A case for CAD$ 11.28 (USD $8.30) by 2029

Below is an analysis of West Red Lake Gold Mines Ltd. (TSXV: WRLG) assuming a successful restart of the Madsen mine and Rowan property, a precious metals bull market, and specific economic conditions. All calculations are in USD, using the commodity prices (gold at $4,500/oz, silver at $100/oz, oil at $80/barrel), inflation at 9%, US 10-year Treasury yield at 11%.

1. Operational Assumptions and Production Projections

This analysis assumes the Madsen mine and Rowan property restart on schedule, with production ramping up as specified. Below are the key operational parameters based on the provided data:

• Madsen Mine:
  • Resource: 2.2 million ounces (oz) at an average head grade of 6 grams per tonne (gpt).
  • Mill Capacity: 1,100 tonnes per day (tpd).
  • Annual Production: At 6 gpt, the mine produces 75,000 oz of gold per year.
  • Calculation:
    • Daily throughput: 1,100 tonnes × 365 days = 401,500 tonnes per year (tpy).
    • Gold recovery at 94%:
      • 6 gpt × 401,500 tonnes × 94% recovery = ~2,264,580 grams = ~72,800 oz/year (rounded to 75,000 oz).
  • Start Date: Assumed restart in H2 2025 (July 2025) based on company statements.
• Rowan Property:
  • Resource: 300,000 oz at 12 gpt.
  • Annual Production: 50,000 oz/year starting in 2026 or 2027.
  • Calculation:
    • To produce 50,000 oz at 12 gpt with 94% recovery:
      • 50,000 oz ÷ (12 gpt × 94%) = ~132,979 tonnes/year.
    • This assumes a smaller-scale operation compared to Madsen, potentially using existing infrastructure or a portion of the Madsen mill.
  • Start Date: Assumed start in 2026 for simplicity, with full production by 2027.
• Combined Production:
  • 2026–2027: 75,000 oz (Madsen) + 50,000 oz (Rowan) = 125,000 oz/year.
  • 2028–2029: Scales to 250,000 oz/year, implying significant expansion (e.g., increased mill capacity, higher throughput, or additional resources).
• Resource Depletion:
  • Madsen: 2.2M oz ÷ 75,000 oz/year = ~29 years of mine life at current production (excluding expansion).
  • Rowan: 300,000 oz ÷ 50,000 oz/year = 6 years of mine life (excluding resource growth).
  • The increase to 250,000 oz/year by 2028 suggests additional resources or higher-grade zones, possibly from ongoing exploration (e.g., Rowan’s 25,000m drilling program).

2. Economic and Market Assumptions

• Commodity Prices:
  • Gold: $4,500/oz (a significant increase from $2,624.50 in 2024, reflecting a strong bull market).
  • Silver: $100/oz (up from $29.14 in Q2 2024, driven by industrial demand and precious metal value).
  • Oil: $80/barrel (relevant for operational costs, e.g., fuel for mining equipment).
• Inflation: 9% annually, impacting operating costs, capital expenditures, and discount rates.
• US 10-Year Treasury Yield: 11%, indicating high interest rates and a challenging financing environment.
• Currency: All calculations in USD. Assuming a stable USD/CAD exchange rate (e.g., 1.35 CAD/USD, typical in recent data), but inflation may weaken the USD, boosting gold’s appeal as a hedge.

3. Financial Projections

To estimate WRLG’s financial performance, we calculate revenue, operating costs, capital expenditures, and net cash flow, factoring in inflation and market conditions.

Revenue Projections

• Gold Price: $4,500/oz (constant for simplicity, though a bull market could push prices higher).
• Production:
  • 2025: 75,000 oz (Madsen, partial year starting July) = 37,500 oz at $4,500 = $168.75M.
  • 2026–2027: 125,000 oz (Madsen + Rowan) × $4,500 = $562.5M/year.
  • 2028–2029: 250,000 oz × $4,500 = $1,125M/year.

Operating Costs

• All-in Sustaining Costs (AISC):
  • Industry AISC for gold mines in Canada averages ~$1,200–$1,500/oz (based on similar Red Lake operations). Assume $1,400/oz in 2025, adjusted for 9% inflation annually:
    • 2026: $1,400 × 1.09 = $1,526/oz.
    • 2027: $1,526 × 1.09 = $1,663/oz.
    • 2028: $1,663 × 1.09 = $1,813/oz.
    • 2029: $1,813 × 1.09 = $1,976/oz.
• Cost Breakdown:
  • Mining, processing, labor, and fuel costs rise with inflation and oil at $80/barrel.
  • Madsen’s existing infrastructure (mill, shaft, tailings) reduces costs compared to greenfield projects.
  • Rowan may leverage Madsen’s mill, lowering AISC for combined operations.
• Annual Operating Costs:
  • 2025: 37,500 oz × $1,400 = $52.5M.
  • 2026: 125,000 oz × $1,526 = $190.75M.
  • 2027: 125,000 oz × $1,663 = $207.88M.
  • 2028: 250,000 oz × $1,813 = $453.25M.
  • 2029: 250,000 oz × $1,976 = $494M.

Capital Expenditures (CapEx)

• Madsen Restart:
  • Prior financing ($20M in 2024) and existing infrastructure suggest modest restart CapEx (~$50M in 2025, inflated from prior deals).
• Rowan Development:
  • Assume $30M in 2026 for infrastructure and drilling (25,000m program).
• Expansion to 250,000 oz:
  • Assume $100M in 2027–2028 for mill upgrades or new facilities to support doubled production.
• Inflation Adjustment:
  • 2025: $50M (Madsen).
  • 2026: $30M × 1.09 = $32.7M (Rowan).
  • 2027: $50M × 1.09² = $59.45M (expansion).
  • 2028: $50M × 1.09³ = $64.8M (expansion).

Net Cash Flow (Pre-Tax)

• Formula: Revenue − Operating Costs − CapEx.
• 2025: $168.75M − $52.5M − $50M = $66.25M.
• 2026: $562.5M − $190.75M − $32.7M = $339.05M.
• 2027: $562.5M − $207.88M − $59.45M = $295.17M.
• ** Shortly thereafter, the company significantly increases production, leading to: 2028: $1,125M − $453.25M − $64.8M = $606.95M.
• 2029: $1,125M − $494M = $631M (no further CapEx assumed).

Taxes and Royalties

• Net Smelter Royalty (NSR): 1% on Madsen (from Pure Gold deal).
  • 2025: $168.75M × 1% = $1.69M.
  • 2026–2027: $562.5M × 1% = $5.63M/year.
  • 2028–2029: $1,125M × 1% = $11.25M/year.
• Taxes: Assume a 30% corporate tax rate (Canadian mining industry standard).
  • Applied to net cash flow after NSR, e.g., 2026: ($339.05M − $5.63M) × 0.7 = $233.29M after tax.

4. Valuation Estimate

To value WRLG, we use a discounted cash flow (DCF) model, reflecting the high-interest-rate environment (11% Treasury yield) and inflation.

• Discount Rate: Use 15% (11% Treasury + 4% risk premium for mining and market volatility).
• Net Present Value (NPV):
  • Cash flows (after tax and NSR):
    • 2025: $66.25M − $1.69M = $64.56M × 0.7 = $45.19M.
    • 2026: $233.29M.
    • 2027: ($295.17M − $5.63M) × 0.7 = $202.38M.
    • 2028: ($606.95M − $11.25M) × 0.7 = $416.84M.
    • 2029: ($631M − $11.25M) × 0.7 = $433.48M.
  • Discounted at 15%:
    • 2025: $45.19M ÷ 1.15 = $39.30M.
    • 2026: $233.29M ÷ 1.15² = $176.28M.
    • 2027: $202.38M ÷ 1.15³ = $132.99M.
    • 2028: $416.84M ÷ 1.15⁴ = $238.18M.
    • 2029: $433.48M ÷ 1.15⁵ = $215.39M.
  • Total NPV (2025–2029): $39.30M + $176.28M + $132.99M + $238.18M + $215.39M = ~$802.14M.
  • Terminal Value: Assume 10 years of 250,000 oz at $631M/year (after tax and NSR) from 2030, using a perpetuity growth rate of 2% (conservative, below inflation):
    • ($631M × 0.7) ÷ (0.15 − 0.02) = $3,395.38M ÷ 1.15⁵ = $1,687.23M.
  • Enterprise Value: $802.14M + $1,687.23M = ~$2,489.37M.
• Share Count: Assume 300M shares outstanding (based on 2023 issuance of 28.46M shares and subsequent financings, inflated for dilution).
• Per-Share Value: $2,489.37M ÷ 300M = ~$8.30/share (USD).

5. Market and Sentiment Context

• Bull Market for Precious Metals:
  • Gold at $4,500/oz and silver at $100/oz align with a strong bull market, driven by inflation (9%), high Treasury yields (11%), and potential USD weakness.
  • Gold mining equities are undervalued despite rising gold prices, with potential for re-rating as investor sentiment shifts.
• WRLG Sentiment:
  • Positive momentum from Madsen restart and Rowan exploration.
  • Strong management (e.g., Tony Makuch, Duncan Middlemiss) and institutional backing (Sprott, Frank Giustra) enhance credibility.
  • Stock price volatility (10% weekly) suggests speculative interest, amplified in a bull market.

6. Risks and Considerations

• Operational Risks:
  • Restart delays or technical issues at Madsen or Rowan could disrupt timelines.
  • Achieving 250,000 oz/year by 2028 requires significant resource expansion or higher grades, which is uncertain without updated NI 43-101 reports.
• Cost Inflation:
  • 9% inflation increases AISC and CapEx, squeezing margins if gold prices stagnate.
  • High oil prices ($80/barrel) raise fuel costs, though mitigated by existing infrastructure.
• Financing Risks:
  • High Treasury yields (11%) increase borrowing costs. WRLG’s $20M financing in 2024 suggests reliance on capital markets, with dilution risk (e.g., Sprott’s 24% stake).
• Market Risks:
  • A sudden shift in inflation or Treasury yields could impact gold prices. If inflation falls, gold may not sustain $4,500/oz.
  • Silver’s $100/oz price assumes strong industrial demand (e.g., solar, EVs), but WRLG’s focus is gold, limiting silver’s impact.
• Resource Uncertainty:
  • Madsen’s 2.2M oz at 6.5 gpt differs from reported estimates (1.65M oz at 7.4 gpt), and Rowan’s 300,000 oz at 12 gpt is higher than reported 827,462 oz at 9.2 gpt.

7. Critical Evaluation

• Assumption Scrutiny:
  • The $4,500/oz gold and $100/oz silver prices are optimistic but plausible in a high-inflation, high-yield environment. However, historical data suggests gold prices may not scale linearly with inflation due to market dynamics.
  • The 250,000 oz/year target by 2028–2029 implies a doubling of production is ambitious.
  • The 6 gpt head grade for Madsen is lower than the reported 7.4 gpt, potentially conservative but realistic for operational planning.
• Establishment Narrative:
  • Company statements (e.g., CEO comments) are bullish, but mining companies often overpromise on timelines and production. The analysis assumes on-schedule restarts, which may be optimistic given industry norms.
  • Sprott’s involvement and analyst forecasts (83.8% earnings growth) suggest strong backing, but high Treasury yields could constrain financing.

8. Conclusion

Assuming successful mine restarts and a precious metals bull market, WRLG could generate significant cash flows, with an estimated enterprise value of ~$2.49B by 2029, translating to ~$8.30/share (USD). The Madsen mine’s existing infrastructure and Rowan’s high-grade potential position WRLG well in a $4,500/oz gold environment. However, risks include operational delays, cost inflation, financing challenges, and resource uncertainty. Investors should monitor updated resource estimates and restart progress to validate these projections.

Recommendation: WRLG is a high-risk, high-reward investment in a gold bull market. The projected share price suggests significant upside, but only for investors comfortable with mining sector volatility and execution risks.