2023-11-15 21:32:36 ET
Summary
- Wesdome Gold Mines has faced challenges with the re-opening of the Kiena mine, leading to the need for external funding and pressure on the balance sheet.
- The share price has been stagnant this year, but production is expected to ramp up in early 2024.
- A strong fourth quarter is most likely under way.
Wesdome Gold Mines ( WDOFF ) (WDO:CA) used to be a market darling promising outsized growth from a planned restart of its Kiena mine near Val d'Or in Quebec. This restart was going to be funded internally from cash flow generated by the operating Eagle River mine, located not far away across the stateline near Wawa in Ontario. Unfortunately, this darling status has fallen by the wayside as Wesdome fumbled the Kiena restart, needed external funding, and stressed the balance sheet in the process.
This fall from grace is illustrated by the share price chart below. Over the past six quarters, the share price has languished in market limbo as Wesdome slowly worked its way towards the so-called 129 level at Kiena, operations at Eagle River struggled to meet high expectations, and the balance sheet took hit after hit.
Financial and operational results for the third quarter were released on November 8 and we were curious to see if there was light visible at the end of this tunnel. Hence we read up on the filings , listened to the earnings call , and updated our charts. Here is a summary of the company's Q3, along with our latest iteration of an investment thesis for Wesdome Gold following on from our SELL call early this year.
Operations
Q3 was always going to be a weak quarter considering the planned annual mill maintenance at the Eagle River mine. Taking into account the two weeks of milling lost at the Eagle River mine we were pleasantly surprised by the latest data point in our chart below. Throughput numbers had held up surprisingly well after all.
Throughput (company filings and author's work)
Grades and metallurgical recovery didn't spoil the party either, and so the consolidated Q3 gold output was weaker than in previous quarters, but above our prior estimate, nevertheless.
Consolidated gold production and sales (company filings and author's work)
Unfortunately, costs were a different story. We knew that all-in sustaining costs were going to be above the annual guidance in Q3, but we hadn't anticipated them to top $2000/oz for the quarter. Ouch, we thought as the red line in the chart below crossed the yellow line, and margins dipped below Zero. The combined impact of the planned shutdown at Eagle River and the timing of capital spending had certainly conspired against margins in Q3.
Margins (company filings and author's work)
Capex spending had picked up in Q3 compared to Q2, sending all-in-sustaining costs North, and free cash flow South as illustrated by the next chart below -- keeping in mind that capex at both mines should be considered sustaining capex following the declaration of commercial production at Kiena early this year.
FCF and capex (company filings and author's work)
As mentioned earlier in this piece, the formerly strong balance sheet has suffered. Working capital has plummeted, and debt has soared as Kiena continues to limp towards the finish line.
Balance sheet (company filings and author's work)
The Elephant: Kiena
The Kiena mine was touted as a potential elephant of a mine when the deep A-Zone was discovered back in 2018. Instead, it has turned into the elephant in the room when investors discuss the fortunes of Wesdome Gold today. Everything depends on Kiena finally delivering the promised high-grade ore from the A-Zone to its starving mill. And arguably, the quarterly progress reports on Kiena mine development have become more important than the other data routinely discussed during earnings calls.
And other than in previous editions, the management had a glimmer of good news for investors this time around -- a glimmer that might well morph into the light at the end of this tunnel mentioned in the introduction to this post. At the end of Q3 the decline had finally reached the all-important 129 level, setting the stage for mine development into the fabled A-Zone. First development ore can be expected shortly, and the first high-grade stoping ore should hit the mill early in 2024. And if production can be ramped up according to plan we should see steady state high-grade production by mid-next-year.
We also note the mention of the new backfill paste plant from the earnings call's Q&A session, and the reports of satisfactory results with backfilling the stopes in challenging ground conditions.
We continue to be excited with our Pastefill Plant, which not only is proving an invaluable tool in cycling stopes effectively, but also enables us to return up to 45% of our tailings underground, a much higher proportion than what the PFS called for, putting less strain on our tailings capacity.
Furthermore, we note the promising results from a satellite deposit called the Presqu'ile Zones, and the receipt of permits to develop an exploration decline into this zone just 1.3km away from the mill. This ramp will most likely become a part of the overall mine infrastructure, and once tied in, should offer a second access option into the Kiena Deep complex in due time. More importantly, we have high expectations for the Presqu'ile Zone to provide the mill fill the excess capacity of the Kiena mill.
Summary & Investment Thesis
While Q3 results may look weak on surface, they still exceeded our expectations considering the expected production shortfall due to the annual mill maintenance shutdown at the Eagle River mine. Wesdome seems confident to reach the production guidance mid-point of 120Koz, at an all-in sustaining cost of $1,620-1,800 per ounce. To be clear, this call implies a near-record fourth quarter on several metrics, with management confident to achieve just that at mid-quarter.
And by the time this fourth quarter will be reported in February 2024, we should also see mining and processing of the first A-Zone stopes.
And finally, we note that Wesdome is probably a good candidate for tax loss selling in coming weeks.
In short: we believe that this is a perfect storm in the making: a near record quarter under way, the Kiena A-Zone finally coming to fruition, and a share price under pressure from tax loss selling. The current market cap of $800M will look like a distant bargain by February next year if these predictions come true.
This is finally a bet we are willing to place, and hence, we are calling BUY on Wesdome Gold Mines.
For further details see:
Wesdome Gold Mines: The End Of Limbo Is In Sight (Ratings Upgrade)