Wesdome Gold Mines Ltd. (TSX: WDO) is a gold producer engaged in mining and related activities including exploration, extraction, processing, and reclamation. The company’s principal assets include the Eagle River Mine, the Mishi Mine and the Eagle River Mill located near Wawa, Ontario, together called the “Eagle River Complex”, the Moss Lake property in Thunder Bay, Ontario, and the Kiena Mining and Milling Complex (“Kiena Complex”) and exploration properties located in Val D’Or, Quebec.

Investment Rationale

• Gold Outlook Remain Positive: Looking at the Federal Reserve’s new inflation target of an average of 2% has created even more long-term potential for the precious metals price and mining sector, and we believe that gold prices would be averaging above USD 1,800 an ounce for an extended period. Also, looking at the current scenario, we believe that the market should remain in its current range as we do not expect to see real bond yields pushing much further into negative territory, nor pushing into positive territory anytime soon.

• Decent third Quarter Performance: In Q3 FY20, the company generated CAD 55.0 million in gold sales revenue from the sale of 21,700 ounces of gold at an average realized price of CAD 2,532 (USD 1,901) per ounce as compared to the sale of 23,450 ounces of gold at CAD 1,957 (USD1,482) per ounce for revenue of CAD 45.9 million in Q3 2019. Further, at the beginning of the year, the company set its full-year 2020 production guidance at 90,000 – 100,000 ounces of gold, primarily from the Eagle River underground mine. The company expects the production profile to be consistent throughout the year, and the company is on track to meet these targets. Also, the group has outperformed the industry in terms of operating margin, net margin and RoE.

Source: Refinitiv (Thomson Reuters)

• Higher Spread between ROCE and WACC: Wesdome Gold’s LTM ROCE stood at 19.6%, whereas Weighted Average Cost of Capital (WACC) stood at 4.2% and Weighted Average Cost of Debt (Kd) stood at 0.8% respectively, implies a spread of ~ 15.2%, from WACC and 18.8% from Kd, which is significantly higher and shows that the company is generating higher returns on capital employed. Also, this shows the efficiency of management in project selection and fund deployment.

• Negligible Balance Sheet Risk: The company has virtually zero debt in its balance sheet. With total debt to equity ratio of Wesdome at the end of September quarter stood at 4.5%, which implies that the company’s operation is broadly funded by internal accruals and it is generating sufficient cash flows to smoothly run its operations. Hence, there is no balance sheet risk hovering over the company, given the minimal debt contribution in the total capital.

• Solid Margin Profile: The group has maintained a robust margin profile over the past several quarters. The group has recorded a solid improvement in its margin since March 2017. We expect the group to continue report robust margins on the back of higher gold prices.

Source: Refinitiv (Thomson Reuters)

• Industry Leading Return on Equity: The TTM ROE of the company stood at 24.4%, better than the peer’s average TTM ROE of 19.5%. Higher ROE also reflects that the company is generating a higher return on shareholder’s money, which is a single strong fundamental factor from an investment standpoint.

Source: Refinitiv (Thomson Reuters)

• Risk Associated to Investment: Sharp volatility in the gold prices would have an impact on the group’s performance, as gold is the underlying commodity in which Wesdome deals in. Therefore, business is highly exposed to the gold price risk in the international market. Further, continuation of virus spread would hamper the group’s production and supply chain and scarcity of labour.

Financial Highlights: Q3FY20

Source: Company Filing

• Revenue from mining operations surged by ~19% to CAD 55.0 million as compared to CAD 45.940 million in the same quarter of FY19. The growth was mainly on account of higher average realised gold prices.
• In the third quarter under consideration, the company generated CAD 55.0 million in gold sales revenue from the sale of 21,700 ounces of gold at an average realized price of CAD 2,532 (US$ 1,901) per ounce; as compared to the sale of 23,450 ounces of gold at CAD 1,957 (US$ 1,482) per ounce for revenue of CAD 45.9 million in Q3 2019.
• Further, a 20% increase in sales revenues is the result of the strong Canadian dollar realized price; offset, partially by the decrease in gold production.
• Cash cost and AISC per ounce of gold sold in Q3 2020 were CAD 1,052 (US$ 790) and CAD 1,395 (US$ 1,047) per ounce; as compared to cash cost and AISC per ounce of gold sold in Q3 2019 of CAD815 (US$ 618) and CAD 1,344 (US$ 1,018), respectively.
• Corporate and general expenditures remained consistent at CAD 1.4 million. The corporate and general expenditure level is expected to be between CAD 1.5 and CAD1 .7 million on a quarterly basis in 2020.
• Cash and Cash equivalent also bolstered to CAD 73.513 million in the quarter under consideration against CAD 38.611 million reported in the same quarter of FY2019.
• Net Income improved from CAD 12.449 million in the Q3FY19 to CAD 14.614 million in Q3FY20.
• Gold production at Eagle River Mine decreased by 33% from Q3 2019 to 19,319 ounces of gold, due to a 41% decrease in head grade; offset partially by a 13% increase in total throughput. Head grade at Eagle River in Q3 2020 averaged 13.8 g/t, slightly below 2020 lower grade guidance of 15.0 g/t.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 34.28% of the total shareholding. Van Eck Associates Corporation and 1832 Asset Management L.P. hold the maximum interests in the company at 9.95% and 5.35%, respectively. The institutional ownership in the WDO stood at 53.69% and strategic ownership stood at 0.51%. 

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Cash Flow based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters).

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: Built upon strong fundamentals Wesdome Gold Mines Ltd is well-positioned to deliver decent price return to its shareholder with strong ROE of 23.4%. Moreover, the company is maintaining a higher spread between ROCE and WACC, which reflects that the company is prudently deploying its capital to generate a higher return on capital. Further, the company is not exposed to any balance sheet risk, with quite lower Debt/Equity ratio of ~4%. This also implies that the company is generating strong cash flows to fund its operations and capital expenditure as well.

Moreover, the company reported decent performance in the third quarter of 2020, with revenue up ~19%, net income soared by ~17% and cash position bolstered significantly on a YoY basis. Further, the company has strong liquidity and free cash flow to meet its obligations smoothly.

We believe that gold prices will remain firm over the next few quarters because of hovering uncertainties over economic recovery across the world because of COVID-19 pandemic. Also, lower oil prices and low-interest rate environment would continue to benefit the company and contribute towards the higher margin. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 9.24 on January 27, 2021.

Technical Price Chart (as on January 27^th, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at January 28, 2021 price as well.

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