Strong Net Cashflow from Operations...Friday, December 5, 2008
Everyone remembers the California gold rush a century ago, but few knowa large gold mine is currently under operations in the southeast cornerof California near the Arizona and Mexican borders. This is the miningoperations known as the Mesquite Mine managed by Western Goldfields(Amex: WGW).
Thismine was actually operated from 1985 to 2001 by several miningcompanies including Newmont, but was suspended in 2001 when gold pricesfell to the bottom. However, Western Goldfields acquired the mine in2003, and production re-started in January of this year, the timing ofwhich couldn’t have been better since the current turmoil in the creditmarket makes any financing very difficult if not impossible for someother cash stripped mining companies.
Western Goldfields (WGW)is headquartered in Toronto, Ontario. I met their President and CEO Mr.Raymond Threlkeld and Director of IR and Corp Development Mr. HannesPortmann on November 20 in New York City. They discussed the details ofthe compelling value and low risk that their Company offered incomparison to their current low stock price.
Their majorproject, the Mesquite Mine, has 4.3 million resource ounces of goldincluding 2.8 million ounces in reserves. They are continuing drillingto find additional gold resources that could add 1 to 2 years ofadditional mine life beyond the current 14 years. Since it is a openpit operation, WGW can produce gold in a relatively cheap cost, with2008 cost of sales averaging around $500 per oz. With the plannedincreasing production from 2009 and beyond, the cost of sales isexpected to average around $420 per oz for the life of the mine.
Thislow cost is important during today’s gold correction and highproduction cost environment, comparing to many other mining companies.It enables WGW to make decent profit and generate substantial cashflowfrom operations. Even with today’s gold price, and expected 150,000 ozor more of annual production starting 2009, they can generate about $50to $60 million in cashflow per year from operations. As a matter offact, their current 3rd quarter 2008 has gold sales of 47K ounces atthe cost of $390 only, with cashflow from operating activities at $16.5million. Their stock price was trading at a ridiculous low level andtemporary dipped below $0.50 per share late last month when the wholemining industry got hammered. However, it has since recovered nicely to$1.34 as of last Friday (11/28).
WGW has a very strong cashposition of $45 million on hand including $7.5 million of restrictedcash due to their loan covenants. At the same time, they are addingcash from their operations each quarter. This is why when their stockprice dropped last month, they announced on Nov. 8 that they will buyback their shares up to 12.8 million shares, or 10% of their publicfloat, maximum allowable by TSX. As Raymond said at NYC that in thecurrent environment, cash is king and they definitely have the luxuryof their vast cash position to do it. WGW does have $86 million loanoutstanding, but since they will be generating strong cash, they areplanning to pay it back in about 2 to 2.5 year’s time. By my roughcalculation above, with today’s gold price, they should have no problemto pay $30 million toward their debt each year from their operations.Unlike many juniors, they don’t need to do any financing withoutpursuing any strategic acquisitions. Their management team seems to bevery financially conservative in their business operations.
Moreimportantly, if we believe the recent gold price is depressed and notsupported by the dire macroeconomic situation and monetary inflation,we should see substantially higher gold price for many years into thefuture. The operating leverage provided by the Mesquite project willsubstantially increase the value of Western Goldfields. It won’tsurprise me that WGW doubles or even triples from the current $1.34price level to somewhere in the $3-4 range, which only brings them backto the price level this time of last year.
Disclosure: I don’town Western Goldfields, but I believe WGW is currently undervalued andprovides a good risk/reward opportunity for a diversified miningportfolio for long term capital gain.
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