2023-05-29 06:25:07 ET
Summary
- Wesdome Gold Mines reported solid Q1 results, with production at Eagle River and Kiena mines improving and development at Kiena ahead of schedule.
- The company's costs and margins improved at Eagle River, partially offsetting a higher-cost quarter at Kiena, but consolidated all-in sustaining costs are tracking below the annual guidance midpoint.
- Wesdome is an undervalued organic growth story, but the stock would need to decline below $5.00 to offer a meaningful margin of safety to justify starting a new position.
The Q1 Earnings Season for the Gold Miners Index ( GDX ) has finally ended, and one of the most recent companies to report its results was Wesdome Gold Mines ( WDOFF ). Fortunately, while results from many of its peers were mixed, Wesdome put together a solid Q1 report relative to what was expected out of the company. This wasn't much of a surprise given that FY2023 guidance looked a little sandbagged, with it being best to err on the side of caution after such a disappointing miss in FY2022. Still, the results have placed Wesdome on track to beat its cost guidance midpoint, and development at Kiena is ahead of schedule, allowing investors worried about further delays to breathe a sigh of relief. Let's take a closer look at the Q1 results below:
All figures are in United States Dollars unless otherwise noted.
Q1 Production & Sales
Wesdome Gold Mines ("Wesdome") released its Q1 results earlier this month, reporting quarterly production of ~28,400 ounces of gold, which was certainly well below the ~40,000 ounces that some investors might have been expecting in Q1 2023 prior to the delays experienced last year. That said, and as discussed in previous updates, the poor performance in 2022 was a mix of not guiding conservatively enough and supply chain headwinds that were out of the company's control, plus negative grade reconciliation at the Falcon Zone which put a dent in its flagship mine's output. Fortunately, grade reconciliation flipped from negative to positive in Q1 in the Falcon Zone with the help of two ultra-productive stopes, and Kiena's grades came in above the top end of the annual guidance range, with solid progress on development as the company heads towards the 129 Level.
Looking at the above chart of quarterly production, Eagle River's Q1 production improved to ~20,2000 ounces (Q1 2022: ~19,300 ounces), benefiting from much higher grades of 13.5 grams per tonne of gold offset by a slight decline in throughput and a marginal tick down in recoveries. The company did note that this was a one-time benefit with grades set to normalize following a very strong Q1. Meanwhile, at the company's Kiena Mine that recently declared commercial production (December 2022), production improved to ~7,900 ounces of gold, a considerable improvement from ~5,100 ounces in the year-ago period. The increased production was related to higher throughput of ~42,300 tonnes processed offset by lower grades, with the company relying on ore from the lower grade S50 and Martin zones as work continues to access the Kiena Deep Zone.
Some investors might be concerned with the average grade of 5.7 grams per tonne of gold at Kiena, a mine that's home to ~606,000 ounces of gold reserves at an average grade of 11.4 grams per tonne of gold. However, it's important to note that grades will improve materially as mining begins in the Kiena Deep A Zone, and grades were actually better in Q1 than the annual expected range of 3.7 to 4.7 grams per tonne of gold. Plus, as discussed by the company in its Q1 results, development is ahead of plan regarding the ramp to the 129 level, with this level expected to be reached by November, positioning the mine for significantly higher production levels in 2024. The company also provided helpful color on its Q1 Conference Call regarding development progress, with ramp development now at the 123 level.
For starters, the company is seeing excellent ground conditions in the basalt with no ground stability issues, and it certainly helps that all necessary equipment and infrastructure is in place vs. last year, with the paste fill plant performing as expected and mechanized bolters on site which can help to tackle more difficult ground conditions in the schist and komatite rock types. Wesdome's Chief Operating Officer Fred Langevin (former GM at Meliadine) also stated that development in the A2 Zone has been "promising", with ground conditions encountered on Level 118, 116, and 114 being slightly better than expected. Overall, this is very encouraging and should increase investors' confidence that 2024 will be a much different year for this high-grade asset, with significantly more ounces available per vertical meter (range of 1,700-2,600 ounces per vertical meter from levels 125 to 129).
The last point worth noting is that Wesdome is planning to drive an exploration ramp from surface into the nearby Presqu'ile Zone, which is expected to start in H2 of this year once permits are in place. Not only could this improve ventilation costs and provide cost savings, but it would offer a secondary access for material and personnel and free up time for additional ore hoisting from the 930-meter production shaft with a capacity of 2,000 tonnes per day. Plus, as discussed in a previous update, Presqui'le could ultimately provide a way to take advantage of existing processing capacity at the Kiena Mill, which is capable of operating at 2,000 tonnes per day (~730,000 tonnes per annum) with the secondary crushing circuit.
As it stands, the mine plan envisions processing less than 1,000 tonnes per day from 2023 to 2027 or ~270,000 tonnes per annum, leaving considerable excess capacity at the mill. So, if the company can take advantage of this excess capacity and add a new feed source for the mill like Presqu'ile combined with continued exploration success down-plunge, we could see longer mine life and a higher production profile than envisioned in the 2021 Preliminary Economic Assessment, adding considerable value to Kiena's NPV (5%) by bringing forward ounces. To summarize, the current production results from Kiena don't do this asset any justice, and this could ultimately be a 130,000-ounce plus per annum producer at sub $1,000/oz AISC and a mini Island Gold.
Costs & Margins
Moving over to costs and margins, Eagle River reported solid cost performance in Q1 2023, with cash costs of $881/oz and all-in sustaining costs of $1,264/oz, which were both down on a year-over-year basis. The lower unit costs benefited from higher sales volume in the period but were despite higher costs to strengthen the mine and technical teams on site, inflationary pressures, and increased development meters. Combined with a higher average realized gold price of $1,888/oz (Q1 2022: $1,879/oz), all-in sustaining cost margins improved at Eagle River, a solid performance considering that many mines saw higher costs on a year-over-year basis due to higher costs for fuel and labor, as well as prices for several consumables.
As for Kiena, the cost performance was not as pleasing, but this is largely a function of the low denominator, with any mine producing less than 8,000 ounces per quarter likely to have very high costs due to the high fixed costs at mining operations. So, while Kiena's Q1 AISC of $2,254/oz was over 70% above that of the estimated industry average (~$1,320/oz), this was partially due to increased staffing levels year-over-year to support commercial production and inclusion of sustaining mining exploration and development costs. As for Wesdome's costs on a consolidated basis, all-in sustaining costs increased to $1,462/oz vs. $1,339/oz but came in below the annual guidance midpoint of $1,710/oz. And based on the strong start to the year and pullback in fuel prices, I would not be surprised to see AISC come in below $1,650/oz and beat the guidance midpoint.
Finally, looking at the financial results, Wesdome reported a slight increase in revenue to C$76.7 million, with increased ounces sold and a slightly higher average realized gold price. However, operating cash flow was down sharply year-over-year, and we saw a much larger cash outflow from a free cash flow standpoint, with free cash flow coming in at (-) C$19.6 million. Finally, the company sold ~3.0 million shares at US$5.00 during the period to help improve its liquidity position as it works to access higher grades at Kiena. The good news is that share sales under the At-The-Market ((ATM)) Equity program are likely to be minimal and represent barely 4% dilution this year at worst, and if it's any consolation, Wesdome is one of the few junior producers that hadn't diluted in years until its recent hiccups. As of quarter-end, Wesdome's liquidity was C$25.1 million after C$8.0 million in debt was paid on its RCF.
Valuation
Based on an estimated ~153 million fully diluted shares at year-end and a share price of US$5.70, Wesdome trades at a market cap of $872 million. This makes it one of the more richly valued junior producers, with its valuation well above that of Tier-1 jurisdiction peers like Victoria Gold ( VITFF ), Karora Resources ( KRRGF ), and Argonaut Gold ( ARNGF ). That said, Wesdome is unique in that it's the proud owner of two of the highest-grade gold mines globally, and benefits from excess capacity at both assets, providing a relatively low-capex path to increasing production later this decade, especially at its Kiena Mine in Quebec. Hence, I believe this justifies a premium valuation, and I see a fair value for Wesdome of US$1.16 billion using a 1.1x P/NAV multiple. After dividing by ~153 million shares, this translates to a fair value of US$7.60.
Although this points to a 32% upside to fair value, I prefer to wait for a steep discount to fair value when buying small-cap producers to ensure an adequate margin of safety, and after applying this discount, Wesdome's low-risk buy zones come in at US$4.85 or lower. Obviously, the stock doesn't have to decline by this magnitude, but this is where I would view the stock as offering an adequate margin of safety and being more attractive from a relative and absolute value standpoint. So, while I continue to see Wesdome as a top-15 gold producer sector-wide and one of the better organic growth stories with the potential to grow production to 200,000+ ounces later this decade, I remain focused elsewhere currently, with some other names trading at much deeper discounts to fair value.
Finally, if we look at the technical picture, Wesdome may be set up for an oversold bounce after a ~20% straight-line descent, but the stock has lost its upside momentum, and we could see additional pressure on the share price from modest share sales under its ATM over the short-term. And while further share sales might have been evaded if the gold price remained above $2,050/oz, it would not surprise me to see another 3.0+ million shares sold before year-end. So, with the stock's momentum flipping to negative, the potential for further supply from share sales under the ATM, I would view any rallies above US$6.90 before August as an opportunity to book some profits.
Summary
Wesdome is a rare breed in the gold sector with two of the top-5 highest-grade gold mines globally in its portfolio, a solely Tier-1 jurisdictional profile, and a path to sub $1,050/oz all-in sustaining costs by 2025. This makes it similar to a mini Alamos Gold ( AGI ), with a combination of material organic growth, consistent 500+ gram-meter gold intercepts drilled into new zones, and this production growth being combined with margin expansion. That said, while Wesdome is undervalued and could certainly make a run towards the US$8.00 level over the next 12 months if the sector comes back in favor, I see more attractive opportunities elsewhere in the sector currently. To summarize, Wesdome remains a solid watchlist name, but I would need to see the stock decline below US$5.00 to become more interested in starting a new position.
For further details see:
Wesdome Gold Mines: Solid Execution In Q1