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August 8th, 2007
Recommendation-Speculative Buy
Risk-High
Target Price C$4.20 / US$4.00
Price (Aug 7) C$2.75; US$2.62
Potential Return 53%
52-Week Range C$3.50-$1.40
% Below High- 21%
% Above Low- 96%
Shares O/S- 117.2 million
Market Cap- $322.3 million
Average Daily Volume
20-Day: 308,400
150-Day: 404,400
Year-End- December 31
Statements Currency- U.S. Dollar
BVPS EPS
2005A $0.10 $(0.09)
2006A $0.19 $(0.18)
2007E $0.46 $(0.18)
2008E $0.61 $0.15
BVPS: Book Value Per Share
EPS: Earnings Per Share
Independent Equity Research Corp., 130 Adelaide Street W., Suite 2215, Toronto, Ontario, Canada M5H 3P5
www.eresearch.ca eResearch Update Report
Analysts
Nigel Heath, BBM, CFA
Bob Weir, BSc., B.Comm, CFA
UPFRONT
With so much uncertainty prevailing in the currently volatile markets, skittish investors
are seeking a safe haven? If there is one, we think it is gold. Since gold prices have
not been keeping pace with the price increases of other precious and base metals, we
think it is now catch-up time. Couple that with the Company’s transition to producer in
less than six months and we consider the shares of Western Goldfi elds Inc. represent an
excellent (albeit speculative) investment opportunity. (See “Mining Cycle”, page 5.)
RECOMMENDATION
eResearch is maintaining its Recommendation for the shares of Western Goldfi elds Inc.
(“Western Goldfi elds” or the “Company”) as a Speculative Buy. Our 12-month Target
Price is raised to C$4.20 (US$4.00), for a 53% increase from the current price.
PROFILE
Western Goldfi elds is a Canadian-based junior mining company engaged in precious
metals production and exploration in south-eastern California.
HIGHLIGHTS
► Transitioning from development stage to production output in January 2008.
► Shareholders poised to benefi t from a possible re-evaluation of the shares as the
Company moves towards becoming a gold producer.
► Risk profi le is lowered: mine fully permitted and development fi nancing in place.
► The Company’s Mesquite Mine is one of few multi-million ounce gold reserves in the
U.S.A. not controlled by a major producer; this could invite takeover overtures.
► Exploration could add to resources/reserves and potentially extend mine life.
► Future Amex listing is expected to broaden the U.S. shareholder base.
►Low-grade Mesquite requires large scale operations to maximize profit
INVESTMENT CONSIDERATIONS
1. Strengths
• Shareholders of Western Goldfi elds should benefi t from an expected re-evaluation of the
Company, stemming from its imminent transition from a mine developer to producer (See
Mining Cycle, page 5);
• Provided that the price of gold exceeds US$600 per ounce, the Mesquite Mine should be
very profi table;
• Funding and permitting are all in place, reducing risk associated with the Mesquite
project;
• Mesquite production timeline has been moved forward three months to January 2008,
providing a full year of cash fl ow generation in 2008;
• Feasibility study, completed in August 2006, indicates a 6-year payback period, with a 16%
after-tax IRR at a $500 gold price;
• The risk associated with reserve/resource estimate is reduced by 16 years of historic mining
and production of 3.9 million ounces of gold (which ended in May 2001 when low gold
prices made the mining uneconomic);
• Exploration upside could potentially add further to the resource base and mine life – recently
extended from 9 ½ to 12 years;
• Mesquite is located in California, a jurisdiction that has a stable political and legal system
which protects large capital investments;
• Strong and experienced management team with recognized mining reputation and
accomplishments;
• eResearch believes management will pursue other mining opportunities by utilizing cash fl ow
from the Mesquite Mine and potential drawings on its bank loan facility (of which US$20
million is available for projects other than Mesquite) to add to shareholder value; and
• With no controlling shareholder(s), Western Goldfi elds is a potential takeover target,
particularly as the Mesquite Mine is one of few multi-million ounce gold reserves in the
U.S.A. not controlled by a major producer.
2. Challenges
• Mesquite’s low grade makes it a high-cost operation in terms of dollars per ounce, and one
that is highly sensitive to changes in the gold price and operating costs;
• With total production costs estimated at US$416 per oz (cost of sales estimated at US$355
per oz, and capital costs of US$61 per oz), the economics of the Mesquite Mine will become
problematic if gold declines towards this level and remains depressed, and no amount of
innovative engineering or fi nancial acumen will make it economic;
• Increases in production costs would have large effects on profi tability of the operation – fuel,
labour, environmental reclamation, etc.; and
• Strategically, management must determine how it will continue to add value for shareholders
once Mesquite is in production. Similar near-production opportunities are rare.
3. Hedging
• The bank credit facility requires that Western Goldfi elds hedges 429,000 oz of gold production,
equal to 66,000 oz of production annually over 6.5 years. This leaves approximately 100,000
oz, or 60% of annual production unhedged.
• The Company has entered a fl at forward hedge contract at US$801. This is one of the highest
forward gold price hedges we have seen.
• Following the period of hedged production, Western Goldfi elds’ shareholders will be in a
position to benefi t from further gold price upside.
As indicated, during the exploration period, the shares are a speculation on the possibilities of the
company being successful with the drill bit. If there is a “hit” (“Confi rmed Deposit”), the shares
usually rise to refl ect it, the amount of the rise being a function of how good the strike is.
If the exploration activity indicates that there could be suffi cient resources to bring the mine
into production, the company undertakes feasibility studies to ascertain the project’s economic
probabilities and the need to raise funds to bring the property forward. During this phase “Reality
sets in”, and unless there is signifi cant exploratory drilling on the company’s other properties
(which often there is not as management and fi nancial resources are required to bring the mine to
the production stage), the shares usually drift lower over time.
As “Construction” is being completed, the shares begin to rise in anticipation of the “Start-up” of
production, which means the generation of revenue and profi ts. This positive phase for the shares
usually lasts a few years.
COMMENT: Western Goldfi elds will be at the “Start-up” position in January 2008. Thus, we
foresee good upside potential in the share price as the Company brings its Mesquite Mine into
production and generates significant revenue and cash flow.
• The mine is in Imperial County, California, in the south-east corner of the state. It is located
six miles north-east of Glamis, California;
• The property consists of 213 unpatented and 53 patented mining lode claims, 127 patented
and 97 patented mill site claims, 263.2 ha (658 acres) of California state lease land and 126
ha (315 acres) of fee lands that cover a total area of about 2,080 ha (5,200 acres);
• It was operated between 1985 and 2001 by Gold Fields Mining Corporation, Santa Fe
Pacifi c Gold Corporation, and fi nally Newmont Gold Company, which changed its name to
Newmont Mining Corporation;
• It closed in 2001 due to low gold prices and unfavourable conditions to undertake a mine
expansion;
• Mining was by truck-and-shovel methods;
• In March 2007, Western Goldfi elds announced updated mineral resource and reserve data
for Mesquite Mine. This had the impact of extending the reserve life by approximately two
and a half years from the original feasibility study, based on production at 165,000 oz per
year. See the following table:
Table 1. Mineral Resources
Source: Company
Current Mine Expansion Plan
The plan to expand the Mesquite Mine includes the following steps:
• Purchasing a new mining fl eet and related equipment (US$70.6 million): DONE!;
• Mining the reserves located in the Big Chief, Rainbow and Vista pits;
• Extending the Pad 6 heap leaching facilities;
• Establishing permanent diversion ditches;
• Installing a new carbon column circuit; and
• Expanding the gold recovery and refi nery circuit.
Mesquite Mine
Mineral Resources (including Reserves)
(March 26, 2007)
Tons Grade Contained
Classification Category (000s) (Au oz/T) (Au ozs.)
Measured Oxide 111,196 0.016 1,748,000
Non-Oxide 30,587 0.024 729,000
Sub-Total 141,783 0.017 2,477,000
Indicated Oxide 44,523 0.017 759,000
Non-Oxide 27,335 0.023 633,000
Sub-Total 71,858 0.019 1,392,000
Measured and Indicated Total 213,641 0.018 3,869,000
FINANCIAL REVIEW AND OUTLOOK
Currency: Western Goldfi elds reports in U.S. dollars, and incurs most of its expenses in U.S. dollars.
However, the stronger Canadian dollar negatively impacts G&A costs paid in Canadian dollars.
Revenue/Income: As expected, the remaining revenue generation continues to decline, given that
no new material has been placed on the leach pads for the past several years. This lower production
was partially offset by the higher average selling price per ounce. The costs of mining, exploration
and general and administrative expenses leave the Company with a sizable net loss for 2007, but
with a full year of production expected in 2008, we expect strong revenue and profi t for that year.
eResearch has estimated year one production at 146,000 oz. refl ecting the start-up of production,
but we expect 165,000 oz. thereafter. We derive our revenue forecast as follows:
Cash: As at the end of its last reporting period, March 31, 2007, Western Goldfi elds had US$57.1
million cash on hand, and working capital of US$56.4 million. This improvement from year end
2006 refl ects the US$59.2 million (net proceeds) common equity offering in Q1/2007.
Burn Rate: General and administrative expenses (i.e., the “burn”, which includes all nondiscretionary
expenses, such as salaries, rent, offi ce operating expense, professional fees, and
shareholder costs, etc.) were US$370,000 monthly for the fi rst half of 2007. eResearch estimates
that, over the ensuing twelve months, the Company’s monthly burn will be closer to US$500,000
as the mine commences production.
Operating Costs: For 2008, we have calculated mine operating costs at US$335/oz, and royalties
and California gold tax at US$19/oz. Average cost of capital is US$61/oz.
Capex: In 2007, Western Goldfi eld’s capital expenditures (“capex”) increased sharply as production
nears at the Mesquite Mine, and exploration drilling continues. The Company made purchase
commitments of US$70.6 million for its mining fl eet and related equipment for the development
of the mine. In addition, the Company has planned capital spending of approximately US$36.9
million in other aspects of the mine’s expansion in 2007. As of June 30, the Company has taken
delivery of six haul trucks and two shovels as part of the mine fl eet.
Financing: Western Goldfi elds now has all its fi nancing in place for the development of the Mesquite
Mine. In addition to the US$59.2 million equity fi nancing, the Company entered into a new term
loan facility with Investec Bank (UK) Limited under which the Company will be able to borrow
up to $105 million. The Company plans to draw US$85 million of the facility for development of
the Mesquite Mine, with the balance available for other corporate purposes until late in 2009. This
term loan facility is subject to certain conditions, including an acceptable gold hedging program
for approximately 450,000 ounces of production.
COMMENT: Western Goldfi elds has US$20 million available under the term loan facility to
allocate towards potential acquisitions and other projects. This could help provide additional
fi nancial fl exibility in the future, if needed.
Warrants: The Company has the following warrants outstanding. Newmont Mining Corporation
holds the 6,056,180 amount.
Source: Company and eResearch
2. Options
As of June 30, 2007, Western Goldfi elds had 13.2 million stock options outstanding at a weighted
average exercise price of $0.61.
Capital Structure: Western Goldfi elds has 117,226,002 shares outstanding which, at current share
prices, gives a market capitalization of C$322.3 million. We anticipate the Company will draw upon
its new bank debt facility in order to pay for the signifi cant near term capex.
Insider Holdings: Insiders control 6.8% of the outstanding shares, or 11.6% on a fully diluted
basis.
Financing Statements: Set out overleaf are Western Goldfi eld’s fi nancial statements:
1. Warrants
Exercise Expiry Potential
Number Price Date Comment Equity
1,000,000 $0.30 February 17, 2008 In-the-Money $300,000
5,433,333 $0.45 February 13, 2008 In-the-Money $2,445,000
225,000 $0.60 February 23, 2010 In-the-Money $135,000
6,056,180 $0.76 TBD In-the-Money $4,602,697
12,714,513 $7,482,697
Note: The entries in italics are within our 12-month forecast period, and total:
6,433,333 additional shares, and potential new equity of: $2,745,000
TBD= To be determined; warrants not yet effective by way of registration
2. Options
As of June 30, 2007, Western Goldfi elds had 13.2 million stock options outstanding at a weighted
average exercise price of $0.61.
Capital Structure: Western Goldfi elds has 117,226,002 shares outstanding which, at current share
prices, gives a market capitalization of C$322.3 million. We anticipate the Company will draw upon
its new bank debt facility in order to pay for the signifi cant near term capex.
Insider Holdings: Insiders control 6.8% of the outstanding shares, or 11.6% on a fully diluted
basis.
COMMENT: Western Goldfi elds is expected to commence production in early 2008 at its recently
expanded Mesquite Mine. The former Mesquite Mine continues to generate modest revenues, but
the ramping up of development costs has led to sharply higher net losses until production starts.
Operating cash fl ow also remains negative, but there is now suffi cient cash and fi nancing in place
to complete the mine’s development. Accordingly, another risk has been reduced, and shareholder
value is expected to benefi t from the Company’s re-rating as a producer rather than development
company. Strong free cash fl ow in 2008 should enable the Company to pay down a considerable
portion of bank debt. Book value is expected to increase to US$82 million by year-end 2008, for a
book value per share of US$0.61.
VALUATION
We have used a Discounted Cash Flow (“DCF”) analysis to derive the Net Asset Value (“NAV”)
for Western Goldfi elds.
Since the Mesquite Mine will soon be in production, we place most emphasis on deriving a Net
Present Value for the property by discounting at various appropriate risk rates (20%, 15%, and
10%) the expected net cash fl ows that the property is anticipated to generate over the 12-year life
of the mine.
Once we have determined the NPV for the Mesquite Mine, we add to this the value of cash (per
share) and deduct debt (per share) to arrive at a Net Asset Value per share. The results of our
calculations are summarized below:
Table 3: NPV Per Share at Selected Discount Rates and Gold Prices
Mesquite Mine NPV Per Share @ Share Price in US Dollars
Various Gold Prices Per Ounce $600 $650 $700 $750 $800
20% Discount Rate $3.01 $3.61 $4.10 4.67 5.25
15% Discount Rate $3.69 $4.45 $5.03 5.75 6.47
10% Discount Rate $4.62 $5.62 $6.31 7.24 8.17
NPV Mesquite Mine $4.45
Add: Cash Per Share* $0.21
Less: Debt Per Share * -$0.68
Net Asset Value $3.98
Mesquite Mine NPV Per Share @ Share Price in Canadian Dollars
Various Gold Prices Per Ounce $600 $650 $700 $750 $800
20% Discount Rate $3.19 $3.82 $4.35 $4.95 $5.57
15% Discount Rate $3.91 $4.71 $5.33 $6.10 $6.86
10% Discount Rate $4.90 $5.95 $6.69 $7.67 $8.66
NPV Mesquite Mine $4.71
Add: Cash Per Share* $0.23
Less: Debt Per Share * -$0.72
Net Asset Value $4.21
* Based on forecasted debt and cash levels 12 months forward.
Assumptions:
The following assumptions were used in our calculations:
• Gold prices per ounce: US$600 to US$800, and increasing at 2% per annum;
• Mine life: 12 years;
• Average annual gold production: 165,000 ounces (as per Feasibility Study). Year 1 estimated
at 146,000 ounces;
• Production hedge: 66,000 oz. of annual production is hedged at US$801. Approximately
100,000 oz. per year remains exposed to spot prices. Total hedging requirement is 429,000
oz., or 6.5 years.
• Average cost of goods sold/operating costs: US$335 per ounce (as per Feasibility Study),
increasing at 3% per annum;
• Average cost of royalties and California gold tax: US$14 per ounce and US$5 per ounce,
respectively (as per Feasibility Study), and held constant;
• Average cost of “life-of-mine” capital: US$61 per ounce (as per Feasibility Study), and held
constant;
• Total cost per ounce over “life-of-mine”: US$416
• Discount rates of 20%; 15%; and 10%; and
• Number of shares currently outstanding: 117,226,002.
Valuation Analysis
eResearch believes that there is an upward bias for the price of gold over the next few years. As
indicated in our DCF table above, we think that the price of gold is most likely to swing between
US$600 and US$700 per ounce over our 12 month forecast period. This compares with the current
price of US$660 per ounce. If there is increasing political strife in the world, increased demand
from Asia and/or a weaker U.S. dollar, then we expect the price to be in the upper end of our stated
range.
We have lowered the range of discount rates since our initial report to refl ect the lower risk profi le
as the Company moves closer to production at the Mesquite Mine. With regulatory permits in
place, full development fi nancing now arranged, pre-stripping underway, and the production date
moved forward to January 2008, there is signifi cantly greater likelihood that the Company will be
generating cash fl ow in early 2008.
Accordingly, using the mid-point gold price of US$650, and the discount rate of 15%, we derive
an Net Asset Value for Western Goldfi elds shares of US$3.98. This compares with the current price
on the OTCBB of US$2.62.
Translating into Canadian dollars at the current exchange rate of US$1.00 = C$1.06, the equivalent
Canadian dollar intrinsic value is C$4.21 compared to the current TSX price of C$2.75.
Valuation Conclusion
Consequently, our 12-month Target Price for the shares of Western Goldfi elds is C$4.20 or
US$4.00.
Technically the next buy range is
TECHNICAL ANALYSIS
By Stephen Whiteside - CEO - TheUpTrend.com
Western Goldfi elds, Inc. (TSX:WGI, OTC BB:WGDF.OB)
When we last looked at Western Goldfi elds in late June, we were looking for a move from the $2.60
area up to the $3 area (Canadian $), that objective has now been reached (1).
Looking at the chart below, we are now projecting a move back down to the to $2.20 - $2.40 area
(2). This cycle move lower may not happen, as we have a band of support in the $2.40 - $2.60 area
(3). Our long-term bullish view of this stock would remain intact, as long as we continue to trade
above the two rising trendlines (4, 5).