Western Goldfields: The new gold rush
It might not top the hype of the California gold rush of 1849, but the recent run-up in the price of gold has had many investors giving gold and other precious metals a second look. The share prices of many gold miners have consistently been hitting new highs in recent weeks as the price of gold edged toward $1,000 per ounce, a level that was topped on Thursday.
One small cap that is set to profit from these rising prices is Western Goldfields Inc. (AMEX: WGW). At a market cap of $488 million, the company has seen its stock price surge 109% over the course of the past year. Currently headquartered in Toronto, the company was incorporated as the Bismarck Mining Company in 1924. It changed its name in 2002 and went through a corporate restructuring in 2006.
Today it has a seasoned management team that includes executives that have come from other big name gold mining companies such Barrick Gold Corp. (NYSE: ABX) and Kinross Gold Corp. (NYSE: KGC). Officers and directors of the company own approximately 4.5% of its outstanding common shares.
The chief asset of Western Goldfields is its Mesquite mine, located in Imperial County, Calif. and operated between 1985 to 2001 under several different companies including Newmont Mining Corporation (NYSE: NEM). In 2001, the mine was closed due to low gold prices and the estimated costs of expanding the mine, but Western Goldfields acquired the mine from Newmont in 2003 and has since worked to bring it back into production.
As of Dec. 31, measured and indicated resources of the mine were approximately 4.3 million ounces. The mine was brought into production in January and the company is now forecasting full-year production of 155,000 to 165,000 ounces for 2008. Western estimates that the mine has a 12-year useful life. With the mine now up and running, the company will likely be able to shift its focus to other potential opportunities such as expanding into other parts of the southern United States, and possibly Canada and Mexico.
For the year ended Dec. 31, Western reported a net loss of $50.3 million, or $0.43 per diluted share. Total revenue from gold sales checked in at $4.3 million. Investors should keep in mind that these results are not indicative of the company’s projected results for 2008 given that the mine only became fully operable from a commercial production standpoint at the beginning of this year. Company management did view 2007 as a success, however, as it was able to execute on its plan to bring the mine into production on schedule and on budget. For 2008, analyst estimates are calling for EPS of $0.18 per share. Revenue is expected to come in at $125.9 million.
Catherine Gignac, an analyst for Wellington West Capital Markets, is bullish on the stock. “The shares offer positive leverage in a rising gold price environment,” she wrote in a recent research note. Gignac has a “buy” rating on the stock with a 12-month target price of $5.50. Shares of Western closed at $3.64 on Thursday.
Aside from volatility in gold prices, a primary risk that investors in Western Goldfields should monitor is the company’s cash position. As with any start-up venture, the ability to maintain an adequate level of liquidity until cash flow from operations has hit full throttle is key. As of Dec. 31, the company had a cash balance, including restricted cash, of $51.4 million. As of Feb. 7, it had $8.2 million remaining under a credit facility available for expansion of the Mesquite mine. It also had $17.7 available under a credit facility for general corporate purposes.
In 2007, Western’s operations used up $28.6 million in cash, yet its financing activities left the company in a considerably stronger position than it was at Dec. 31, 2006, when it reported cash of $5.5 million. Although this situation should continue to be watched, Western’s cash situation will likely improve dramatically in the years ahead. With its mine now being fully operational, the company projects that it will generate approximately $60 million in cash flow in 2008 provided that they are able to hit their production target and gold prices remain close to their current level.
This year will unquestionably be a pivotal one for Western Goldfields (WGW). The fact that the company has been able to bring Mesquite into production just as gold prices have begun to take off could not have been better timing for the company.
One small cap that is set to profit from these rising prices is Western Goldfields Inc. (AMEX: WGW). At a market cap of $488 million, the company has seen its stock price surge 109% over the course of the past year. Currently headquartered in Toronto, the company was incorporated as the Bismarck Mining Company in 1924. It changed its name in 2002 and went through a corporate restructuring in 2006.
Today it has a seasoned management team that includes executives that have come from other big name gold mining companies such Barrick Gold Corp. (NYSE: ABX) and Kinross Gold Corp. (NYSE: KGC). Officers and directors of the company own approximately 4.5% of its outstanding common shares.
The chief asset of Western Goldfields is its Mesquite mine, located in Imperial County, Calif. and operated between 1985 to 2001 under several different companies including Newmont Mining Corporation (NYSE: NEM). In 2001, the mine was closed due to low gold prices and the estimated costs of expanding the mine, but Western Goldfields acquired the mine from Newmont in 2003 and has since worked to bring it back into production.
As of Dec. 31, measured and indicated resources of the mine were approximately 4.3 million ounces. The mine was brought into production in January and the company is now forecasting full-year production of 155,000 to 165,000 ounces for 2008. Western estimates that the mine has a 12-year useful life. With the mine now up and running, the company will likely be able to shift its focus to other potential opportunities such as expanding into other parts of the southern United States, and possibly Canada and Mexico.
For the year ended Dec. 31, Western reported a net loss of $50.3 million, or $0.43 per diluted share. Total revenue from gold sales checked in at $4.3 million. Investors should keep in mind that these results are not indicative of the company’s projected results for 2008 given that the mine only became fully operable from a commercial production standpoint at the beginning of this year. Company management did view 2007 as a success, however, as it was able to execute on its plan to bring the mine into production on schedule and on budget. For 2008, analyst estimates are calling for EPS of $0.18 per share. Revenue is expected to come in at $125.9 million.
Catherine Gignac, an analyst for Wellington West Capital Markets, is bullish on the stock. “The shares offer positive leverage in a rising gold price environment,” she wrote in a recent research note. Gignac has a “buy” rating on the stock with a 12-month target price of $5.50. Shares of Western closed at $3.64 on Thursday.
Aside from volatility in gold prices, a primary risk that investors in Western Goldfields should monitor is the company’s cash position. As with any start-up venture, the ability to maintain an adequate level of liquidity until cash flow from operations has hit full throttle is key. As of Dec. 31, the company had a cash balance, including restricted cash, of $51.4 million. As of Feb. 7, it had $8.2 million remaining under a credit facility available for expansion of the Mesquite mine. It also had $17.7 available under a credit facility for general corporate purposes.
In 2007, Western’s operations used up $28.6 million in cash, yet its financing activities left the company in a considerably stronger position than it was at Dec. 31, 2006, when it reported cash of $5.5 million. Although this situation should continue to be watched, Western’s cash situation will likely improve dramatically in the years ahead. With its mine now being fully operational, the company projects that it will generate approximately $60 million in cash flow in 2008 provided that they are able to hit their production target and gold prices remain close to their current level.
This year will unquestionably be a pivotal one for Western Goldfields (WGW). The fact that the company has been able to bring Mesquite into production just as gold prices have begun to take off could not have been better timing for the company.
About the Author
Billy Fisher is a certified public accountant and and freelance investment writer whose work has appeared in Investor's Business Daily and The Motley Fool.