Wesdome Mines: Significant Production Growth On Deck (OTCQX:WDOFF)

The Q1 earnings season for gold miners (GDX) is just around the corner, and it’s one of the most awaited earnings season in years. This is because the industry will benefit from their highest average realized gold price on average (~$2,070/oz) in the upcoming quarter, setting up improved free cash flow generation year-over-year for most producers and helping to offset the impact of mid single-digit inflation felt sector-wide. One name that’s set to be a beneficiary of these higher gold prices and will receive significantly more for each ounce left in the ground in 2023’s transition year is Wesdome Gold Mines (OTCQX:WDOFF) which is set to up to enjoy ~40% production growth this year, albeit largely due to lapping easy year-over-year comparisons.

In this update, we’ll dig into its preliminary Q1 results, recent developments, and its valuation after its year-to-date outperformance.

All figures are in United States Dollars unless otherwise noted.

Q1 Production & Sales

Wesdome Gold Mines (“Wesdome”) released its preliminary Q1 results last week, reporting quarterly production of ~33,300 ounces of gold, a ~16% increase from the year-ago period. The sharp increase in production was mostly related to its legacy Eagle River Mine which produced ~24,900 ounces (Q1 2023: ~20,500 ounces) while its new Kiena Mine produced ~8,400 ounces, a 7% increase from Q1 2023 levels. And while this first quarter production has left the company tracking at just ~19.6% of its annual guidance midpoint (170,000 ounces), the weaker Q1 was largely to be expected as Wesdome guided for higher grades in Q2 with a significant proportion of ore from Q1 still coming from the lower-grade Martin Zone vs. Kiena Deep.

Digging into the quarter a little closer, Eagle River processed ~51,600 tonnes at an average grade of 15.5 grams per tonne of gold, up from ~54,300 tonnes at 12.2 grams per tonne of gold in the year-ago period. The lower throughput was related to the depletion of Mishi stockpiles that benefited throughput in Q1, but this was more than offset by higher than planned grades, while development into the 300 Zone is progressing on budget with this high-grade zone remaining open down-plunge, with highlight intercepts like 9.4 meters at 83.2 grams per tonne of gold.

Moving to the company’s new Kiena Mine, Wesdome processed ~45,300 tonnes at 5.9 grams per tonne of gold, up from ~42,300 tonnes at 5.9 grams per tonne of gold in the year-ago period. The lower grades relative to FY2024 guidance of 12.0 to 13.5 grams per tonne of gold (annual range) was still in line with plans given that grades are set to tick up materially in Q2 and improve further in H2 as Wesdome begins mining the 129 Level where it will benefit from a significant increase in ounces per vertical meter. And while Kiena’s Q1 output is sitting at just ~10% of its annual guidance midpoint (85,000 ounces), this has not deviated from the plan, and we can expect significant catch-up in the upcoming quarter and throughout the year with consistent ~25,000 ounce quarters, especially if we see positive grade reconciliation like we did in 2023 (FY2023 actual grade of 5.9 grams per tonne of gold vs. plan of 3.7 – 4.7 grams per tonne of gold).

As for Wesdome’s sales performance, gold sales came in at ~35,700 ounces and a much higher average realized gold price which will translate to significantly higher revenue year-over-year. Meanwhile, the Q2 outlook is also solid with the benefit of a weaker Canadian Dollar and an even higher average realized gold price as the company gets set to start producing upwards of 40,000+ ounces per quarter. Hence, while Q1 unit costs will likely be well above the FY2024 guidance range of $1,325/oz to $1,475/oz, we should see ~$900/oz AISC margins in H2 2024, making it a tale of two halves with robust financial results in the second half of this year and a spike in free cash flow generation.

2024/2025 Outlook

Looking at the 2020-2023 financial results, Wesdome saw three consecutive years of negative free cash flow as it worked to bring Kiena online, and this certainly wasn’t helped by a rough 2022 with a massive miss vs. annual guidance. However, 2024 is expected to be a much better year, with production set to more than double from its Kiena Mine, and the stronger gold price has upgraded the free cash flow outlook, with Wesdome now on track to generate upwards of $65 million in free cash flow this year even assuming a ~$2,200/oz gold price assumption (below spot levels). And with a full year of higher-grade feed expected from Kiena next year, we should see an even more robust year in 2025 with the potential for Wesdome to generate upwards of $100 million in free cash flow.

As for Wesdome’s cost outlook, costs are expected to be roughly in line with the industry average this year ($1,400/oz all-in sustaining costs based on guidance mid-point), but should improve to below the industry average next year and closer to $1,200/oz. The lower costs in 2025 should benefit from reduced sustaining capital expenditures (2024 guidance: $75 million), and a higher denominator with production expected to increase another 10% looking out to 2025. Hence, while Wesdome may be a higher-cost producer today on paper (FY2023 AISC: $1,653/oz) which might be surprising given its industry-leading grades, this is expected to change and costs could improve even further in 2026 as it’s able to leverage excess capacity at the Kiena Mill with an extra ~400 tonnes per day of mid-grade ore from Presqu’ile where reserves were added at year-end 2023 and which sits just west of the current mining area at Kiena (exploration ramp underway).

Recent Developments

As for recent developments, Wesdome had a solid year for reserve replacement, adding ~130,000 ounces of gold reserves to its inventory. This has given Wesdome the top spot from a grade standpoint among its advanced developer/producer peer group for reserve grades, with Wesdome ending the year with ~1.13 million ounces of gold reserves at an average grade of 12.4 grams per tonne of gold. Meanwhile, its Eagle River Mine actually saw an increase in grades to edge out Macassa (Kirkland Lake Camp, Ontario) at ~14.5 grams per tonne of gold (Eagle River: 17.4 grams per tonne of gold), and while grades slid at Kiena, this was largely a function of adding lower-grade reserves at the planned future mining area, Presqu’ile.

Just as importantly, Wesdome saw a tick up in reserves per share despite slight dilution following shares under its At-The-Market Equity program, with reserves per share sitting just off their 2021 peak. And with a busy exploration program in 2024 (110,000+ meters), I would expect to see further resource growth this year and maintain its 1.0 million ounce reserve base. Wesdome noted that exploration at Kiena will focus on drilling adjacent to Presqu’ile to potentially identify additional zones of mineralization as well as drilling down plunge at the Kiena Deep A zones and Footwall zones, as well as the South Limb and New Basalt zones. At Eagle River, the company plans to drill up-plunge from the Falcon 311 Zone (high-grade intercept of 2.3 meters at 270 grams per tonne of gold) and 6 Zone in addition to testing for potential parallel zones north of the 6 and 8 zones.

Let’s look at Wesdome’s valuation to see if this strong growth profile and improved free cash outlook is starting to get priced into the stock:

Valuation

Based on ~152 million fully diluted shares and a share price of US$8.00, Wesdome trades at a market cap of ~$1.22 billion and an enterprise value of ~$1.21 billion. This makes it one of the richest valued sub 200,000 ounce producers in the market today, with Wesdome now trading at ~17x FY2024 free cash flow estimates and ~1.10x P/NAV vs. an estimated net asset value of $1.13 billion. And while some of this premium is justified given that it’s among a small subset of high-grade producers in Tier-1 ranked jurisdictions, it’s now trading at a premium to its Tier-1 jurisdiction peer group as well, sitting at a much higher multiple than names like New Gold (NGD), Karora (OTCQX:KRRGF), and Silver Lake Resources (OTCPK:SVLKF). In fact, Wesdome’s FY2024 free cash flow multiple is now approaching that of Alamos Gold and Agnico Eagle, but these companies have 3.5x to 15x Wesdome’s scale per 2026 production estimates, with Alamos and Agnico set to produce ~700,000 ounces and ~3.5 million ounces, respectively.

Using what I believe to be fair multiples of 8.0x P/CF and 1.15x P/NAV to account for Wesdome’s position as a high-grade Tier-1 jurisdiction producer and using a 65/35 weighting to P/NAV vs. P/CF, I see an updated fair value for the stock of US$8.50. And while this fair value estimate points to further upside for the stock, Wesdome’s ~6% upside to fair value pales compared to many other producers that, I believe, have 50% to 70% upside to fair value given their far more attractive multiples. Besides, I prefer to buy at a deep discount to fair value to ensure a margin of safety, and I see minimal margin of safety in Wesdome’s shares today, making it tough to justify paying up for the stock above US$8.00.

Some investors might argue that Wesdome has takeover potential which should command a premium, but I would disagree. And while I thought there might have been potential for a transaction at lower levels in Q1 2023 given that the stock was trading at a significant discount to fair value below US$5.00 per share, this is no longer the case. In fact, Wesdome is now back to trading at a large premium to its small-cap peer group at ~1.0x P/NAV and ~16x 2024 free cash flow estimates ($2,200/oz gold price assumption), and those miners that might have been most interested in Wesdome have either transacted elsewhere or would see margin compression by adding Wesdome’s mines to their portfolio.

As for the first candidate, Alamos Gold (AGI) has a habit of only buying at a massive discount to fair value (which Wesdome is not), and it already has a peer-leading organic growth profile. In addition, Wesdome’s ~$1,200/oz future AISC profile would pull up Alamos’ costs, which are expected to dip below $1,050/oz post P3+ Expansion at Island Gold. Finally, Alamos has closed two acquisitions in the past 12 months and is working on closing a third acquisition this year (Manitou, Orford, Argonaut), so I don’t think the company is in any rush to complete a billion-dollar acquisition when it already has two robust projects in the pipeline (Lynn Lake, P3+ Expansion) and will be busy working to integrate Argonaut’s Magino Mine in its quest to create a Tier-1 mining complex just northeast of Wawa, Ontario.

As for who might be another assumed potential suitor, Wesdome’s Kiena Mine may be in Agnico Eagle’s (AEM) backyard near Goldex, Malartic and LaRonde, but AEM has a ton on its plate already. This includes a joint-venture at its high-grade polymetallic project in Zacatecas (San Nicolas), a massive high-grade asset in care & maintenance in Nunavut (Hope Bay), and a planned expansion at Detour Lake while it simultaneously transitions to underground mining at Canadian Malartic.

Meanwhile, it already has multiple potential spokes identified to feed its Malartic Mill which include Camflo, Upper Beaver, and Wasamac. Plus, while the grades are phenomenal at Kiena, and it would complement the portfolio, a ~120,000 ounce-per-annum asset doesn’t really fit for a ~3.5 million ounce producer. The reason is that I don’t imagine Agnico Eagle would have any interest in operating a ~90,000 ounce-per-annum asset (Eagle River), so the motivation would be for Kiena alone. And unless Agnico is looking to pay $1.0+ billion for high-grade ore next to Malartic or ~$1,400/oz on reserves (which I don’t think it is) I don’t see an acquisition as likely.

As for other potential suitors, there’s no shortage of gold producers that would love to have additional Tier-1 jurisdiction exposure, but a deal is tougher to justify at these levels when many mid-tiers are actually trading at discounts to Wesdome. And if we look at deals completed recently for ~200,000 ounce producers, WestGold just paid ~$800 million for Karora in a merger of equals (~200,000 ounces per annum at similar operating costs to Wesdome), Gold Fields (GFI) paid ~$900 million for 50% of Osisko Mining which will see similar attributable production but at much lower costs (~$750/oz AISC), and Calibre stole Marathon which is a ~190,000 ounce per annum operation as of 2025 at similar operating costs for ~$300 million.

So, with Wesdome having a similar production profile to these three recent acquisitions but a deal likely requiring a price tag that’s twice the average when factoring in a premium to get it done ($1.5+ billion), I struggle to see the allure from a suitor’s standpoint, and $7,500 per ounce of production would be a rich price to pay even for the quality of these assets ($1.5 billion vs. ~200,000 ounces per annum). In summary, I think it’s a stretch to argue for baking in a takeover premium on Wesdome here and I see far more attractive names elsewhere in the sector currently from a relative value standpoint.

Looking at one example, K92 Mining (OTCQX:KNTNF) has a similar production profile to Wesdome currently, but trades at ~0.50x P/NAV (Wesdome: ~1.10x P/NAV), and ~3.9x FY2026 free cash flow estimates vs. Wesdome at ~10x FY2026 free cash flow estimates at the same gold price assumption. In addition, K92’s Kainantu Mine is expected to be a monster relative to Wesdome’s two smaller high-grade mines and one of the largest and lowest-cost assets in the gold sector, with an expected production profile of ~460,000 gold-equivalent ounces in 2027 at sub $680/oz AISC (Wesdome 2026 estimates: ~210,000 ounces at ~$1,200/oz AISC). Finally, on a grade standpoint, both companies stack up well, but K92 Mining’s resource base dwarfs that of Wesdome (~7.1 million gold-equivalent ounces vs. ~2.4 million ounces of gold) at similar grades. So, for investors looking for higher growth at barely one-third of the FY2026 free cash flow multiple and less than half its P/NAV multiple, I see K92 Mining being far more attractive at current levels.

It’s important to note that while K92 Mining trades at ~3.9x FY2026 free cash flow estimates, this figure drops to ~2.5x free cash flow estimates in FY2027, given that K92 Mining is only halfway through its Stage 4 Expansion in 2026.

Summary

Wesdome Gold Mines has significant production growth on deck in FY2024 and will see further growth to the ~190,000 ounce-per-annum mark with a full year of higher grades from Kiena Deep in 2025. Meanwhile, the outlook for free cash flow generation has improved materially given the strength in the gold price, with the price of gold averaging ~$2,120/oz year-to-date and set to potentially average $2,200/oz this year. That said, Wesdome is now trading at a valuation typically reserved for a high-margin mid-tier or large-cap producer and at a significant premium to its peer group small-scale producers (sub 200,000 ounces) which makes it hard to justify chasing the stock above US$8.00. So, while Wesdome was a steal below US$5.00 last year and is one of the better stories in the junior space, I think there are far more attractive bets elsewhere in the sector currently.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.