalent production of 55,051 ounces at the 56:1 gold-to-silver ratio realized in fourth quarter 2007 (66-per-cent improvement over fourth quarter 2007);

• Cash costs of $395 per gold equivalent ounce at the realized 78:1 gold-to-silver ratio (37-per-cent improvement over fourth quarter 2007);

• Cash costs of $351 per adjusted gold equivalent ounce at the 56:1 gold-to-silver ratio realized in fourth quarter 2007 (56-per-cent improvement over fourth quarter 2007).

Unaudited fourth quarter 2008 El Cubo production and cash costs:

• Gold production of 9,891 ounces (23-per-cent improvement over fourth quarter 2007);

• Silver production of 473,466 ounces (20-per-cent improvement over fourth quarter 2007);

• Gold equivalent production of 15,967 ounces at the realized 78:1 gold-to-silver ratio (6-per-cent improvement over fourth quarter 2007);

• Adjusted gold equivalent production of 18,412 ounces at the 56:1 gold-to-silver ratio realized in fourth quarter 2007 (22-per-cent improvement over fourth quarter 2007);

• Cash costs of $572 per gold equivalent ounce at the realized 78:1 gold-to-silver ratio (29-per-cent improvement over fourth quarter 2007);

• Cash costs of $495 per adjusted gold equivalent ounce at the 56:1 gold-to-silver ratio realized in fourth quarter 2007 (38-per-cent improvement over fourth quarter 2007).

                  Ocampo               El Cubo             Consolidated
            Q4 2008    Q4 2007    Q4 2008    Q4 2007    Q4 2008    Q4 2007
Gold
ounces
produced     33,877     19,553      9,891      8,018     43,768     27,571
Silver
ounces
produced  1,176,427    746,060    473,466    394,737  1,649,893  1,140,797
Gold
equivalent
ounces
produced     48,922     33,070     15,967     15,114     64,889     48,184
Gold
ounces sold  31,671     20,647      9,333      8,018     41,004     28,665
Silver 
ounces
sold      1,083,571    788,992    450,747    394,737  1,534,318  1,183,729
Gold
equivalent
ounces
sold         45,546     34,855     15,116     15,114     60,662     49,969
Total cash
costs per
gold
equivalent
ounce          $395       $624       $572       $803       $439       $676
Total cash
costs per
gold ounce     $216       $505       $466       $805       $273       $589

                   Ocampo               El Cubo              Consolidated
               2008       2007       2008       2007       2008       2007
Gold
ounces
produced    115,656     87,647     38,767     33,740    154,428    121,387
Silver
ounces
produced  3,995,725  3,453,388  1,783,145  1,582,316  5,778,874  5,035,704
Gold
equivalent
ounces
produced    182,400    154,423     69,142     64,311    251,510    218,734
Gold
ounces
sold        112,682     87,357     37,964     33,740    150,646    121,097
Silver
ounces
sold      3,867,178  3,445,667  1,739,361  1,582,316  5,606,539  5,027,983
Gold
equivalent
ounces
sold        177,404    153,961     67,624     64,311    245,028    218,272
Total
cash costs
per gold
equivalent
ounce          $501       $702       $639       $593       $539       $670
Total cash
costs per
gold ounce     $285       $703       $465       $511       $331       $614

"During fourth quarter 2008, the Ocampo team has achieved record production levels and cash cost performance along with many other key performance indicators. With phase I of the mill expansion now fully commissioned, processing rates remain in line with the new nameplate capacity of 2,400 to 2,600 tonnes per operating day. Phase II of the mill expansion is under way and is expected to more than double average 2007 mill throughput rate by mid-2009. The capital requirements related to the mill expansion program were minimal yet the impact of the increased capacity is substantial with a very short-term payback," stated Russell Tremayne, chief operating officer of Gammon Gold. "We have been very pro-active in adapting our operations to the current market environment and the flexibility of our mine plan has allowed us to quickly and decisively respond to market influences."

2009 outlook

Based on the increase in processing capacity at Ocampo and overall productivity improvements throughout the company's operations, the company has provided updated guidance for 2009.

2009 consolidated guidance:

• Gold production of 185,000 to 205,000 ounces (33-per-cent improvement over 2008, 69 per cent over 2007);

• Silver production of 8.17 million to 8,945,000 ounces (55-per-cent improvement over 2008, 78 per cent over 2007);

• Gold equivalent production of 290,000 to 320,000 ounces at an assumed gold-to-silver equivalency ratio of 78:1 (45 per cent of this production anticipated in first half 2009 and 55 per cent in second half 2009);

• Adjusted gold equivalent production of 333,000 to 367,000 ounces at a 55:1 gold-to-silver ratio as assumed in the company's March 31, 2008, three-year guidance;

• Cash costs per gold equivalent ounce of $410 to $445 at the assumed 78:1 gold-to-silver equivalency ratio;

• Cash costs per adjusted gold equivalent ounce of $360 to $390 at a 55:1 gold-to-silver ratio as assumed in the company's March 31, 2008, three-year guidance.

In responding to the current period of economic and commodity price volatility, management has completed a detailed fiscal review that focused on eliminating and/or deferring all non-business-critical and discretionary investment expenditures. As part of this review, management felt it was prudent to temporarily defer work at the Guadalupe y Calvo advanced exploration development project to maximize company-wide cash flow generation. As part of the scoping study for this project that was scheduled for completion in first quarter 2009, the company completed 126 holes for 38,339 metres in 2008, bringing the project total drilling to 183 holes for 52,075 metres. Further drilling and engineering work required to complete the scoping study have been temporarily postponed. The company will continue to re-evaluate this decision on a periodic basis.

"We anticipate further improved performance results in 2009, underpinned by the strategies developed and largely executed on in 2008," stated Mr. Marion. "What is particularly significant is that assuming a 55:1 gold-to-silver ratio as per the three-year guidance released on March 31, 2008, our 2009 guidance for gold equivalent production is anticipated to be between 333,000 and 367,000 gold equivalent ounces at a cash cost of between $360 and $390 per gold equivalent ounce. This is more in line with the March 31, 2008, guidance provided for 2010 and is up to a 68-per-cent production improvement over 2007 with a cash cost reduction of up to 45 per cent over the same two-year period. Our 2009 business plan is based on conservative metal price assumptions and we continue to believe that we are well positioned to fully fund our business model internally."

Hg