Winston Gold Corporation. Starting Production And The Next 10 Years.

Summary

• The Winston Gold Mine near Helena, Montana, is a small narrow vein historical underground gold mine that was quickly permitted and relatively inexpensively re-developed.
• Winston Gold Corp. (WGC), a Junior miner, started production in July 2021 - after unexpected delays of approximately 6 months. As of March 19, 2022 production remains slow.
• WGC's business model of quickly bringing small narrow vein gold mines into production should be highly profitable and scalable. Winston's profits will fund development of similar small mines.
• Monte Carlo runs (5/29/21) show 90% exceedance probabilities for stock prices of US$0.24 and US$0.42 in 2023 and 2024 respectively - ~8x the 3/18/22 price of US$0.033.
• A 10-year deterministic look-ahead model, run 2/6/21, shows an after tax IRR of 111%, an NPV(5%) of US$329M, and potential for early returns of 3x, growing to 17x.

As of December 28, 2021 Seeking Alpha says they have discontinued blog posts. We will try continue this thread through their selected and edited articles. This may take a while. 

This article was first published on December 27, 2020, and has been updated as circumstances at Winston Gold change. The summary bullets above represent our best current thinking.

Updates are summarized below and details placed at the end of the article. We  do not change or edit any of the prior updates, or the article itself. Thus, readers are able track changes in Winston, changes in our thinking, and dare we say it; any errors we may make.

March 20, 2022 Update: Winston Gold Struggles to Get into Full Production

Since our last update of July 17, 2021, Winston has struggled to ramp up to full production, and in so doing, have proven a number of our predictions quite wrong - we clearly point these out in the prior updates below. The failure of Winston to meet scheduled production has been the biggest problem impacting our detailed financial predictions. These delays, and associated cash burn, have impacted Winston's ability to raise loans, or issue equity, without giving the farm away.

Even though Winston has experienced terrible delays and our prediction track record is at this time rather poor, we remain bullish on Winston largely due to their permitted and operating mill, and attractive ore body which they have accessed. We believe buying at the current share price of US$0.0335 (3/18/22) is attractive. We explain why below.

Through published commentary from Joe Carrabba, Chairman of the Winston Board (press release 12/01/21 and comment on Yahoo Finance to Tom, posted about 3 months ago), 2021 was a difficult year for Winston in which they encountered the following difficulties:

• Excessive ore dilution due to cave-ins from unexpected old workings.
• Technical difficulties in bringing the mill into full production.
• Long schedule delays due to 1 and 2 above.
• Supply chain issues and associated price increases.

However, there were several positive developments, again according to Joe Carrabba and Winston Press Releases:

• Winston's mill throughputs in the last 7 months are shown in the table below. (See Form 7 August 2021 through February 2022 under CSE filings). Although far short of the 150 tons/day anticipated, the data shows perseverance and progress that should lead to mill optimization. According to the Form 7 information Winston also has been selling concentrate.

Month and Year	Tons of Ore Milled
August 21	1,271
September 21	137
October 21	168
November 21	351
December 21	368
January 22	352
February 22	329

• The Paradine mill has been achieving recoveries of up to ~75%; and is likely being optimized through the many small runs referenced above.
• Winston purchased the rights to the Hard Cash mine (in a 50% ownership deal with Bond Resources), a potential resource within just a few miles of their Paradine mill. This bodes well for the bigger picture expansion plan outlined in the long term model presented below.
• Winston has developed access tunnels to the unmined lower ore along the Custer vein. This should help with the dilution issues and give them access to higher grade ore; which based on historical records and their own drill results, could be around 0.4 oz/ton; a rich grade.

Material changes that would impact the models are:

• Schedule delays push model results out by approximately 12 to 24 months (assuming a ramp up to full production within the next year).
• Inflation will increase production costs; this may be offset by higher gold and silver prices.
• There may be additional loan costs. These would have a short term impact.
• There may be additional equity dilution as the company seeks additional financing. 
• Increased costs associated with shipping and refining ore.
• If Winston actually starts mining the deeper ore, the grades assumed in the models could possibly be increased offsetting the production cost increases.

We will update the models once Winston releases more information, however, we believe the models remain fairly accurate for the case of a fully productive mine and mill. 

July 17, 2021 Update: Winston Gold in Production

Winston is now in production. They were able to start up in late June 2021 and have already sold their first batch of concentrate. 

To get into production, WGC had to borrow US$2 million and issue further equity resulting in stock dilution. By our estimates, the outstanding shares will number about 440 million once WGC completes their current private placement. Both the US$2 million loan, and the additional issuance of stock, were anticipated in our earlier (2/6/21 and 5/29/21) models and thus there is no need to update these models.

WGC's stock has been punished due the unanticipated production delays and currently (7/17/21) trades at US$0.065. [3/20/22 update: The stock has been further punished to US$0.033]. We remain bullish on the company and have bought approximately 800,000 shares over the last few months at these lower prices. Our models continue to predict good performance, with:

• Monte Carlo runs on 5/29/21 showing 90% exceedance probabilities for stock prices of US$0.24 and US$0.42 in 2022 and 2023 respectively - 3 to 6x the current (7/17/21) price of US$0.065. [3/20/22 Update: 2022 is delayed to at least until 2023, and 2023 to at least until 2024] 
• A 10-year deterministic look-ahead model, run 2/6/21 showing an after tax IRR of 111%, an NPV(5%) of US$329M, and potential for early returns of 3x, growing to 17x over 10 years on a stock price of US$0.11.

With the mine now producing, and a good arrangement with the lender (Ocean Partners), we see few immediate risks. [3/20/22 Update: The mine production did not ramp up, and we have not heard of any financial assistance from Ocean Partners]

May 29, 2021 Update: New Models to Account for 6 Months of Unanticipated Schedule Delays, Additional Stock Dilution, and Increased Silver Grades

On December 15, 2020 Winston stock reached a high of US$0.15 per share on a gold price of $1,853/ounce. Since then, the stock price has dropped with startup problems delaying Winston's gold production schedule by about 6 months. This has put a strain on cash flow and has required several additional private placements with associated stock dilutions. These factors have created strongly negative investor emotions driving the stock price down to US$0.083 (5/28/2021).

The good news is that Winston has run its mill (the Paradine Mill) on a test basis and produced its first concentrates (25 tons) for shipment to the refinery. They have also acquired the rights in a 50/50 deal with Bond Resources to the Hard Cash Mine, just 5 miles away from their Paradine Mill. This bodes well for future expansions. Other positive news is that Winston is now reporting 5 to 6 opt of silver in the ore coming from the Custer Vein. Previously, Winston has not reported silver grades in their drill results, although the historical mine had rich silver grades. Finally, gold is hovering around $1,900/ ounce (5/29/2021) and sentiment is bullish.

From our mill construction and start-up experience, we see Winston's start-up issues as not uncommon and we believe the mill will restart to reasonable (but not optimized) production levels within weeks, as indicated by management in their recent press releases (i.e. restart in June 2021). [3/20/22 Update: the mill did restart but did not get to full production]. During the downtime, Winston has continued to mine and stockpile both high- and low-grade ore, which is a big plus to achieving steady production.  [3/20/22 Update: this is now questionable]

With the restart of the mill, we expect an increase in stock price and look at the current low price as a buying opportunity [3/20/22 Update: this did not happen] - we have added about 300,000 shares to our position over the last few weeks.

Currently, the only immediate risks are around serious mill production problems beyond typical start up issues [3/20/22 Update: start up issues have persisted] . Other issues will continue to arise but should not result in extended production interruptions.

We have added updated operating models to the end of this article.

February 6, 2021 Update: New Models to Account for Additional Private Placements and Associated Stock Dilution

When writing this article on December 27, 2020, we believed that WGC did not require any further private placements to get into production and positive cash flow. Well, we were proven wrong! Winston has since run two more private placements increasing the total outstanding shares to 375 million. Warrants and options have similarly increased. This is likely to ensure that they have sufficient cash to carry the mine through start up and positive cash flow.

Based on this information, we have updated the 10-year look ahead model, by updating:

1. Shares issued at the end of 2020 from 340 MM to 380 MM.
2. Increasing warrants and options exercised per year from 50 MM to 55 MM.
3. Increasing the cost to bring a new mine into production from US$13 million to US$15 million as the new private placements are showing it is costing more than previously estimated to bring Winston into production.
4. Adjusted year 1 production down from 20,000 to 15,000 ounces as production has not started a soon as we thought it would.

Scroll to the end of the article for further details.

December 27, 2020 Article:

Introduction

Winston Gold Corp (OTCQB:WGMCF) is a Junior gold mining company developing the high grade, narrow vein, Winston Gold Mine near Helena, Montana. The property is traversed by the historic 2,400-foot long mesothermal Custer vein which was profitably mined in the early 1900s. Winston Gold Corp. (WGC) has shown this vein to extend in length and at some point will mine the rich deep ore below the water table (about 400 feet deep) that the early miners could not reach.

Winston Gold Mine (Winston) is already mining and stockpiling ore. Their mill is currently running and their first production of gold is imminent.

By exploiting the historic success of the Custer vein, extensive drilling by previous companies and their own drilling programs, WGC has identified 3 new veins and extensions to the historic Custer vein - all are likely profitable. The drilled veins are open at depth and along strike. Historic records indicate grades of about 0.6 to 1.0 oz/ton were mined from the Custer Vein. WGC's drilling indicates average grades of ~0.35 oz/ton, including planned dilution to a practical excavation width. WGC has not had resources confirmed in a NI 43-101 resource study, and do not explicitly state a size of resource. From an interpretation of their drill results, and an analysis of the historic Custer Vein, we estimate ~500,000 oz of gold could be exploited at current gold prices. More drilling could expand this estimated resource size. WGC currently has 3 drills working full time at the mine and an on-site assay lab (regularly checked by Bureau Veritas) to quickly turn around samples, guiding both mining and exploration.

The historic success of the Custer mine gives confidence as to the suitability of the area for underground mining (it has been done) and points to large quantities of ore (larger than what would ever be tested in a NI 43-101 resource study) that were successfully mined and processed (at an inflated gold price of about 1/5 of today's price).

WGC has strong management and technical teams led by CEO, Murray Nye, who with this team spearheaded the development of the similar, and successful, Drumlummon mine; giving the investor confidence in their management skills, cost estimating, and narrow vein underground mining capabilities.

Winston’s hands-on Executive Chairman is Joe Carrabba, a respected mining leader, who was CEO and Chairman of Cleveland Cliffs, CEO and President of Diavik, General Manager of Weipa Bauxite Operation of Comalco Aluminum, and has served/ serves on several boards, including: Newmont Gold Corporation, Timken Steel, AECON, and NioCorp. Joe owns about 15% of the company after heavily investing a few years back. One has to believe he has the shareholders interests at heart.

I have visited the Winston mine and have met both Murray Nye and Joe Carrabba. Both impress me as people who want to do the right thing; from running a safe operation to treating staff well, safeguarding the environment, supporting the community, and serving shareholders.

But most remarkable, is the astute and scalable plan Winston's management is following to economically and quickly bring narrow vein mines into production.

[For additional details, see our previous analyses of WGC at these links:

Winston Gold Corporation: Expect Recent Breakout To Go Higher. - Analytical_Investor

Winston Gold Corporation: Near-Production And Potentially Strong Returns. Why, How Quickly, And The Risks. - Analytical_Investor]

WGC's Astute and Scalable Business Plan

WGC developed an astute plan to quickly and inexpensively bring Winston into production - against the typical high failure odds we see for Junior Gold Mining companies. WGC's success is largely attributable to the skilled management team that relentlessly pushes development speed and low cost development. These key success factors were exploited in the Winston mine development through:

1. Using Montana's quick permitting for small mines that is highly advantageous to underground mines with small surface footprints.
2. Capitalizing on a historical mine with a proven track record. This resulted in reduced exploration and study costs, and in schedule reductions.
3. Undertaking relatively inexpensive development afforded by Winston's near surface narrow veins, prior exploration programs, and in-place workings.
4. Hiring and developing an efficient team skilled in the almost lost art of narrow vein mining, honed on the nearby Drumlummon mine that was brought into production by WGC's management team.
5. Leasing the existing nearby Paradine mill to avoid lengthy permitting and the high capital costs of building a new mill. (By mining high grade veins Winston can afford to truck their ore several hundred miles to the mill, giving them flexibility and speed. The Paradine mill is just 35 miles away from the mine).

Even with WGC's emphasis on speed and low development costs, it took about 5 years to bring Winston on line; largely due to the difficulty in raising capital quickly. With Winston producing gold, self financing will be possible and the impediment of slow financing will be removed.

The key factor to future success is that WGC's astute plan is replicable and scalable and will enable WGC to bring a number of similar small narrow vein, low cost, mines into production using cash generated from Winston's operations. By our estimates (not WGC's), we think WGC can bring a new small narrow vein mine online every two years, starting in 2023 (i.e. we could expect 4 new mines, or the equivalent production, in the next 10 years).

Apart from strong management and a scalable business model, WGC can exploit the following strategic advantages:

1. Other area mills have available capacity and could be leased. This could be useful as the 4 new mines are brought into production.
2. WGC has the option to buy their leased Paradine Mill, which is both expandable and grandfathered to process gold using cyanide. This will allow easy expansion of capacity.
3. Underground mines have low closure costs, a factor that is becoming more and more important as regulators place more emphasis (and bonding costs) on closure requirements.
4. Access to area mine properties through their Montana/ Idaho network developed over 10 years of operations.
5. Near surface narrow vein underground deposits are relatively common in Montana/ Idaho and few other companies show the desire, or skills, to exploit these resources. Thus WGC has little competition.
6. Winston's experienced in-place underground mining team can quickly train new teams needed for the new mines or expanded production.

Winston Gold Corporation - A 10-year Look Ahead Model

Based on WGC's scalable business model proven on the Drumlummon mine and now the Winston Gold Mine, we created a 10-year cash flow model.

The spreadsheet model, shown below, uses the following conservative parameters:

1. Gold price drops (linearly) from ~US$1860 at the end of 2020 to US$1700 in 2030.
2. Our estimate of Winston's AISC (All-In Sustaining Cost), used for all the mines, escalates by 1.5% per year from US$1029/oz in 2020 to US$1200/oz in 2030. Our AISC is based on a detailed production model (see: Winston Gold Corporation: Expect Recent Breakout To Go Higher. - Analytical_Investor) and includes generous sustainable development capital to keep each mine functional over its life. Note: WGC believes Winston's 2021 AISC is about US$900/oz.
3. WGC brings 4 mines similar to Winston into production over the next 10 years for total gold production by WGC's 5 mines of 1,080,000 ounces. Although developing 4 new mines in 10 years may seem somewhat of a tall order, it is quite possible that Winston alone could produce 500,000 ounces over the next 10 years, indicating that a million ounces of equivalent production is possible.
4. To be conservative, we modeled each of the four mine's development costs at US$13 million, and believe the real cost is more likely between US$6 and US$10 million; the cost to start Winston net all the costs of raising money.
5. 50 million options and warrants are exercised per year, for 840 million fully diluted shares in 2030. This is higher than the December 2020 fully diluted number of ~600 million outstanding shares, warrants, and options (See WGC website, January 2021). It appears that WGC will not undertake any further private placements, thus dilution will be limited to the granting of bonus options, which should be considerably less than the additional 240 million we have modelled above the current fully diluted number of shares.
6. P/e ratios are modeled to be between 11 and 22; likely low for a company with high growth potential.
7. An annual dividend payout of 60% cash on hand.
8. A 25% annual State & Federal tax rate, likely high especially for early years.
9. Unplanned ore dilution of 18% is assumed. This is higher than similar mines.
10. An average gold grade of 0.32 oz/ton is assumed. This is lower than Winston's average of 0.35 oz/ton drilled.

The model makes the following (at a minimum) simplifying assumptions:

1. New mines are similar to the current Winston mine. New mines start up every second year with the same initial production rates.
2. Gold price linearly increases/ decreases over time, based on user input.
3. AISC linearly increases/ decreases over time as input.
4. Capital expenditures are deducted in the year spent rather than depreciated over operating life. Initial US$13 million capital expenditures are not deducted. There are no deductions for test mining or for resource depletion.

Figure 1: Winston Gold Corporation. 10-Year Look-Ahead Model (dated 1/6/2020)Using the above somewhat conservative parameters, modeled financials for the next 10 years show an after tax IRR of 137%, an NPV(5%) of US$336M, 4x stock price increases as production kicks in, and further strong increases (shown on the table) as the scalable business plan is ramped up.

Keeping the above model parameters, with noted adjustments, we see:

1. An after tax IRR of 117% with a low gold price of US$1200 in 2030.
2. An after tax IRR of 99.5% if only 85% of production is achieved and taxes are raised from 25% to 27%.
3. An after tax IRR of 156% and an NPV(5%) of US$529M, if the 2030 gold price rises to US$2100 and the 2020 AISC drops to US$950.

These are impressive numbers and the model is robust to changes. WGC's market cap currently at $31 million with the NPV(5%) around $300 million is another indication of WGC's potential.

We believe the more conservative cases are quite likely to pan out. However, it should be remembered that these are modeled numbers based on our projections and not those of WGC. WGC may implement other ideas or plans, however, our model is in general accordance with WGC's goals stated on their website.

Potential risks that could jeopardize such strong performance are, in rough order from highest to lowest:

1. Price of gold suddenly drops below US$1200, and remains low. This risk is quite low and could be substantially mitigated through a hedging program on a small proportion (~20%) of production.
2. Winston does not produce to expectation. This is unlikely as they are continuing to find good grades, they have stockpiled ore, their mill is running, and in early years they can high-grade, if necessary, while they bring another mine online. (Update 5/29/2021: This rather innocuous sounding risk of Winston not producing to expectation came to bear with Winston's 6 months of startup problems and delays - running from December 2020 through May/ June 2021. Although conservative, our December 2020 and February 2021 models did not anticipate such a long delay. The 5/29/2021 model has built in a further 2 months of delay, which we do not think is likely, but could happen. Even under this scenario the models still show robust financials - see below). [3/20/22 Update: Production start up issues have persisted and it could be another 24 months until full production is reached].
3. Management team leaves WGC. This is unlikely as they have sizable ownership shares in the company, and know the potential of their resource and plan.
4. The team cannot find 4 new mines. Again, this is quite unlikely, as WGC is already assessing opportunities in a historically rich district and a favorable jurisdiction; and, Winston may produce a large proportion of the gold production modeled.

Note: We are open to sharing this spreadsheet model. If interested, please message me on Seeking Alpha.

Conclusions

WGC appears to have a good resource, a strong management team, a high commodity price, and an attractive and scalable business plan. If just the Winston Gold Mine is successful, as seems to be the case, an investment now in WGC should be well rewarded.

If WGC leverages the potential of the Winston Gold Mine and exploits their scalable business plan of bringing similar mines quickly and cheaply into production, then an investment now should be royally rewarded. The success of this will depend on the focus and dedication of the talented management team.

Let me know what you think.

~

~

~Appendices

February 6, 2021 Update:  New Models to Account for Additional Private Placements and Associated Stock Dilution 

When writing this article on December 27, 2020, we believed that WGC did not require any further private placements to get into production and cash flow. Well, we were proven wrong! Winston has since run two more private placements increasing the total outstanding shares to 375 million. Warrants and options have similarly increased. This is likely to ensure that they have sufficient cash to carry the mine through start up and positive cash flow.

Based on this information, we have updated the 10-year look ahead model, by updating:

1. Shares issued at the end of 2020 from 340 MM to 380 MM. (Note the model time step is one year so there is a small approximation here).
2. Increasing warrants and options exercised per year from 50 MM to 55 MM. 
3. Increasing the cost to bring a new mine into production from US$13 million to US$15 million as the new private placements are showing it is costing more than previously estimated to bring Winston into production.
4. Adjusted year 1 production down from 20,000 to 15,000 ounces as production has not started a soon as we thought it would.

We have kept all other variables the same as shown in Figure 1, Revision 7, dated 1/6/2021, including the share price at US$0.11 for easier comparison. 

Figure 2: Winston Gold Corporation. 10-Year Look-Ahead Model (dated 2/4/2020)

Using the adjusted parameters (2/4/2021), modeled financials for the next 10 years show an after tax IRR of 111%, an NPV(5%) of US$329M, 3x stock price increases as production kicks in, and further strong increases (shown on the table) as the scalable business plan is ramped up.

For completeness, we have added the Monte Carlo simulation model (shown in Figure 3, below) used to estimate the AISC costs. (Note: The Monte Carlo model uses current, uninflated costs). The 10 year look ahead model uses the approximate median AISC from the Monte Carlo model, as over 10 years things will likely even out.

Figure 3: Winston Gold Corporation. Monte Carlo Simulation of Winston Production Costs and Share Price for Year 2 of Operation (dated 2/6/2020)

Figure 4: Winston Gold Corporation. Stock Price Frequency Chart for Monte Carlo Simulation of Winston Production Costs and Share Price for Year 2 of Operation (dated 2/6/2020)

Figure 5: Winston Gold Corporation. Exceedance Probabilities for Various Share Prices based on Monte Carlo Simulation of Winston Production Costs for Year 2 of Operation, and Mean P/e = 13 (dated 2/6/2020)

In previous articles we have used different parameters in the Monte Carlo model, and continually update these parameters based on our latest knowledge. The most difficult parameters to estimate are price of gold, unplanned dilution (although we should get a better handle on this as Winston moves into production), and P/e ratio. In previous models we have used a mean P/e of 25 for year 2, which we have since adjusted down to 13. This is possibly overly conservative, although we want to be able to defend every parameter and not be accused of creating too rosy an outlook for already impressive financials.

For comparison, we developed the exceedance table using a mean P/e of 25, shown in Figure 6 below. This gives very impressive financials.

Figure 6: Winston Gold Corporation. Exceedance Probabilities for Various Share Prices based on Monte Carlo Simulation of Winston Production Costs for Year 2 of Operation, and Mean P/e = 25 (dated 2/6/2020)

May 29, 2021 Update: New Models to Account for 6 Months of Unanticipated Schedule Delays, Additional Stock Dilution, and Increased Silver Grades 

The production slippage of ~6 months experienced by Winston affects the previously modeled results for 2022 (called year 2 in these prior models). The most significant parameters affected are an estimated decrease in tons per day mined as Winston has lost ~6 months of revenues that would have enabled production ramp up, and added stock dilution required to keep the operation financed during the delays. We have also decreased recoveries based on startup difficulties and inflated production costs. On the positive side, we have increased the expected silver grade, and unit price for silver. Changes from 2/6/2020 are shown in yellow.

Again, we have tried to be conservative and have added the issuance of ~35 million new stock to the current (5/29/2021) 389 million stocks issued. This is equivalent to US$2.0 million in additional funding for Winston at US$0.06 per share. Thus, in our model, Winston's startup delays could extend at least another ~2 months. This should be sufficient time to fix production issues and hopefully these issues are fixed in June 2021, as indicated by management. We should note that the shipment of the first batch of concentrate will produce Winston's first revenue, an important milestone possibly allowing the borrowing of money on the open market. The model maintains $400k per year in debt payments, sufficient to service a sizeable debt - we do not believe Winston has any significant debt at this time. With the delays Winston may need to borrow money in additional to private placements, thus we have kept this debt payment in the model. 

The 5/29/2021 model shows a 90% probability for an approximately 3x, or more, increase in stock price from the current (5/29/2021) price of US$0.083 to a 2022 price of US$0.24.  

We expect 2023 production to be quite high based on our analysis that shows the Paradine Mill production can be fairly easily and economically increased by approximately 2 to 6x through feed upgrades and process expansions. 

Our 2023 model is shown below, with changes from the 2022 model (above) highlighted in yellow.

Disclosure: I am/we are long WGMCF, KGC, NEM, XOM, RDSA, RCL, PAAS.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.