2023-08-02 00:53:00 ET
Summary
- Wesdome Mines reported solid Q2 results with ~31,000 ounces of gold produced and ~60,000 year-to-date, tracking well against its FY2023 guidance.
- While Kiena's production came in lower year-over-year with a significant drop-off in grades, it's important to remember this is a transition year with the feed coming from lower-grade sources.
- With the company ahead on ramp development despite weather headwinds and set to develop into more bountiful zones later this year, 2024 should be much different.
- With Wesdome being a reasonably priced and high-grade turnaround story with a solid exploration kicker in top-ranked jurisdictions, I would view any pullbacks below US$4.85 as buying opportunities.
Just over six weeks ago, I wrote on Wesdome Mines ( OTCQX:WDOFF ), noting that while the stock had a solid Q1, there wasn't enough margin of safety in place and that the ideal buy zone would come in at US$4.85 or lower. Since then, the stock has retreated below US$4.85 before finding firm support, and delivered another solid quarter in Q2 with ~ 31,000 ounces produced - tracking well against its FY2023 guidance midpoint of 120,000 ounces even with some of its peers in Ontario and Quebec reporting headwinds (significant weather related power outages, cancelled shifts from wildfires). The other positive news is that the unexpected forest fires have led to minimal disruption to development, with Kiena still appearing to be on track to reach the 129 Level by November, with production from the more productive 129 Level next year. Let's look at the preliminary Q2 results below:
Q2 Production & Sales
Wesdome Mines released its Q2 results last month, reporting quarterly production of ~31,000 ounces of gold, an improvement from the ~27,200 ounces of gold produced in Q2 2022 despite a minor headwind from Mishi where the company saw no gold production (Q2 2022: ~600 ounces). The increase in production was driven by a better quarter from the company's flagship Eagle River Mine in Ontario (Canada), which produced ~22,800 ounces of gold, benefiting from higher grades and throughput than the year-ago period. This was partially because of being up against easy comparisons with the hoist rope manufacturing defect and leach tank failure in the year-ago period (since resolved), resulting in two weeks of reduced productivity, as ore had to be trucked to surface. However, this was still a solid quarter from Eagle River, with record productivity making up for slightly lower grades related to mine sequencing.
Wesdome Mines - Quarterly Gold Production (Company Filings, Author's Chart)
Moving over to the company's newly restarted Kiena Mine in Quebec (Canada), production was lower year-over-year at ~8,100 ounces of gold, a nearly 10% decline because of much lower feed grades (5.0 grams per tonne of gold vs. 10.6 grams per tonne of gold), mostly offset by increased mill throughput. This might appear alarming at first glance, given the trend we're seeing below in lower grades and the fact that production is coming in at a fraction of expectations in the 2021 Technical Report. However, it's important to note that supply chain headwinds out of Wesdome's control placed the company a year behind schedule on ramp development.
The result is that Wesdome has had to rely on feed from lower grades areas of the mine (S50: 4.7 gram per tonne average head grade), Martin (4.0 gram per tonne average head grade), and the VC Zone. So, while these grades are not even 50% of what investors were expecting in 2023 (~10.8 grams per tonne of gold), this is not a case of poor grade reconciliation or excess overbreak like Pure Gold Mining experienced (which would sound off alarm bells). Instead, it's a case of having to blend any available ore from Kiena Deep with multiple lower grade feed sources in a transition year while the company plays catch-up on mine development.
Kiena Mine - Quarterly Operating Metrics, Average Grades Per PFS (Company Filings, Author's Chart, 2021 TR)
The good news is that Wesdome should be at the more bountiful 129 Level (~1,700+ ounces per vertical meter) by November, which is slightly ahead of plan, and once a station is developed, it can mine these areas which will provide a significant life to overall production. Simultaneously, we should see a material decline in sustaining capital at Kiena (per the 2021 TR), and the combination of significantly higher production (65,000+ ounces in 2024) and lower sustaining capital should contribute towards much more respectable costs at the mine vs. the US$2,254/oz all-in sustaining costs reported in Q1 2023 at Kiena. And with this mine producing more ounces and no longer being a significant drag on margins, 2024 is set up to be a much better year with Wesdome transitioning from a ~120,000 ounce producer at ~US$1,700/oz AISC to a 160,000+ ounce producer at sub US$1,150/oz AISC.
Kiena - Current Development, Ounces Per Vertical Meter & Sustaining Capital Expenditures (Company Presentation, 2021 TR)
To summarize, while the Q2 results were only a little better than Q1 and while (~31,000 ounces vs. ~28,400 ounces), and costs will remain high in Q2, this is a transition year for the company and does not reflect the true potential of these two high-grade mines. So, investors new to the story should look past the Q2 results and even the H2 2023 results and instead be patient for 2024, which should finally highlight the real potential of Kiena, which is a ~100,000 ounce producer post-2024 at industry-leading costs and the potential for further growth given the excess capacity at the mill and the high-grade opportunity next door at Presqu'ile, which is being discussed more regularly as a potential top-up opportunity to boost Kiena's production.
Recent Developments
As for recent developments, Wesdome reported more solid exploration results from Eagle River in planned extension and definition drilling of the 300 East Zone, with the highlight hits being:
- 6.0 meters (true width) at 77.6 grams per tonne of gold
- 1.7 meters (true width) at 42.6 grams per tonne of gold
- 1.6 meters (true width) at 150.7 grams per tonne of gold
The major takeaway is that the 300 East Zone's mineralization has been extended to the 1,600 meter level and remains open down-plunge, an upgrade from the 1,400 meter level depth previously. In addition, while widths of quartz veining were typically coming in at true widths of less than 1.5 meters, intercepts along the eastern margin of this zone have yielded thicker intercepts while continuing to impress on grades with grades well above Eagle River's average reserve grade (15.3 grams per tonne of gold) an encouraging development. The company also added:
Additionally, the drilling of the 300 East Zone confirms the continuity of the mineralization at depth, thus suggesting that many other similar zones, such as 808, 811, 818, 711 and 7 East, have this same potential to continue at depth."
Wesdome Mines Press Release - June 14th, 2023
Overall, this is exciting news, with more high-grade hits coming out of the 300 East Zone and Wesdome already having additional upside at the Falcon 7 Zone up-plunge (plus parallel zones), the 5 Zone, and the recent confirmation that high-grade shoots are present outside of the mine diorite in the surrounding volcanic rocks. Not only do these opportunities point to further resource and reserve growth at Eagle River, which is one of the top-3 highest grade mines in North America, but the grades of these new discoveries are very impressive, suggesting that Wesdome won't need to sacrifice on grades regarding moving new ounces into its future mine plans, which can be one challenge for high-grade mines, like what we're seeing at Fosterville currently with the Swan Zone depleted and difficulty making new half to three-quarter ounce per tonne gold discoveries.
Meanwhile, from a gold price standpoint, Wesdome should have a better Q2 on deck financially, benefiting from increased gold sales (~32,000 vs. ~30,000) at a higher average realized gold price. In fact, among the producers that have reported year-to-date, the average realized gold price has come in near ~$1,970/oz, which would represent a 5% improvement from the $1,888/oz reported by Wesdome in Q1 2023. This should translate to upwards of C$85 million in revenue (C$76.7 million), the best quarter for the company since Q4 2021 (C$85.5 million). And while Wesdome's operating costs are expected to remain elevated for the year on a consolidated basis until it hits higher-grade zones at Kiena, the higher gold price in Q2 and Q3 should provide some help from a margin standpoint vs. the compressed AISC margins of US$426/oz reported in Q1 2023.
Finally, from a weather standpoint, Alamos Gold ( AGI ) confirmed that mining rates returned to normal levels in July, boding well for the company's Eagle River Mine which is relatively close to Island Gold (Dubreuilville) with it sitting just west of Wawa, Ontario. This suggests the forest fires shouldn't negatively affect operations at Wesdome's Eagle River Mine in Q3, setting the company up for a strong second half. And at the company's Kiena Mine that is just east of LaRonde which saw weather related headwinds (lower air quality which led to fewer production days) in Q2 according to Agnico Eagle ( AEM ), Wesdome noted it saw limited impact from the forest fires with just 36 hours (3 shifts) of downtime and surface milling was not affected, translating to much less of an impact than some of its peers. Hence, from a weather-related standpoint regarding meeting guidance, the risks look to be low, especially given the solid start to the year with Wesdome tracking at ~49.5% of its guidance midpoint.
Eagle has been operating normally with no interruptions or restrictions as the closest fire remains more than 100 kilometres away, and winds carrying the plumes of smoke have not come within the vicinity of the mine. Both operations remain on alert with monitoring of the situation to continue. We would like to extend our utmost gratitude to the firefighters and all first responders for their excellent work in safely containing these fires."
- Wesdome Press Release, June 13, 2023
Summary
Wesdome Mines put together another solid quarter in Q2 and is tracking well against its FY2023 guidance midpoint of 120,000 ounces, which I expected it would with the possibility that management had sandbagged guidance a little to ensure it didn't disappoint investors for a second year after the miserable 2022 results ( albeit mostly out of management's control with supply chain headwinds and negative grade reconciliation ). This has certainly been the case, and 2024 is shaping up to be a much better year with the potential for 160,000+ ounces of company-wide production at sub $1,150/oz all-in sustaining costs, which are more in line with what investors expected after bringing the high-grade Kiena Mine online to supplement its solid production base at Eagle River.
That all being said, I continue to see the low-risk buy zone for Wesdome coming in at US$4.85 or lower, where it would trade at an adequate discount to estimate fair value (US$7.60), and with the stock now over 10% off its lows at US$5.30, I remain neutral short-term. This neutral stance is reinforced by there continuing to be more attractive bets elsewhere in the sector from a relative value standpoint, with some producers trading at barely 5x FY2025 free cash flow estimates vs. Wesdome at closer to 9x FY2025 free cash flow estimates. And while this is still a very reasonable valuation, I prefer to buy those names at the deepest discount to fair value, especially if putting new money to work in the small-cap precious metals arena. Hence, while I would become very interested in WDOFF below US$4.90, I see more attractive opportunities elsewhere for now.
For further details see:
Wesdome: Further Weakness Should Present A Buying Opportunity