2023-10-19 07:42:30 ET
Summary
- Wesdome Gold Mines' Q3 results came in softer than I expected, and it will need a strong Q4 report to meet its FY2023 guidance midpoint.
- On a positive note, ramp development at Kiena Mine is ahead of schedule, which will provide a significant lift to grades starting in Q2-2024 at this ultra high-grade asset.
- In this update we'll dig into the Q3 results, how each asset is doing relative to FY2023 guidance & recent developments that could allow for much higher company-wide production long-term.
The Q3 Earnings Season for the Gold Miners Index ( GDX ) starts next week and one of the first companies to report its preliminary results is Wesdome Mines (WDOFF). Unfortunately, the company's Q3 results came in a little softer than I expected and it's now going to need a near-record Q4 report to meet the midpoint of its FY2023 guidance range after coming into the quarter looks like delivering into the upper end would be an easy feat. On a positive note, ramp development at Kiena continues to track ahead of schedule, with first stope ore expected to be extracted by the end of Q1 2024, providing a much-awaited lift to grades at this high-grade asset. Let's inspect recent developments below:
Eagle River Operations - Company Website
All figures are in United States Dollars unless otherwise noted.
Q3 Production Results
Wesdome Mines released its preliminary Q3 results last week, reporting quarterly production of ~27,800 ounces of gold, a 21% increase from the year-ago period. However, while the headline result seems impressive, production was down over 10% sequentially and the company was lapping very easy year-over-year comps from the prior-year period, with Q3 2022 being a kitchen sink quarter. This was related to lower-than-planned grades at the Falcon Zone and 15 and 24 days of downtime, respectively, at Eagle River and Kiena. Fortunately, Wesdome should still be able to hit its guidance mid-point, but it's going to need a ~32,900-ounce quarter to do so. Hence, while I previously saw the very low risk of a miss on the guidance midpoint as of Q2 (49.4% of guidance), tracking at ~72.6% of the guidance suggests minor uncertainty for hitting the mid-point.
Wesdome - Quarterly Gold Production - Company Filings, Author's Chart
Digging into Wesdome's production results in a little closer, its Kiena Mine saw improved production of ~7,400 ounces of gold on the back of higher throughput which was offset by lower grades (4.9 grams per tonne of gold vs. 10.2 grams per tonne of gold). That said, while production is tracking at just ~66.9% of the mid-point, Kiena Deep ramp development to the 129 Level remains ahead of the company's internal schedule (~1,700 ounces per vertical meter vs. ~1,000 ounces per meter in current mining areas) and grades are also coming in better than planned year-to-date, with head grades of ~5.0 grams per tonne of gold ahead of guided grades of 3.7 to 4.7 grams per tonne gold.
That said, Kiena is going to need higher throughput and grades to meet its 35,000-ounce guidance midpoint, with ~11,600 ounces needed in Q4, which would require ~55,000 tonnes at 6.7 grams per tonne of gold just to hit the mid-point (or higher grades if throughput comes in lower). So, while there's no question that Wesdome will mine much higher grades starting in Q2 2024 (positively impacting its production levels at Kiena), it's not clear whether the asset will meet its FY2023 guidance midpoint.
Wesdome - Quarterly Gold Production by Mine - Author's Chart
Moving over to the company's Eagle River Mine, production came in at ~20,400 ounces, a 17% increase from the year-ago period. However, as noted, the company was up against very easy comparisons relative to Q3 2022 with negative grade reconciliation in the prior-year period at the Falcon Zone and planned downtime for mill thickener refurbishment work. Digging into the results a little closer, Eagle River processed ~55,000 tonnes at 11.9 grams per tonne of gold, an 11% improvement from the year-ago period. And while Kiena is tracking behind its guidance mid-point, Eagle River has picked up slack from no contribution from Mishi, with ~63,400 ounces produced year-to-date, sitting at ~75% of its annual guidance midpoint.
Recent Developments
As for recent developments, there has been little to report on, with just one release since the Q2 results announced in July. However, the results were quite encouraging, with Wesdome reporting more solid holes from the Presqu'ile Zone that lies just 2 kilometers west of its main mining operations, and with this potentially being a future source of mill feed to top up the hungry Kiena Mill (permitted for 2,000 tonnes per day). As highlighted in the release, the company intersected 2.9 meters at 32.5 grams per tonne of gold, 4.0 meters at 14.0 grams per tonne of gold, and 4.3 meters of 9.3 grams per tonne of gold, and the average grade and width from the PR2 and PR2-A zones at Presqu'ile was ~3.4 meters at ~8.8 grams per tonne of gold.
Looking at the above resources, we can see that the average intercept was slightly better than the average grade of ~7.7 grams per tonne of gold across indicated and inferred resources at Presqu'ile, with a total resource of ~340,000 tonnes or ~85,000 ounces of gold. This is certainly encouraging, as is the fact that Wesdome has its permit in hand (initially planned to begin in Q4 2023) to drive an exploration ramp at Presqu'ile which will not only provide a secondary access point to convey material but will also reduce ventilation costs for the mine. In addition, this will allow the company to test the down-plunge extent off Presqu'ile Zone to east towards the PR2 and PR2-A zones, and the ability to tie in this exploration ramp to its existing ramp network might mean other mining opportunities down the road, such as going after high-grade ounces on Level 33 east of the Kiena shaft at Dubuisson (~154,000 ounces at 6.6 grams per tonne of gold).
Overall, the fact that the current program has confirmed the continuity of mineralization at Presqu'ile is very positive, and not only does this potentially add new catalysts (investors can look forward to results from potential down-plunge extensions at this zone besides Kiena Deep drilling), but it also suggests that Kiena could be capable of much more than the ~100,000-ounce production profile envisioned. And while it's early to estimate potential mining rates and grades, an extra 700 tonnes per day to the mill at 6.5 grams per tonne of gold from Presqu'ile could translate to another 50,000 ounces of gold per annum, which could make Wesdome a ~220,000 ounce producer in 2027 between Eagle River, Kiena Deep, and Presqu'ile.
Valuation
Based on ~152 million fully diluted shares and a share price of US$5.80, Wesdome trades at a market cap of ~$880 million and an enterprise value of ~$900 million. This leaves it as one of the higher capitalization junior producers in the market today and also one of the more expensive names from a P/NAV standpoint, trading at ~0.87x P/NAV vs. some junior producers with similar production profiles elsewhere in Canada at 0.60x or lower. That said, and as I've highlighted in past updates, Wesdome deserves a premium, owning two of the highest-grade gold mines globally and operating in solely Tier-1 jurisdictions. Hence, although it may look expensive at first glance relative to other names like Karora ( OTCQX:KRRGF ), New Gold ( NGD ) and Orla Mining ( ORLA ), some of this premium is justified.
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.
Wesdome Mines Corporate G&A - Company Filings,
Using what I believe to be fair multiples (premium to peer group) of 1.10x P/NAV/P/CF and a 65%/35% weighting (P/NAV/FY2024 OCF estimates, respectively), I see a fair value for the stock of US$7.40 on a fully diluted basis. This points to a 28% upside from current levels, which leaves Wesdome undervalued, especially if it can continue to execute its plans under new CEO, Anthea Bath. However, I am looking for a minimum 35% discount to fair value for small-cap producers to ensure a margin of safety when starting new positions. If we apply this discount to its estimated, Wesdome's ideal buy zone comes in at US$4.85 or lower. So, while I saw the stock as a Buy in January below US$4.60 and started a position in the stock given that it was trading at a steep discount to fair value, I don't see a low-risk buy zone just yet.
Wesdome - Historical Cash Flow Multiple - FASTGraphs.com
Obviously, I could be wrong and my buy target may be too ambitious, but I prefer to buy when miners are being given away and hated, not when they're only moderately out of favor and trading at only a 30% discount to fair value. This is because they are highly cyclical and depleting businesses that encounter the odd setback (even for the best teams), meaning that there's simply no need to invest unless the odds are stacked heavily in one's favor. To summarize, while I see Wesdome as one of the better-run names and a top-10 junior producer, I continue to see more attractive bets elsewhere. One name that stands out currently trading at a massive discount to fair value is Marathon Gold ( OTCQX:MGDPF ), which trades at less than 0.30x NPV (8%) just 13 months away from its first gold pour.
Summary
Wesdome Mines is one of the more unique stories in the market today, with it being the proud owner of two high-grade mines in safe jurisdictions when jurisdiction has never been more important (Kumtor nationalization, Russia conflict that led to dumping of gold assets, security concerns in West Africa, and Mexican mining law reforms). However, the story is even more special given that its mills both have excess capacity, suggesting that Wesdome could potentially double its production from FY2022 levels (~120,000 ounces) by optimizing these assets vs. having to do M&A like other companies. That said, some of this already looks priced into the stock at a ~$900 million enterprise value, and while the stock is undervalued, it's not what I would consider near fire-sale prices. So, I remain neutral short term and see the more attractive buy zone being at US$4.85 or lower.
For further details see:
Wesdome Gold Mines: A Strong Q4 Needed To Meet Guidance Midpoint