Wesdome Gold Mines stock: improving valuation after decline (OTCMKTS: WDOFF)
The first quarter earnings season was tough for the Gold Miners Index (GDX), and although Wesdome (OTCQX:WDOFF) started the year with a second mine in production, it was not immune sector-wide headwinds. In fact, a third of its the total workforce was impacted by Omicron, while supply chain issues hurt Kiena’s performance, leading to below-average results in the first quarter. While this impacted the FY22 guidance, the company has a strong H2 ahead, with issues largely in the rear view mirror. Given Wesdome’s peak growth profile, I would expect further weakness to present a buying opportunity.
Just over two months ago, I wrote about Wesdome, noting that while the company had one of the best growth profiles in the industry, the stock was getting a bit ahead of itself in the short term. Indeed, it was trading at a P/NAV multiple north of 1.30x, leaving little room for further multiple expansion and making it more vulnerable to any weakness in the gold price. Since then, the stock has slid just over 20%, attributed to a weaker first quarter and a sharp decline in the price of gold. Let’s take a closer look at the first quarter results and valuation below:
Wesdome Gold Mines released its first quarter results last month, reporting quarterly gold production of around 25,600 ounces, up 13% from the year-ago period, but a down 32% on a sequential basis. This was partly related to lower head grades and throughput at the company’s Eagle River, where grades dropped from 13.7 grams per tonne gold to 11.6 grams per tonne gold. However, the main culprit for the decline in performance is Kiena, which recorded gold production of only ~5,100 ounces in Q1 2022, compared to ~16,900 ounces in Q4 2021.
In addition to Omicron, which had a significant impact on labor availability, the drop in production at Eagle River was related to grades well below the first half compared to the annual forecast of 12.1 at 13.4 grams per tonne of gold. At Kiena, first quarter production was impacted by unplanned underground crusher downtime, further exacerbated by the later than expected delivery of underground mobile equipment. Unsurprisingly, this severely affected grades and throughput over the period, with Kiena processing only ~21,200 tonnes at 7.7 grams per tonne gold, compared to ~38,000 tonnes at 14.1 grams per tonne gold. gold over the last quarter.
The good news is that the crusher is now back in service and the mobile equipment arrived on site at the end of the first quarter. Additionally, the company is working towards the completion of the paste fill plant, which is expected to be operational in the third quarter (slightly behind schedule), which will significantly improve cycle times at jobsites. Meanwhile, at Eagle River, grades are expected to improve significantly as the year progresses, helping the asset return to a production rate of over 21,500 ounces per quarter. While this will lead to a significant improvement in quarterly results for both assets, a guidance pace appears to be off the table, with annual production expected to be at the lower end of the guided range (160,000-180,000 ounces).
Given the much weaker production results, it’s no surprise that costs have risen significantly, with Wesdome reporting all-in sustaining costs of $1,399/oz at Eagle River and $1,339/oz on a consolidated. While these costs were up 18% year-over-year (Q1 2021: $1,182/oz), costs are expected to improve significantly throughout the year and are expected to settle below level of $1,110/oz over a full year. So while this cost performance may be quite disappointing for two assets with top ratings, it is important to note that this is largely due to poor sales performance, which is not representative of what these assets are. capable from a margin point of view.
Exploration and other developments
Fortunately, while operating performance was below normal in the first quarter, although largely beyond Wesdome’s control (supply chain issues, high absenteeism due to COVID-19), exploration results were phenomenal. This was demonstrated by incredible Eagle River holes, with intersections that included 3.4 meters at 90.2 grams per tonne gold (21.2 grams per tonne capped), 5.7 meters at 87.1 grams per tonne gold (59.5 grams per tonne capped) and 4.0 meters at 49.8 grams per tonne gold (46.4 grams per tonne capped). The above intersections are based on estimated true widths.
These intersections were drilled in the Falcon 7 zone, a key development as it reaffirms the potential of volcanic rocks to host significant deposits of gold mineralization. This could provide the opportunity to make additional discoveries in volcanic rocks outside of the existing Eagle River mine footprint, with the quartz diorite stock historically being the most favorable host rock observed to date. Therefore, the presence of high grades in volcanic rocks is a big problem for this asset from a prospectivity perspective. It also helps that the Falcon 7 area is away from the main mining area at depth, allowing for a separate working area rather than being congested in the main area.
Moving northeast to Kiena, this asset also continues to deliver from an exploration perspective, with the A Zone continuing to deliver impressive results. Recent intersections included 5.5 meters at 92.1 grams per tonne gold (23.3 grams per tonne capped), 5.0 meters at 18.7 grams per tonne gold (9.0 grams per tonne capped ) and 13.9 grams per tonne gold (9.9 grams per tonne capped) on an intercept with no currently known true width. The first two intersections were over true widths, could add to the ounces per vertical meter at Kiena Deep, and even from a capped perspective, drillhole 6796W6 (23.3 grams per tonne gold) is well within above current resource grade.
Not only does this suggest a very high likelihood of resource growth in what is already shaping up to be one of the top 3 richest gold mines in the world, but it also suggests that the reserve grade at Kiena could end up being conservative. . This is because we have seen many intercepts coming in at or above the current reserve grade and over solid mining widths. To sum up, while Kiena’s estimated after-tax NPV (5%) may be around $600 million right now, it’s possible this could increase to $750 million and more as the economy improves with more ounces per vertical meter and many more ounces moved through the mine. to plan.
Finally, in an effort to add significant operational experience to the team, Wesdome appointed Frédéric Mercier-Langevin as Chief Operating Officer effective last week. Mr. Langevin was general manager of the Goldex and Lapa mines in Quebec under Agnico Eagle (AEM), and most recently was general manager of the approximately 300,000+ ounce Meliadine mine in Nunavut. He is a great addition to the team, with nearly 20 years of operational experience at arguably one of the top 3 gold miners.
Based on approximately 144 million fully diluted shares and a share price of $9.90, Wesdome trades at a market capitalization of approximately $1.43 billion. That leaves the shares trading at a P/NAV multiple of around 1.15x, based on an estimated net asset value of $1.02 billion for Kiena and Eagle River and $250 million of exploration at the rise. I would say this is a more than reasonable valuation for Wesdome, and the stock could easily command a P/NAV multiple of 1.40, given that it has very similar attributes to Kirkland Lake Gold in its period of significant outperformance (2016-2019) .
The comparison above and a premium multiple to its peer group is based on Wesdome being one of the few producers to tick the following boxes:
- ultra-high-grade ore bodies and a top-10 exploration history in the entire industry
- only Tier 1 jurisdictions
- double-digit compound annual production growth (next three years)
- the potential for all-in sustaining costs 35% lower than the industry average (under $900/oz)
After the recent 23% decline, Wesdome looks undervalued, with more than 20% upside in fair value. However, while the stock is attractive from a valuation perspective, it still doesn’t quite meet my low-risk buy criteria. Indeed, even after the decline in its stock price, the stock is still near the middle of its trading range, with support at US$8.00 and strong resistance at US$12.75. From a current stock price of $9.90, this translates to $1.90 downside potential for support and $2.85 upside potential for resistance (reward/ risk of 1.5 to 1.0).
When it comes to small cap producers, I prefer to only start new positions with a reward/risk ratio of 5.0 to 1.0 or better, and Wesdome doesn’t clearly meet those criteria yet, although this is a top 12 producer. That said, if the stock were to drop below US$8.80, where its reward/risk ratio would improve significantly, it would provide a low-risk buy point. Obviously, there is no guarantee that the stock will go that low, and waiting could lead to a missed opportunity. However, I see no need to pay for stocks in a turbulent market environment, so I’m on the sidelines for now.
For investors keen to increase their exposure to precious metals and looking for producers who can invest in a rising cost environment, Wesdome is one of the best options available. It has very low jurisdictional risk, offers industry-leading organic growth, and has a path to much higher margins as most of the industry struggles to hold the line due to inflationary pressures. Finally, it is one of the best industry-wide exploration stories, with the current reserve base and grades underestimating the true potential of its two assets. Therefore, if we were to see Wesdome pull back below US$8.80, I would view this as a low risk buying opportunity.