When it comes to gold stocks, I have written quite a bit about them lately. But what has recently caught my eye are two things. One is the great turnaround of Kirkland Lake (KGILF), which took place in 2014 and is now firing on all cylinders; and Wesdome Gold (OTCPK:WDOFF), which could possibly be the next Kirkland Lake type turnaround play.
When it comes to valuations, Wesdome Gold's EV/EBITDA ratio currently stands at 26, and its price to book ratio stands at 2.21, trading just over two times its book value per share price of $0.61 per share. In terms of its net asset value per share, I calculated that its asset value per share to be at $0.97 per share. Currently, Wesdome is trading a little more than $0.30 higher than that price. In terms of valuation, this company is overvalued, but one has to remember that its profit margins stand at negative 23 percent. When it comes to resource equities, traditional Buffett-Graham style valuations can actually be misleading because commodities can trade below their cost of production, thus causing negative cash flow which will hurt their valuation; and due to that, they can be considered overvalued, when in fact they could actually be undervalued. A pullback could be coming soon, so there might be a better entry point for this stock, but in terms of some traditional metrics, this stock isn't cheap. But this is also a turnaround play, and not an undervalued play, so even if valuation metrics show it to be overvalued, it could possibly be undervalued depending on what you think gold is going to do in the next year or so. So let's dig into the company.
In 2013, Wesdome Gold was considered a high-cost gold producer with costs of roughly $1,360 per ounce in a low-priced environment. After the 2013 price decline, most analysts perceived the mining industry as an industry that will be experiencing many bankruptcies and restructuring problems, and Wesdome Gold wasn't considered any different. In response to this declining environment, management restructuring took place were Rolly Uloth returned as CEO, while other executive management changes were also made. As a result of this change in leadership, the company refocused its strategy so it could generate profitable growth, and not just production growth. It first implemented this strategy by putting the Kiena complex on care and maintenance, and then it consolidated some assets, and bought back $5 million worth of royalties. As a result of these moves, 2014 proved to be a better year in which it generated $12-15 million of free cash flow.
But in 2015, due to an increased mill expansion budget, combined with the fact that it was mining lower grades at its Eagle River mine, it went back to generating negative cash flow and income and not positive.
In terms of the company's forward guidance; in 2016, it is estimated to produce 54k-60k ounces of gold; in 2017, it is estimated to produce 63k-70k ounces of gold; in 2018, it is estimated to 74k-82k ounces of gold; and in 2019, it is estimated to produce 72k-80k ounces of gold. Its mill processing rate is estimated to increase from 980 tons per day (tpd) to 1,380 tpd by 2019. Its sustaining CAPEX budget is estimated to be $15 million a year for each year up to the year 2019, and its project CAPEX is estimated to be $11 million in 2016, $7 million in 2017, $3 million in 2018, and $2 million in 2019. Currently, Wesdome Gold's production costs are estimated to be at roughly $1,150-12k an ounce. By 2018, its costs are estimated to decrease to around $800-$900 per ounce. By 2018, management believes that they will be free cash flowing again as long as current gold prices persist. Yes, you read that right, current prices not higher; personally, I think by 2018 gold prices will be higher. Now let's dig into its asset profile.
In terms of its assets, its Eagle River mine contains 1,011,000 tonnes of 2P gold reserves with grades of 9.2 grams per tone (g/t). Its Mishi mine contains 1,885,000 tonnes of 2P gold reserves with grades of 2.2 g/t. It also has a Moss Lake mine in which it is focused on completing its preliminary economic assessment (PEA) in the future. This asset is mainly an exploration play, and I am not big fan of exploration upside, because exploration results can hit or miss, and the growth from exploration is less proven than production growth is. That is why I don't really care to learn about its Moss Lake property until I can get more clarity on its economics and production potential, and possible production dates and rates.
In terms of the company's financials, its balance sheet has a current ratio of 1.3, with $3.705 million of cash in the bank, while its total assets to total liabilities ratio contains 4.38 assets for every one liability on its balance sheet
Its net income did have a net loss of $4.294 million, but there was a $4.934 million write-down, which is basically a non-cash charge, so I am not that worried about the large loss showing on the income statement. Its cash flow was calculated at negative $626,000 last quarter. In the future, higher gold prices, and declining costs will turn this positive as the company is projecting it to be free cash flow positive in 2018.
What I also like about this stock is its share structure. Currently, it has 111,218,583 shares outstanding, and on a fully diluted basis, it has 116,768,411 total shares. This is a good solid share structure in my opinion. What I like most about its shares is that the management and directors of the company own eight percent of the shares outstanding. This shows that they believe in the company, its future, and the turnaround story that is presently taking place.
Whether this company becomes the next Kirkland Lake or not, no one really knows, and if someone claims that they knew, then they are lying. But its future does look promising, and its prospects do look strong. While this company may trade significantly higher over the next couple of years, it should only be purchased with non-core funds from one's portfolio. Remember this is a turnaround story, not an industry leader. Sometimes turnarounds don't work out, and this could possibly happen to Wesdome Gold. I believe that this turnaround story will work out, that is why I am writing this article, but it is possible that I can be wrong. I would hate to see someone read this article, and then over invest in the company. So basically, what I am saying is that this should be bought with speculative money only, not large substantial amounts of money from your savings and portfolio.
Hopefully, now that the gold bull market is underway, I will be trying to write one article a week about a new company that is in the oil, uranium, and or precious metals sector. There could be a pullback in gold, which seems very likely now, but I do believe this is the last year of possible sideways to declining price action in the precious metals sector, and the big gains will be made next year (2017). If you are interested in these sectors, follow me on Seeking Alpha, and you will be able to read more about the companies I have researched about for the upcoming, or the now existing bull market in resource equities.
Disclosure: I am/we are long KGILF, WDOFF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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