Monday, May 16, 2016

Wesdome Gold Mines - The Battle Has Just Started

Wesdome Gold Mines is a small gold producer. The company operates two mines, located in the Mishibishu Greenstone Belt, Ontario, Canada. Mishibishu is part of a much larger mineral structure, called the Abitibi Greenstone Belt. Those familiar with world deposits surely know that Abitibi is one of the best gold-bearing areas, where many successful mining companies operate. One of such companies is Richmont Mines, operating its Island Gold Mine, located also in Ontario. To be honest, in my opinion, Wesdome is very similar to Richmont:

  • similar location (Abitibi Greenstone Belt)
  • similar deposit structure - quartz veins
  • both mines demonstrate the high-grading ores
  • last exploration programs delivered promising discoveries - levels 300 and 700 at Eagle River (Wesdome) and Lower Zone at Island Gold (Richmont)
  • both mines are in their transition periods, ramping-up production from new discoveries
  • both companies forecast much higher production in the coming years
Of these two companies it was Richmont which, most recently, delivered outstanding returns for its investors (the author of this blog included). Wesdome was a laggard. 
Well, I think that Wesdome is a sort of an outsider - not many investors are even aware of its existence. In my opinion, it is a mistake because Wesdome or, more precisely, its Eagle River Mine, is a very, very decent deposit. 

However, in 1Q 2016 the company delivered very poor results. Let me show just one chart:


Since 1Q 2015 the company was on track to decrease its production costs (represented by all-in sustaining costs) from C$1,971 to C$1,387 per ounce of gold. Then, suddenly, in 1Q 2016 these costs went strongly up to C$2,505 (an increase of 80.6% in just one quarter!). Well, I was very surprised. What is more, one of the largest Wesdome shareholders, Resolute Performance Fund, today announced that it initiated the action against the current company's management. Let me cite an abstract from this announcement:


"Resolute is particularly concerned with:

• the fact that gold production dropped to 8,036 ounces in the first quarter of 2016 
from 14,484 ounces in the third quarter of 2015;
• the significant increase in cash burn in the first quarter of 2016, as reflected by the 
decrease of $7.3 million in cash and cash equivalents, compared to a decrease of 
$0.362 million in the third quarter of 2015;
• the significant increase in the all-in sustaining costs per ounce on a production
basis to $2,501 per ounce in the first quarter of 2016, compared to $1,368 per
ounce in the third quarter of 2015; and
• the proposed increase in the size of the board of directors from five to eight
members, which Resolute believes will simply increase overhead and other costs
without leading to the necessary operational changes."


But the "best" part is here:


"Resolute does not believe that the proposed board and existing management are capable of addressing the pressing issues at Eagle River."


Well, Wesdome management got a very strong message. It looks like the battle of Wesdome has just started.

To be honest, I think that Resolute announcement confirms the fact that Eagle River is an excellent deposit. What is more, I do not think that Resolute action was ignited by the last quarter results. It  looks like the matter is much deeper and I expect that in the coming future we will get more info on this issue.

Summarizing - in my opinion, Resolute action against the current company's management is a starting point for the Eagle River takeover. Expect hot news on that issue soon. 



3 comments:

  1. Tx for this article.
    I recently discovered your blog, via Seeking Alpha, and have been busy reading past posts. Your posts are well written and very credible and I appreciate your sharing your work.
    I too am a shh of WDO and have been for some time (and of RIC also!)
    Before learning last night that the AGM had been postponed, I had planned to travel to Toronto for the WDO AGM today.
    Though I hadn't known about Resolute's dissidence until late yesterday afternoon, via a google alert at 4pm with this 'news item' : http://tinyurl.com/ztw6owm , I do recall a Resolute rep. making forcefully critical comments to the Officers at the last AGM I attended 2 or 3 years ago.
    So, I'll keep owning my shares and reading what you write.

    ReplyDelete
    Replies
    1. Joey, thanks for nice words.
      As for Resolute, it looks like they like getting into an argument...
      It's fine you didn't go to Toronto.

      Delete
  2. Thanks for this article Simple. Will keep this miner on my radar...sounds like a turnaround story if we have a management shakeup

    ReplyDelete