Wesdome Gold: Close, But No Cigar (TSX:WDO:CA)

Wesdome Gold (OTCQX:WDOFF) launched Q4 production results and its 2023 guidance on January 18 and the market casted its verdict in no unsure phrases. For readers questioning if this was a shopping for alternative for this (former) market darling: we submit it’s not.

However let’s take a step again and bear in mind how we acquired right here.

For the higher a part of the previous three years, Wesdome’s storyline has revolved round bringing the Kiena mine again into manufacturing and exploiting the newly found high-grade A-Zone useful resource at this web site. This restart was going to be funded internally from money circulation stemming from the corporate’s producing Eagle mine, the place operations had been steadily bettering because the appointment of Mr. Middlemiss because the CEO again in 2016.

Market confidence elevated as milestone after milestone was hit, driving the share value to tickle the C$15 line on two events. The boldness (if not the exuberance) appeared justified as the corporate executed on its plan with outstanding precision and reliability, proper till the house stretch. Sadly, first cracks began to point out late final yr, and with the most recent information launch, these cracks have deepened. Administration had reassured markets when third quarter outcomes fell brief, promising to hit the already revised steering with an outsized fourth quarter. To cite from the Q3 earnings call:

As implied by our steering, we predict a giant fourth quarter.

To not occur, because it turned out. The January 18 information launch confirmed what we had already foreshadowed for our subscribers: Wesdome’s manufacturing has fallen wanting its revised steering (see orange field beneath, share refers back to the decrease finish of the guided vary).

The steering miss on the Eagle mine was attributable to the nuggety nature of the ore on the Falcon zone, and the related difficulties in estimating the reserve and head grades. The detrimental results of those difficulties had been mounting for many of 2023, and a promising uptick in grades throughout This fall was not sufficient to compensate for the sooner quarters. And we do not blame Wesdome for not making an attempt: the corporate even forwent mixing low-grade stockpiled ore from the Mishi pit offering a further grade kicker.

Throughput on the Eagle mine was near the 650tpd nameplate capability, and mixed with better-than-recent grades, This fall manufacturing at Eagle ranks as an all-time third in accordance with our database (purple bars within the chart beneath).

Report throughput at Kiena solely remodeled into 9,614 ounces of gold manufacturing due to low grades from the at the moment out there S-50, VC, and Martin Zones. Entry to mining faces within the newly found A-Zone, the precise motive for re-opening the mine, has been hampered by delays in bringing the paste fill plant on-line. As a knock-on impact, ramp building into the deeper and high-grade parts of this A-Zone has been hamstrung and buyers must wait till early 2024 for the high-grade ore to achieve the mill.

Actually, This fall seems like the most effective quarters within the firm’s current historical past, however it will have wanted a blow-out file quarter to fulfill steering. Hindsight is most frequently 20/20, however promising such a blow-out file was maybe not the wisest factor to do on the Q3 earnings name.

Trying Ahead

Mr. Middlemiss has termed the present yr a “consolidation yr for the corporate” as 2022 experiences ought to enable for a greater manufacturing forecast at Eagle River normally, and the Falcon zone particularly. And over on the Kiena mine, this yr might be marked by mine growth, with a purpose of opening up the A-Zone by yr’s finish. Within the meantime, the mill might be fed with low-grade ore from the talked about out there zones. Kiena will most certainly stay free-cash-flow unfavourable in 2023 in consequence, and any free money circulation generated at Eagle River might be directed in the direction of Kiena. Nevertheless, we’re uncertain about Eagle River with the ability to totally carry Kiena by way of this yr and we anticipate some funding must be met by different sources.

Administration appears to entertain comparable considerations. On the finish of Q3 Wesdome’s stability had deteriorated sufficiently for administration to place in place measures to make sure liquidity. An at-the-market equity program was established permitting the corporate to promote as much as $100M widespread shares from treasury, and the revolving credit facility was expanded to $150M of which $40M had been drawn as of November 9 2022. These initiatives will most certainly suffice to fund the remaining $45M in capex spending earmarked for 2023, and they’ll additionally present working capital if wanted as Wesdome completes the ramp into the center of the A-Zone over the course of the yr.

Abstract and Funding Thesis

Wesdome Gold has come agonizingly near finishing its bold plan to fund the Kiena restart organically, however has fallen flat on the house stretch — shut, however sadly no cigar.

The stability sheet has suffered and the corporate has ensured liquidity by increasing its credit score facility and by implementing an at-the-market program. The latter is more likely to weigh on the share value, as will servicing the previous.

Traders have been burned, and we suspect it’ll take time for market confidence to rebuild.

We see a tough yr forward for Wesdome Gold. Traders had anticipated to learn from the Kiena mine by now, but they’ve simply been requested to attend for not less than one other yr. And as soon as the Kiena mine lastly reaches its potential, debt service will take precedence over shareholder advantages. The share value will most certainly replicate this example, and the ATM program might be in the back of minds ought to it rally anyway.

We had been on the lookout for an entry of late, however given this tough yr forward now we have determined to remain on the sidelines. The share value will most certainly stay underneath strain for the foreseeable future; and any additional mishap might be punished by an already pissed off market. We anticipate higher potential entry factors because the yr unfolds.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a serious U.S. change. Please concentrate on the dangers related to these shares.