2023-08-30 06:29:22 ET
Summary
- Wesdome Mines put together a solid Q2 report, with revenue and cash flow up year-over-year, benefiting from higher production from Eagle River and the gold price.
- Meanwhile, the company appointed a new CEO in the period, confirmed ramp development is tracking well, and extinguished its ATM, which was weighing on the stock.
- In this update, we'll look at the Q2 results and see whether the stock is still offering enough margin of safety after its recent ~25% rally.
Just over three months ago, I wrote on Wesdome Gold Mines ( OTCQX:WDOFF ), noting that with sentiment for Wesdome in the gutter and the stock down over 60% from its highs, any pullbacks below US$5.00 would offer a low-risk buying opportunity. Since the update, the stock has significantly outperformed the Gold Miners Index ( GDX ), up ~20% vs. a 6% decline in the GDX. Regarding the outperformance, Wesdome has done an excellent job delivering against its stated goals, continuing to track ahead of plans for Kiena ramp development despite one-time headwinds from wildfires in Quebec. Just as importantly, the company has extinguished its At-The-Market Equity facility [ATM], removing uncertainty about future share dilution. Let's take a closer look at the company's recent Q2 results below:
Kiena Mine Operations (Company Website)
All figures are in United States Dollars unless otherwise noted with a C$ in front of the dollar figure.
Q2 Production & Sales
Wesdome released its Q2 results earlier this month, reporting quarterly production of ~31,000 ounces of gold and sales of ~32,000 ounces at $1,966/oz. This was a meaningful improvement from the year-ago period despite no contribution from Mishi open-pit operation, which contributed 600 ounces of gold in Q2 2022. Wesdome achieved these solid operating results despite wildfires that affected some operations in Quebec (Lamaque, LaRonde), with Eagle River benefiting from higher grades and throughput (~64,700 tonnes at 11.4 grams per tonne of gold) and Kiena benefiting from increased throughput (~51,800 tonnes processed), which more than offset the lower grades in the period. That said, Wesdome was up against relatively easy comps relative to Q2 2022 related to a hoist rope manufacturing defect and leach tank failure (Eagle River), so while the beat was encouraging, the bar was set low on a year-over-year basis.
Wesdome Mines - Quarterly Gold Production (Company Filings, Author's Chart)
Given the solid operating performance, Wesdome is sitting in a great position to deliver into its FY2023 guidance of 110,000 to 130,000 ounces of gold production at $1,620/oz to $1,800/oz all-in sustaining costs, with ~59,400 ounces produced year-to-date at sub $1,600/oz AISC. And while we will likely see a weaker Q3 from a margin standpoint (sustaining capital being back-end weighted), the company should be able to deliver at or near its guidance mid-point of 120,000 ounces of gold production at sub $1,700/oz all-in sustaining costs, setting up the potential for a slight beat relative to its FY2023 cost guidance mid-point ($1,710/oz). Just as importantly, ramp development to the 129 Level at Kiena is tracking ahead of schedule, setting Wesdome up to access the high-grade A Zone at Kiena Deep later this year, giving investors' confidence that 2024 will be a much better year as much higher grades start heading to the mill.
Kiena Ramp Development - Company Presentation
Looking at the company's financial results, Wesdome generated C$84.6 million in revenue and C$14.0 million in operating cash flow, comparing favorably to C$61.9 in revenue and C$12.1 million in cash flow in the year-ago period. The improvement in revenue and cash flow generation was related to the benefit of higher gold sales and a much higher average realized gold price ($1,966/oz), and while free cash flow came in at negative $5.3 million, this was an improvement from C$28.6 million in Q2 2022, benefiting from reduced capital expenditures. As for the company's financial position, Wesdome ended the quarter with ~$18 million in cash and ~$130 million in liquidity, with the company selling ~1.43 million shares under its ATM in the period.
Wesdome - Gold Sales (Ounces), Quarterly Revenue & Operating Cash Flow - Company Filings, Author's Chart
Costs & Margins
Moving over to costs and margins, the numbers weren't pretty relative to what investors have come to expect from its high-grade operations, but they performed ahead of plans. Wesdome's Eagle River Mine reported all-in sustaining costs of $1,504/oz despite the benefit of higher gold sales, with increased development meters, improvements in the mine management and technical team, and general maintenance. Meanwhile, Kiena's all-in sustaining costs [AISC] came in at $2,052/oz, a 21% increase year-over-year from the $1,789/oz in Q2 2022. The higher costs at Kiena were related to higher sustaining capital year-over-year and higher G&A, and we should see higher sustaining capital in H2 which will continue to weigh on margins based on sustaining capital tracking at ~44% of annual guidance. The result was that company-wide AISC increased to $1,666/oz vs. US$1,582/oz in the year-ago period.
Wesdome - Quarterly AISC - Company Filings, Author's Chart
Fortunately, while costs were higher year-over-year, the company got some help from the gold price, with AISC margins improving to $300/oz vs. $282/oz in the year-ago period. And while Q3 and Q4 AISC margins will remain well below the industry average, there is a path to sub $1,200/oz company-wide all-in sustaining costs next year, as we see Kiena operate more in line with its long-term potential (~100,000 ounces per annum). Hence, while Wesdome's cost and margin profile are not anything to write home about currently and its Q3 margins could dip sequentially because of the softness in the gold price and higher sustaining capital spend, I would expect to see AISC margins improve to $700/oz or better in FY2024, transforming Wesdome from a low-margin producer into an above-average margin producer, with further margin gains in 2025 with what's likely to be a full year of production at 10.0 grams per tonne of gold at Kiena (FY2023 guidance: 3.7 - 4.7 grams per tonne of gold).
Recent Developments
As for recent developments, the first positive development is that Wesdome has a new CEO in Anthea Bath, who was previously the VP of Technical Services and COO of Ero Copper ( ERO ), a high-grade copper/gold company based out of Brazil. This is a positive appointment given the solid operational background at underground mines (Pilar and Vermelhos UG at the Caraiba Complex), and the first major decision was to suspend the ATM, putting an end to what was over 4% share dilution since it was put in place last year. Not only does this reduce uncertainty about future share dilution, with the share count sitting at ~152 million at quarter-end (fully diluted), but it also takes an additional seller out of the market that was weighing on Wesdome's stock.
As for developments on the ground, Wesdome noted that surface drilling is ongoing at Presqu'ile, which sits just 2 kilometers west of the Kiena Mine, with a goal to convert the inferred resource to the indicated category to boost property-wide mineral reserves at year-end. However, the benefit of Presqu'ile, Shawkey, and Dubuisson is not just that they could ultimately add to reserves given their positive exploration results to date, but it's that the Kiena Mill is running at well below its full capacity of up to 2,000 tonnes per day, with considerable availability at the plant per the 2021 PFS. And 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.
Kiena - Mine Production & Plant Utilization - Company TR
This is a big deal because if the company can take advantage of this excess capacity and add a new feed source for the mill like Presqu'ile (and or Shawkey/Dubuisson which could provide additional feed), we could see longer mine life, a higher production profile and ultimately a higher NPV (5%) than envisioned in the 2021 Preliminary Economic Assessment (~$367 million at $1,600/oz gold). So, while the results from Kiena Deep that are above the average reserve grade continue to be encouraging, investors should pay just as much attention to the results coming out of possible future feed sources like Presqu'ile (3.8 meters at 45.0 grams per tonne of gold), Shawkey (72.0 meters at 2.3 grams per tonne of gold), Dubuisson (25.2 meters at 9.8 grams per tonne of gold) which could potentially transform Kiena from a ~100,000-ounce producer to a ~150,000 ounce producer post-2026 by utilizing excess mill capacity.
Valuation
Based on ~152 million fully diluted shares and a share price of US$6.15, Wesdome is trading at a market cap of ~$950 million and an enterprise value of ~$970 million. This continues to make it one of the most expensive junior producers in the market, especially when we compare this figure to names like Victoria Gold ( OTCPK:VITFF ) at ~$520 million, Karora Resources ( OTCQX:KRRGF ) at ~$600 million, McEwen Mining ( MUX ) at ~$400 million, and Argonaut Gold ( OTCPK:ARNGF ) at ~$580 million. That said, and as highlighted in previous updates, Wesdome's mines are far superior to most other mines sector-wide held in junior and even mid-tier portfolios, with the company owning not just one but two of the highest-grade mines globally in Tier-1 ranked jurisdictions. And while its all-in sustaining costs [AISC] may compare unfavorably to some of these peers today, the Wesdome of 2024 and 2025 will look far different from the Wesdome of 2023 once high-grade tonnes are heading to the mill from the A Zone at Kiena Deep, as highlighted below (currently mining well below reserve grades).
Kiena - Throughput & Grades vs. Reserve Grade - Company Filings, Author's Chart
Plus, while the company is benefiting from higher grades and annual production at Kiena, the company should also see a steady decline in sustaining capital spending, with the 2021 PFS highlighting ~C$30 million in sustaining capital spend from 2025 to 2028 or an average of ~C$10 million per year. And even if we adjust for inflationary pressures and add 30% to these costs, this would still translate to annual sustaining capital spend of ~C$13.0 million per year, below the implied annualized sustaining capital spend of ~$14.6 million in H2 2023 year assuming Kiena's C$13.0 million sustaining capital guidance is met. Hence, with lower growth capital spend, lower sustaining capital and production set to nearly triple from the FY2023 guidance mid-point (~100,000+ ounces per annum post-2024 vs. ~35,000 ounces), we should see Kiena's AISC drop below $925/oz, making this one of the higher margin mines globally and improving the company's consolidated AISC.
So, what's a fair value for the stock?
Using what I believe to be fair multiples of 1.1x P/NAV and 10.0x cash flow given Wesdome's unique position as a high-grade and high-margin Tier-1 producer (offset by its lower scale) and a 65%/35% weighting to P/NAV and FY2024 P/CF, respectively, I see a fair value for the stock of US$7.50 on a fully diluted basis. This points to a 25% upside from current levels, which is a decent upside case, but this does not meet my required 35% discount to fair value to justify starting new positions in small-cap producers. So, while there's no question that Wesdome scores well on quality, I don't see enough of a margin of safety to justify chasing the stock above US$6.25 with an ideal buy zone of US$4.95 or lower. Obviously, I could be wrong and the stock could continue to rally. Still, with small-cap producers, I prefer to buy at less than 0.60x P/NAV ideally, and with Wesdome at ~0.95x P/NAV even including exploration upside, I see better opportunities elsewhere.
Summary
Wesdome Mines had a solid Q2 and the news on the ATM is certainly positive, with shareholders no longer having to worry about further share dilution as we've seen in previous quarters and additional supply coming to market which could weigh on the stock. Meanwhile, the company continues to make solid progress from a development standpoint and 2024 should be a much better year for the company from a financial standpoint if the gold price can cooperate. That said, I prefer to buy those miners trading at deep discounts to fair value when buying small-cap names, and while Wesdome is reasonably valued, it's getting overbought short-term above US$6.25 and trading at one of the richer P/NAV multiples among its peers, making this an ideal spot to book some profits. So, while I would strongly consider re-buying the stock below US$4.90, I don't see a compelling enough reward/risk setup at current levels, especially relative to what's available elsewhere in the market today.
For further details see:
Wesdome Gold Mines: Tracking Well Against Annual Guidance