WGX (ASX) Ann: Sale of South Kalgoorlie Operations

Originally posted by blackcastle ↑

Can I just say again, this is a fantastic deal for Westgold!

I hate to get attached to any company, but I was walking around with a smile on my face. Westgold has had to face some tough decisions of late as they were spread way to thin for the incoming capital they receive. We have a massive opportunity with the Big Murch that we haven't leveraged the full opportunity at hand. Putting my McKinsey's hat on and be clinical in hiving all under-performing or idle capital from the balance sheet then SKO, HGO, Rover and Lithium needs to be divested. A tight focus placed on expanding the footprint with the Big Murch can plug the hole in production at the same time drive economies of scale in driving costs down towards World Class.

I do believe everyone is worried about the 4 million in resources we will loose. But a significant portion of that hasn't been converted to reserves due to the fact that it's not low cost. At first glance SKO looks like a low cost producer, but if you look under the hood and unpack the cost story it's the toll processing credits that keeps it viable. SKO has been toll processing in some form since Cookie acquired it and it's toll processing 50% of the time i think. The 2017 Somners & Partners report had this to say:

SKO improving but still loss making as underground grades miss expectations. Output, grades and recoveries improved QoQ largely due to the Cannon Mine dominating production at SKO. Cannon is a 50% profit share for WGX. Disappointingly, 100% owned production from the HBJ underground continued to miss our expectations with grades of 2.7g/t/Au still below our forecast of 4g/t Au. As a result of increased capital expenditure (A$2.5m up on expectations) the operation continued to make a loss with AISC of A$1,664/oz falling short of an achieved gold price of A$1,636/oz.

I am guessing here, but I think the story there was it needed to get upwards to 4g to be profitable on its own (without toll processing) and it wasn't going to get there. Also SKO is an old plant, was commissioned in May 1987, and when MLX bought it was primarily toll processing and there was ore stock pile. It's production has also been diminishing with output well short of years of forecast.

I like this deal as it's pretty close to a cash deal with no escrow on the NST shares. On today closing price for NST, the deal sits at about $84m today. MLX bought SKO and HGO for $40m in late 2013. Most brokers value SKO around 37% of that combine value with HGO slightly higher. So you can assume that the theoritical price paid for SKO was 14.8m and sold 4.5 years later for 84m which about 5.5x gross return - not bad for 4.5 years! (Ofcourse I haven't factored in other capital costs incl. acquisitions) .... also note we still have the Lithium rights which we will try to sell to someone else.

Anyway my happiness turned sombre pretty quickly when I remembered who was at the helm of WGX, Peter Cook was in charge and that means he may do something silly like use the capital to upgrade HGO. Heaven forbid!

If Cookie can flick HGO for $140m (5.5x) (and the Lithium for $25m) then we've got a formidable balance sheet. I would suggest we would become quite compelling for more assertive funds searching for alpha. And we urgently need them to inflate our stock price.

I know I knock PC when I can, but strategically he has assembled some magnificent tenements around the Murch which I am sure there is more to come and today's performance I am slowly coming around to him. I really want to change my sentiment to Buy, but I am nervous with Cookie holding the cheque book that I moved from Hold to Neutral (None) until I see what happens next.

Expand

Interesting to hear you say high AISC of SKO, on the contrary to @loki01 who says this is the lowest cost mine of WGX. Selling the best asset or worst asset makes day and night difference.

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Last $2.96		Change 0.040(1.37%)		Mkt cap ! $2.772B

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$2.98	$2.98	$2.87	$9.168M	3.115M

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