Goldfields is a Toronto-based junior gold miner that has recently restarted
production of an existing mine located in California. The company is fully-financed,
has been ramping production throughout 2008, is generating cash as it exits
2008, and is undervalued by up to 50% based on spot gold at $850/oz and 7x 2010 free cash flow per share (before debt principal repayments) and my life
of mine NAV-7.5% of $2.27.
stock trades on the Amex under the symbol WGW at a recent price of $1.45 (TSX
symbol WGI), has 153M diluted shares, and a market cap of $213M.
fact that the mine asset is located in North America
(California’s anti-mining stance is not a problem as the mine if fully
permitted and grandfathered in ahead of tougher current laws), is a past producing mine, is a strip mine (not underground), is fully
financed and should be cash flowing this quarter makes WGW an attractive
micro-cap junior miner with less risk than many of its peers, especially those
in need of financing.
sole property, the Mesquite Mine, is located in Imperial County, California. It
was operated between 1985 and 2001 by Goldfields Mining Corporation, Sante Fe
Minerals Corporation, and finally Newmont Mining Corporation, who suspended the
mining operations in 2001 due to low gold prices and unfavorable economics to
continue a mine expansion. At the time of closure, Newmont continued the
permitting process for a mine expansion. The expansion permit was approved on
July 16, 2002, but due to low gold prices Newmont elected not to reactivate
mining at Mesquite.
Goldfields, Inc. acquired the mine in 2003. Production at Mesquite re-started
in January 2008. The asset has limited opportunities to expand resources and I
am not adding anything to valuation for exploration upside. (There may be
and probable reserves amount to 2.75M ozs of gold and will be extracted over
approximately twelve years at a rate of roughly 150,000 ozs in 2009, 175,000
ozs in 2010, 200,000 in 2011, before dropping back to around 160,000 oz per
annum for most of the out years. Cash costs in 2009 should dip from ~$491/oz in
2008 to ~420/oz in '09 and '10. Lower diesel is one driver of lower costs (some
of which was recently hedged) as is a streamlined mine plan.
has $86M in debt and $45M in cash on its balance sheet as of Q3 with $18.7M
available under its credit facility. The mine redevelopment was financed as
33.3M shares at C$2.25 in Jan07 to raise $59.2M
11.3M shares at C$3.05 in Oct07 to raise $33.4M.
Mar07, established a $105M credit facility with Investec Bank.
secure the credit facility the company was required to forward hedge 429,000
ozs of gold at $801 per ounce. The hedge represents a commitment to sell 5500
ounces per month for 78 months (66,000 ounces per year) commencing July 2008
with the last deliverable in December 2014. Each quarter the remaining hedge is
marked to market and the resulting gain or loss runs through the income
statement, but is non cash. Based on production guidance, approximately 80,000
to 125,000 ounces per year remained leveraged to the gold price until the hedge
company has $47.5M of NOLs which should be recovered beginning in 2009.
initiated production of the Mesquite mine in Q1’08. In Q2 production was below
plan as is overall 2008 production (117,000 ozs). A revised mining plan in
which the mining process will be shifted from a concurrent to a sequential open
pit mining plan should reduce costs, improve equipment availability
and lower fuel needs. I am not a mining expert (please keep that in mind; conduct
your own research), but it appears that a rush to start production and in the
process an attempt to use an old leach pad may have contributed to some early
CEO is Raymond Threlkeld, a former senior manager with Barrick, Coeur d’Alene,
with over 30 years industry experience.
2008 2009 2010
including hedged ozs $858
Oz @$801 66,000
Oz @850 84,000 109,000
Ounces 117,255 150,000 175,000
cost per oz $491 $419 $421
($M) 100.6 124.3 154.5
costs 55.5 62.9
Royalties 2.1 2.5 2.9
G&A 4.6 5.2 6.0
Exploration 1.2 1.6 1.6
exp 3.7 1.6 0.4
inc 1.1 0.5 0.6
Taxes - - -
capex - 2.0 2.0
cash flow 34.5 53.0 63.6
FCF/share $0.22 $0.35 $0.41
Debt 63.2 25.6 Zero at yr-end
Cash 45.8 56.8 90.4
rate: LIBOR + 2.2% dropping to +1.75% in 2H’08, per loan agreement.
on cash balance at 1%.
of ~2.0% assumed
and warrant cash added to cash balance, $15.5M.
capex considered project related, thus no maintenance
debt repayments of $17.7M in Q4’08, $4.7M in Jun’09, $6.9M in Dec’09 plus 50%
of cash flow. (I am a little higher on my percent of cash flow repayments than called for. However, I would not be surprised to see the company further accelerate debt payments beyond the current updated agreements. In any case, the difference has little bearing on valuation.)
am valuing WGW at 7x 2009 FCF of $0.35, or $2.42 per share and my life of mine
NAV-7.5% of $2.27 with spot gold at $850/oz. Fair value rises quickly with the
gold price (though limited somewhat by the hedge). I am not counting balance
sheet cash in my P/FCF, arguably this should add to valuation as cash builds in
excess of debt (and full debt repayment which should occur by end of 2010). If the
company meets its targets and gold remains steady or breaks out then valuation
multiples afforded by the market typically rise, too. A 10x multiple would be likely
under those circumstances. I'm using a 7.5% NAV as the project is financed and as production ramps becoming further derisked.
FCF $1.12 $1.73 $2.07
7x FCF $1.57 $2.42 $2.90
FCF $2.25 $3.46 $4.15
the price of gold: I am not a gold bug. The price seems to be
stable and I am willing to work with that. You need to come to your own
position on gold. I am taking the approach that deflationary forces are offsetting
the eventual impact of inflationary forces set off by monetary insanity and
eventual economic recovery. These offsetting forces are holding gold steady in
its current channel. If the gold price drops too much I have no intention of
arguing with it and I am likely to sell w/o notice. If gold spikes and the
metal and the stocks go parabolic I will also sell.
company misses production estimates or the gold price drops, hardly a rare
event for mining and oil/gas explorers. As a non-geologist I am unable to understand
some flaw in their mine plan (though I have talked to a geologist/analyst who
understands the project to get his views on the risks).
Production estimates are met and gold remains roughly were it is or goes higher.