Thursday, August 18, 2016

Wesdome Gold Mines: Not Everything Is Fine

After the 1Q 2016 disaster, in the last quarter Wesdome Gold delivered much better results. However, the company is still quite far from its "business as usual" performance.

Let me show just one chart:

                              source: Simple Digressions

The chart shows cash cost of production (direct costs  of mining and milling per ounce of gold sold), starting from 1Q 2015. Note that in 2Q 2016 Wesdome was still incurring quite high costs of production to extract its gold. The progress visible in 2015 (costs going down) was stopped this year.

I guess this mess may last. Remember that there is a new CEO, Mr. Middlemiss.  Usually, in hard times, when a company has problems and changes in the management board occur, it takes time to make things better.

Let me cite the company (Wesdome's report page 3):

"Mr. Middlemiss has extensive mine management and planning experience. A review of operations, including these recent developments, will refine the existing guidance in Q3 2016"
It looks like the company is preparing Wesdome's investors for a cut in 2016 Outlook. To remind my readers, according to this guidance, the company should deliver 54,000 - 60,000 ounces of gold in 2016. In 1H 2016 it delivered 20,183 ounces so it should have been delivering around 17 thousand ounces per each of remaining quarters of 2016. I doubt it.

On the other hand, Wesdome has just started mining in the totally new zone of Eagle River:

"We have now opened up three parallel zones in the western portion of the Eagle River Mine. Of particular interest currently is a sill drift on the 300 Zone which has encountered 140 m of strong grades and continues west beyond available drilling information"
New zones may bring big surprises so, who knows...

The current state of uncertainty is well evidenced by Wesdome share prices action:


Shortly after hitting its three year high at around C$2.20, the company's shares went quickly down to their strong support at C$1.55.

What is more, the upper panel of the chart shows that this year Wesdome shares were one of the worst performers among gold / silver plays.  

I do think that Mr. Market is wrong. In my opinion, Wesdome is a very decent company and its short - term problems create a nice buying opportunity.

On the other hand, keep in mind that Resolute Fund, the unsatisfied company's shareholder, most recently sold a large stake in the company - surely this event increased the selling pressure (by the way, this fund sold its shares at very good prices - near multi - year highs). Now it looks like there is no big selling (low volume) so either Resolute stopped its campaign or it is going to show us another, much better, buying opportunity.

Last but not least - the lower prices of Wesdome 's shares the better buying opportunity for a potential acquirer. 

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