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 Prices are Expected to Remain Firm in the short-term to Mid-term: Gold has corrected approximately 2% in the past one month; however, still up by 26% on a YoY basis. We believe that recent correction was just a short-term consolidation, and gold prices are likely to remain firm over the next few quarters. There is a lot of uncertainties hovering over the fast-economic recovery, which would keep gold as an asset class in the investor’s limelight. Despite the recent slowdown in gold jewellery demand and tapering of central bank buying, the price of gold is not expected to see major changes as ETFs are continuing with their gold buying spree.

• Higher gold prices are likely to enhance margin and profitability: Gold and gold stocks have been on a great run since hopes for a V-shaped recovery were doused by an increasing case of the virus. Investing in gold stocks seems to be a safe bet, considering the fact that gold prices remained elevated. Though there was a slight correction in the recent past, still gold prices are up ~26% on an annual basis. The higher gold price would have a positive impact on the profitability and margin profile of the group.

• Solid quarterly result: At the end of June quarter, the Company reported an EBITDA margin of 56.9% vs Industry median of 28.7%, Operating margin of 45.3% vs industry median of 11.8%, and Net Margin of 29.4% vs 2.5% industry median. Further, the group generated significantly higher RoE compared to the industry median despite having a significantly lower debt to equity ratio.

Source: Refinitiv (Thomson Reuters), Kalkine Group 

• Higher Spread between ROCE and WACC: Wesdome Gold’s LTM ROCE stood at 20.5%, whereas Weighted Average Cost of Capital (WACC) stood at 5.7%, which implies a spread of ~14.3%. This shows the efficiency of the management in using funds in higher profitability projects. Also, higher ROCE shows that the company is generating higher returns on capital employed.

• Virtually Zero Debt in the Balance Sheet: The group has virtually zero debt in its balance sheet and debt to equity ratio stood at 4.8%, which suggests no balance sheet risk for the company. At the end of 2QFY20, the company has a net cash position in its balance sheet. Also, it implies that the majority of the group’s capex funding comes from the internal cash flow generation. Also, a lower debt contribution leads to higher Return Capital Employed and higher free cash flow generation.

• Solid Margins and Return Profile: The group is built upon the solid fundamentals and recorded a continuous improvement in its margin and return profile. Wesdome has consistently maintained an EBITDA margin above 20% over the past eight quarters, and an operating margin above 15% in the same quarter. Except for a couple of quarter, the Net margin was also consistently above 10%. The group’s ROE and ROIC improved significantly since 2QFY17.

Source: Refinitiv (Thomson Reuters), Kalkine Group 

• Significant improvement in the Free Cash Flow: In the second quarter of FY20, the group reported a Free cash flow of CAD 17.7 million, which increased by CAD 16.5 million against the previous corresponding period.

• Relative Strength: Wesdome’s shares have significantly outperformed the benchmark TSX Composite and Sector peer’s over the past one year. On a YoY basis, the relative outperformance of WDO against benchmark stood above 100%. The stock has outperformed the sector by more than 40% at the same time.

Source: Refinitiv (Thomson Reuters), Kalkine Group 

• Risk Associated to Investment: Sharp volatility in the gold prices may 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, the second wave of the virus outbreak would hamper the group’s production and supply chain and also the scarcity of labour.

2QFY20: Financial Highlights

Source: Refinitiv (Thomson Reuters)

• The group reported gold production of 25,142 ounces from the Eagle River Complex. Gold production increased by 12% against 22,437 ounces in Q2 2019, as a result of increased ore feed from the Eagle River Complex.
• The group reported Gold Cash costs of CAD 882 (US$637) per ounce of gold sold. Cash cost in Canadian dollars increased by 5% vs Q2 2019 of CAD 837 (US$626) per ounce due to lower ounces sold.
• All-in sustaining costs (AISC) for the second quarter stood at CAD 1,218 (US$ 879) per ounces. AISC in Canadian dollars decreased slightly (Q2 2019 – CAD 1,220 (US$912) per ounce due to lower sustaining capital expenditures; partially offset by lower ounces sold.
• The group earned mine profit of CAD 34.3 million. Mine profit increased by 55% or CAD 12.2 million (Q2 2019 – CAD 22.1 million) due to higher realized gold prices.
• Operating cash flow of CAD 30.2 million or CAD 0.22 per share, increased by 96% or CAD 14.8 million (Q2 2019 – CAD 15.4 million or CAD 0.11 per share) due to higher realized prices.
• Free cash flow of CAD 17.7 million or CAD 0.13 per share, increased by CAD 16.5 million (Q2 2019 – CAD 1.2 million).
• Net income attributable to shareholders of CAD 16.1 million and Adjusted net income of CAD 16.5 million or CAD 0.12 per share.
• In Q2 2020, Wesdome realized an average gold price of CAD 2,365 (US$1,707) per ounce as compared to CAD 1,752 (US$1,309) per ounce in Q2 2019. The market price for gold in the quarter averaged US$1,709 per ounce.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 31.8% of the total shareholding. Van Eck Associates Corporation and1832 Asset Management L.P. hold the maximum interests in the company at 9.96% and 5.52%, respectively. The institutional ownership in the WDO stood at 48.5% and strategic ownership stood at 0.51%. 

Source: Refinitiv (Thomson Reuters)

Stock Performance

In a year-over period, WDO shares have generated a price return of approximately 102%. The shares increased ~24% on a YTD basis.

1-Year Price Chart (as on October 07, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

In a year-over period, its shares have tested a 52W high of CAD 15.0 as August 18, 2020 and tested a 52W low of CAD 5.85 on March 16, 2020. 

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

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

Stock Recommendation: The group reported solid second-quarter performance led by higher gold realisation prices and improved production. Also, free cash flow of the company has improved significantly in the last quarter with Free cash flow of CAD 17.7, which increased by CAD 16.5 million compared to the previous corresponding period. Further EBITDA margin has improved significantly on a YoY basis, with Q2FY20 EBITDA stood at 56.9% vs 44.8% in Q2FY19. Further, the group has a strong balance sheet with a net cash position at the end of Q2FY20. Total debt to equity ratio of Wesdome at the end of June quarter stood at 4.8%, which implies that the there is no balance sheet risk hovering over the company given the minimal debt contribution in the total capital. Moreover, the company is maintaining a higher spread between ROCE and WACC, which reflect the efficiency of the management and prudent fund allocation.

At the last traded price, its shares have traded well above the crucial long-term support level of 200-day SMA, with Price/200-day SMA ratio stood at 1.14x, which shows that the stock is trading approximately 14% above its crucial support level and hovering in a bullish zone.

Further, we believe that gold prices would remain firm over the next few quarters because of hovering uncertainties over economic recovery across the world on account of COVID-19 pandemic. Also, lower oil prices and low-interest-rate environment would continue to benefit the company and contribute to the margin expansion.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 12.61 on October 07, 2020. We have considered Maverix Metals Inc, Wheaton Precious Metals Corp and Yamana Gold Inc etc., as a peer group for the comparison purpose.

*Recommendation is valid at October 8, 2020 price as well.

Disclaimer

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