July 19, 2011 / 11:14 AM / in 6 years

UPDATE 2-Lake Shore Gold cuts FY production view, shares plunge

* Says Q2 production will be lower than its expectations

* Sees 2011 output of 85,000-100,000 ounces vs 125,000 ounces earlier

* Lowers second half estimates for head grades

* Expects Q2 cash operating costs to be sequentially higher

* Shares fall 19 pct (Adds analysts’ comments, share movement)

By Bhaswati Mukhopadhyay

BANGALORE, July 19 (Reuters) - Lake Shore Gold Corp said second-quarter production will be lower than its estimates due to a change in mining sequence at its Timmins mine in northern Ontario, and lowered its full-year production target, sending its shares down 19 percent.

The Canadian gold miner, whose Timmins mine began commercial production in January, also indicated that second half output would be lower.

Lake Shore, which explores and develops gold properties in northern Ontario and Quebec, expects 2011 production of 85,000-100,000 ounces of gold, down from its prior estimate of 125,000 ounces, due to lower head grades planned for the rest of the year.

The stock was one of the top percentage losers on the Toronto Stock Exchange. It was trading down 47 Canadian cents at C$2.92 on Tuesday afternoon after falling to a low of C$2.76.

“There is concern about the company being able to meet its current guidance and its ability to get its mine up and running in a commercial manner,” said analyst Andrew Kaip of BMO Capital Markets.

Kaip said the market would likely expect the production to be closer to the lower end of the forecast range.

“The principal challenge for this company is a credibility challenge with respect to be able to guide realistically.”

The company, whose gold sales totaled 18,988 ounces in the second quarter, said the change in mining sequence caused the advancement of lower-grade sources earlier than anticipated.

This indicates that the company has yet to identify an appropriate mining method for its Timmins mine, even though it is in commercial production, said Kaip of BMO Capital Markets.

Analyst Marc Johnson of M Partners said the change in mining sequence indicates that production will be lower not just for this year but potentially next year as well.

For the second half of the year, Lake Shore said it has lowered its estimates for head grades as a result of less mining than planned in the UM1 zone at its Timmins mine.

The Toronto, Ontario-based company, which is scheduled to report its second-quarter results on Aug. 9, said it has deferred 130,000 tonnes of ore it had previously planned to mine from the UM1 zone in 2011 until early 2012.

Mill throughput averaged 1,790 tonnes per day in the second quarter, compared with the company’s expectations of 2,000-2,100 tonnes per day.

Lake Shore also expects cash operating costs for the second quarter to be sequentially higher due to lower grades and production levels. Cash operating costs from the Timmins mine was $586 per ounce in the first quarter of commercial operation.

Lake Shore, which has a market capitalization of C$1.28 billion, said grades were also adversely affected by milling of low-grade stockpiles from the Bell Creek mine in Ontario. (Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Roshni Menon and Sriraj Kalluvila)

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