2023-11-19 20:30:06 ET
Summary
- Wesdome Gold Mines reported higher production year-over-year, but this was largely because of being up against comps after a challenging 2022.
- However, it will need a strong Q4 to meet its guide midpoint (which it expects) & although WDO is down sharply, it still trades at a premium to its peers.
- In this update, we'll dig into the Q3 results, the 2024 outlook once the company is mining higher grades at Kiena, and whether the stock has entered a low-risk buy.
Just over a month ago, I wrote on Wesdome Gold Mines ( WDOFF ) noting that it would need a strong Q4 to meet guidance and that Marathon Gold ( MGDPF ) was the far more attractive bet at US$0.38, trading at just ~0.30x NPV (8%) vs. Wesdome at ~0.90x NPV (5%). Since then, Marathon has outperformed Wesdome by over 50% following a takeover offer by Calibre Mining ( CXBMF ). This underperformance is not surprising given that Wesdome reported its weakest quarter of the year (27,800 ounces produced at all-in sustaining costs of $2,021/oz) and was much less undervalued than peers heading into its Q3 report. In this update we'll dig into the Q3 results, the 2024 outlook once the company is mining higher grades at Kiena, and whether the stock has entered a low-risk buy zone.
Kiena Operations - Company Website
All figures are in United States Dollars unless otherwise noted.
Q3 Production & Sales
Wesdome Gold Mines ("Wesdome") released its Q3 results earlier this month, reporting quarterly production of ~27,800 ounces, a 21% increase from the year-ago period. The sharp increase in production was to be expected because of easy year-over-year comparisons following the challenges last year (grade underperformance at Falcon, downtime at Kiena to complete planned hoist refurbishment), with the company lapping production of just ~22,900 ounces in Q3 2022. That said, the company had a minor headwind with no contribution from Mishi this year and it was expected to be a softer quarter due to planned downtime in the period at Eagle River. Plus, although Kiena continues to make strong progress with the development of the ramp to the 129 level ahead of schedule (access achieved as of November), we haven't seen the fruits of this labor yet from a grade standpoint with head grades of just 4.9 grams per tonne of gold in Q3 because of reliance on lower-grade ore from the S50 and Martin zones while it prepares to mine high-grade stope ore from Kiena Deep next year.
Wesdome - Quarterly Production by Mine - Company Filings, Author's Chart
Digging into the results a little closer, we can see that both mines had a better quarter overall from a year-over-year standpoint, with Eagle River producing ~20,400 ounces because of higher throughput and grades, and Kiena's higher throughput (~47,400 ounces) offsetting lower grades processed in the period. However, the company will need a strong Q4 to meet its guidance mid-point of 120,000 ounces this year and AISC is currently tracking slightly above my estimates, suggesting it may deliver slightly above its cost guidance midpoint as well. That said, better grades than expected could certainly swing production easily in the quarter, but I think a more conservative estimate for 2023 is ~119,000 ounces at $1,720/oz vs. the FY2023 guidance midpoint of 120,000 ounces at $1,710/oz.
As it stands and with one quarter to go, Wesdome has produced ~87,100 ounces of gold at $1,704/oz.
As for the company's sales and financial results, gold sold was slightly below production and benefited from a higher average realized gold price year-over-year ($1,923/oz vs. $1,720/oz), translating to revenue of C$69.7 million in Q3 (+13% year-over-year). Meanwhile, operating cash flow improved to C$45.1 million (Q3 2022: C$12.9 million) and free cash flow flipped back to positive at C$10.7 million, its first quarter coming in positive in two years. And while the company drew C$10 million on its revolver after quarter-end, the improvement in its results has allowed it to halt sales under its ATM, which contributed to share dilution earlier in the year at unfavorable prices (~4.4 million shares at C$7.25). Importantly, Wesdome has sufficient liquidity to fund elevated capex (FY2024 expected to be similar to FY2023) with over $100 million in liquidity as of quarter-end (cash and ~$80 million available on RCF).
Wesdome - Gold Sales, Revenue, Operating Cash Flow - Company Filings, Author's Chart
Costs & Margins
Although production results were roughly in line with my estimates, the headline results from a cost standpoint might have spooked some investors. This is because all-in sustaining costs [AISC] soared to $1,839/oz at Eagle River and $2,504/oz at Kiena, translating to consolidated costs of $2,021/oz in the period and AISC margins of [-] $98/oz despite a higher realized gold price. However, it's important to note that the spike in costs was largely related to elevated sustaining capital spend in the period and fewer ounces sold vs. produced. In fact, sustaining mine capital, sustaining exploration/development, and tailings management-related costs came in at C$20.1 million in the period vs. C$11.1 million. Plus, the company did note that it is working on asset optimization work at the Eagle River Mine and looking at alternative mining and material handling methods and cut-off grade levels, suggesting there may be room for cost-savings in the future.
Wesdome Gold Mines - Quarterly AISC - Company Filings, Author's Chart
Obviously, the above chart doesn't inspire much confidence at first glance and it's likely we'll see another year of elevated sustaining capital due to continued investments in its assets. Still, this should be more than offset by higher sales, with Wesdome likely to produce at least 160,000 ounces next year with it noting that it will be mining higher-grade A zone stopes in Q1 2024 (with the bulk of mill feed set to be higher-grade material by the end of Q2 2024). So, although we could see another two mediocre quarters at Kiena (Q4/Q1), I would expect much better costs and margins starting in Q2 2024, especially if the gold price can cooperate. In addition, the company calling out positive reconciliation in the newly commissioned A Zone and preliminary results "confirming the thickness, continuity, and grade of the A Zone at depth" is certainly encouraging.
So, what might 2024 look like?
Based on the steady hockey-stick-like improvement in grades at Kiena post-2023 and estimates of $676/oz over the life of mine, some investors might be expecting sub $950/oz all-in sustaining costs for Wesdome next year. However, it's important to note that the 2021 TR and this PEA were based on an accuracy of within 25% and were based on Q4 2020 pricing. In addition, there was no inflation or escalation in the economic model, suggesting that the estimated operating costs of ~$140.00/tonne are likely far too ambitious. Plus, sustaining capital is likely to be much higher than envisioned given the inflationary pressures we've seen, putting further pressure on costs. So, even with the benefit of positive grade reconciliation, the potential to flex throughput, and the potential for more ounces per vertical meter, I think more reasonable cost assumptions over the life of mine are $925/oz or higher.
Given the impact of inflationary pressures and based on another year of elevated sustaining capital and with only a partial year of high-grade stoping ore from Kiena, I would be shocked to see AISC come in below US$1,400/oz on a company-wide basis in 2024 which would still place Wesdome's AISC above the industry average. Plus, while free cash flow will improve materially year-over-year, Wesdome will still trade at an expensive EV/FCF multiple vs. peers assuming ~US$45 million in free cash flow in FY2024. And while these figures will improve materially in 2025 with higher grades, it may take until Q4-24 for sentiment to turn meaningfully in the stock and help with a re-rating. Let's look at the valuation today and see whether the stock is priced as a turnaround story or if it continues to trade at a premium to its peer group.
Valuation
Based on ~152 million fully diluted shares and a share price of US$5.45, Wesdome trades at a market cap of ~$830 million and an enterprise value of ~$840 million. This continues to leave Wesdome as one of the highest capitalization junior producers on current and FY2025 production estimates (EV/gold production), with the stock trading at ~$7,000/oz per ounce of production based on FY2023 estimates (~119,000 ounces) and ~$4,800/oz based vs. its current enterprise value using FY2025 estimates. These figures compare unfavorably to other Tier-1 jurisdiction producers at less than $2,500/oz, which will also see production growth in the period. Meanwhile, the stock may trade at a discount to its historical multiples on a P/NAV basis vs. an estimated net asset value of ~$850 million, it trades at nearly double that of some of its peers at ~1.0x P/NAV (excluding exploration upside) or ~0.83x P/NAV (including exploration upside).
Gold Reserve/Resource Grade Mines Globally - Company Filings, Author's Chart & Estimates
Wesdome's estimated net asset value of ~$1.02 billion includes exploration upside at both of its assets, with it trading at well over 1.10x P/NAV excluding value assigned to exploration upside at Kiena and Eagle River.
As the chart above highlights, Wesdome is in the unique position of owning two of the highest-grade gold mines globally, and a premium to its peer group is certainly justified given that both mines are in Tier-1 jurisdictions. Still, it's hard to argue that Wesdome offers anywhere near the relative value that it did when I bought the stock below US$4.60 in January when it had diverged from the sector vs. currently when it's outperformed over the past nine months. So, with larger producers with more diversified production profiles trading at similar P/NAV multiples and lower FY2024 and FY2025 cash flow multiples, Wesdome's relative value remains mediocre at best. Plus, when compared to my estimated fair value of US$7.40, I still don't see enough margin of safety here with the ideal buy zone coming in at US$4.85 or lower (35% discount to fair value estimate).
Wesdome Gold Mines Q1-22 Update - Seeking Alpha Premium/PRO
Some investors might argue that Wesdome is massively undervalued here relative to where it has traded in the past, and if one ignores the significant multiple compression we've seen sector-wide, maybe this is the case. However, I would argue that Wesdome never belonged above US$10.00 in the first place (let alone US$12.00), meaning that the magnitude of its correction from its highs is less relevant when trying to determine if the stock is undervalued. Plus, there are some producers sector-wide with larger production profiles trading at less than 4.5x FY2025 free cash flow estimates vs. Wesdome at ~10.5x EV/FCF (FY2025 estimates: $80 million), leaving it sitting at double the multiple of other opportunities elsewhere. Hence, although I do see upside for Wesdome from current levels, I continue to see far more attractive bets elsewhere in the sector.
Summary
Wesdome Gold Mines' Q3 may have been softer, but this was largely expected (maintenance and elevated capex spending, and this drove higher AISC in the quarter. However, the most important metric to watch this year and next was/is development progress at Kiena, early reads on progress mining in the schist (less favorable rock quality), and grades. And when it comes to development progress and grades, the company is ahead of its schedule, having reached the 129 level in October. Plus, it continues to see positive grade reconciliation in the A2 Zone. That said, the time to buy the stock was when it was hated and being ridiculed in January of this year, and while Wesdome remains reasonably valued, several names are trading at their most attractive valuations in years, providing more leverage to the gold price and better reward/risk setups. Hence, while I would strongly consider jumping back in Wesdome if it dips below US$4.85 per share, I continue to focus elsewhere for the time being.
For further details see:
Wesdome Gold Mines: A Much Better Year Ahead