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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Monday, June 30, 2008

Western Goldfields Inc.

CURRENT PRICE: $2.22
TARGET PRICE RANGE: $2.91-$7.06

Western Goldfields Inc. is a gold mining company with operations in Imperial County, in the Southeastern corner of California. Western Goldfields strategy is to identify and invest in proven and politically safe North American gold deposits using cash flow from their Mesquite gold mine production.

Western Goldfields had their first pour on January 15, 2008 and first quarter production of 9,960 ounces of gold. Management expects 20,000 to 30,000 ounces of gold production in the second quarter and hope to ramp up to 135,000-145,000 ounces of gold production in 2008 and 2009.

Mesquite Gold Mine
The Mesquite Gold Mine is an open pit mine outfitted with a fully permitted heap leach processing facility with a capability of up to 170,000 ounces per year production. The heap leaching process is explained very well in their promotional video.

Western Goldfields Inc. Promotional Video

Measured, indicated and inferred (MI&I) resources equal about 4.3 million ounces of gold at Mesquite—a very nicely defined resource. The gold resource is very finely disseminated particles of gold throughout the ore. Proven and probable reserves are

WESTERN GOLDFIELDS INC. SUMMARY

AMEX: WGW
TSX: WGI

Shares Outstanding: 135.4 Million (155.2 million fully diluted)

Market Capitalization: ~$300 Million

Investor Relations Telephone: 416-324-6015

Western Goldfields Inc. Web Site

Western Goldfields Inc. June Presentation

Western Goldfields Inc. has a total of 4.3 million oz of gold compliant with Canada’s 43-101 regulatory rule. There are 2.8 million proven and probably reserves defined for SEC purposes.

A portion of Western Goldfields production is hedged. A total of 66,000 ounces of gold per year are hedged though 2014 due to a credit facility agreement. The hedges are at $801 per ounce. That is roughly 40 percent of their gold production. Given the rising price of gold, the hedge is costing Western Goldfields almost $1.00 per share in share value for 2009 valuation based on the cash flow method of valuation used by the Gold Stock Strategist.

WGW had about $69 million in debt reported in the 2007 annual report through a loan term facility and has 6 million warrants outstanding maturing as early as December 2009.

Cash on hand as of June 2008 = ~$40,000,000. with 7.5 million restricted. They expect to have become cash flow positive in June 2008.

Production projections range from 135,000 up to 170,000 per year when the Mesquite mine is fully operational. For purposes of modeling, Western Goldfields Inc. production is projected to be 80,000 oz. in 2008; 130,000 oz.in 2009; 155,000 oz. in 2010.

A major issue of concern is the cost of production, estimated by management to be $470-$490 per ounce in 2008. Management projects the cost of production is to decline to $430-$450 in 2009 and $390-$410 by 2010. If energy costs continue to rise, cost of production is likely to increase relative to current management projections. This is the wild card for all producers in my opinion.

Management is experienced and well connected in the industry working for Barrick and Kinross Gold and other resource companies.

The following valuation methods are what I use to value Western Goldfields Inc. for my investment purposes and provide a range of short-run and potential long-run value. Of course, different assumptions would produce different valuations. The reader can assess the reasonableness of the assumptions.

SHORT-RUN CASH FLOW SHARE VALUE

$2.91 per share in 2009 using a cash flow model valuation and assuming the following:

10x cash flow
$865 per ounce POG (adjusted for hedge based on $925 spot POG)
$500 per ounce production cost
130,000 ounces of production
$6,200,000 G&A costs
155,167,000 shares outstanding (fully diluted)

POTENTIAL LONG-RUN RESERVE SHARE VALUE

$7.06 per share using Western Goldfields Inc.s 4.3 million oz. MI&I gold resource estimate.

The majors are paying about $280 an ounce for buyouts at $950 an ounce POG. 4,300,000 times $280 an ounce equals $1,095 million. $1,095 million divided by 155.2 million shares (fully diluted) equals $7.06 per share.

MANAGEMENT

Randall Oliphant, Chairman
Raymond W. Threlkeld, President and Chief Executive Officer
Brian Penny, Chief Financial Officer
Paul G. Semple, Vice President, Projects
Wesley C. (Wes) Hanson, Vice President, Mine Development


BOARD OF DIRECTORS

Randall Oliphant
Vahan Kololian
Martyn Konig
Gerald Ruth
Raymond W. Threlkeld

-------------------------------------------------

Full disclosure: I do not own shares in Western Goldfields Inc. The information provided in this post is believed to be correct, but not guaranteed. Investing in junior gold miners entails risks. Readers are responsible for their own investment decisions. Do your own due diligence.

3 comments:

MontyHigh said...

Been pretty quiet on this board while there's been a lot of ugly action with our favorite stocks.

Hope everything is ok.

I'm expecting that things will start to turn back up this week.

Monty

Anonymous said...

Seems that Nova Gold might be a candidate for your coverage. They are planning on starting production this year. Great site, keep up the good work.

JC said...
This comment has been removed by a blog administrator.

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