- The gold price has risen sharply over the last 8 months and could rise higher on low interest rates, high debt, fractious politics, geopolitical tensions, and massive ongoing Covid-19 bailouts.
- Near-production Winston Gold Corporation, whose stock price remains low, is showing signs of a strong breakout.
- A Monte Carlo analysis shows a high likelihood that Winston’s stock price could rise significantly higher.
In March 2020 we published a detailed blog describing the strong potential of near-production Winston Gold Corporation’s Winston Gold Mine. Since then Winston’s stock has risen about 70% in value and the mine itself is now about to start production; a major step forward.
Figure 1: Winston Stock Price showing signs of Breakout from US$0.06 to US$0.09 in Two Weeks (approximately).
Other smaller (Junior) gold mining stocks are also showing breakouts, with Freegold Ventures (TSX: FVL) and Midas Gold (OTC: OTCQX:MDRPF) being examples.
Figure 2: Freegold Stock Price showing Breakout from US$0.08 to US$1.26 in Two Months (approximately).
Based on a Monte Carlo analysis using fundamental mine construction and operating metrics, we believe that Winston stock has strong potential to continue this early breakout to much higher levels.
Potential Stock Price Increase – Monte Carlo Analysis
A simple financial model was developed to estimate the potential for Winston’s stock price growth (OTC: WGMCF or CSE: WGC). The model is run for a single year of operation and assumes stock price growth is estimated by 24 key parameters, including: gold price, production tonnage, ore dilution, number of outstanding shares, etc. Catastrophic risks/ events and unpredictable management actions are not modeled. Parameter variations were analyzed in a Monte Carlo model running through random (uniformly distributed over relatively narrow ranges) variations of the key parameters. The ranges for the key parameters are based on Winston public information and our somewhat conservative best estimates. Graphical and tabular results of the model runs estimating probabilities of various stock prices are shown. The time period for these estimated increases was not modeled.
Figure 4: Monte Carlo Inputs, Production, and Revenue (Inputs are likely conservative).
Figure 5: Monte Carlo Outputs Showing Frequency of Stock Price Bands.
Figure 6: Monte Carlo Outputs Showing Exceedance Probabilities for Various Stock Prices.
For the above assumptions and runs, and assuming no catastrophic events, the likelihood of a US$0.54 stock price, or better, is 95% and a US$1.08 stock price, or better, is 49%. These are strong returns on the current (August 2, 2020) stock price of ~US$0.09.
A somewhat bullish scenario shows the likelihood of a US$1.08 stock price, or better, is 94% and a US$1.89 stock price, or better, is 44%.
Whether these returns are recognized in months or years is hard to predict, however the current high gold price could make this quite quick and could exceed estimates. Conversely, a slew of problems could crash the investment.
(We are open to making this spreadsheet model freely available to interested parties. If interested, message Analytical Investor on Seeking Alpha).
Such a strong stock price increase is not without risks. Winston is a small indebted gold mining company that is near production, but a number of factors could impact production and estimated profitability.
The risks below should be carefully weighed against the potentially high return.
- WGMCF and WGC are thinly traded stocks and the investor should buy slowly and sell slowly (small volumes).
- Winston has not undertaken sufficient drilling or metallurgical testing to have their resource certified by a National Instrument 43-101 study. Winston is rather relying on the richness of the area, the profitable historic Custer mine, which likely has considerable undiscovered resources, and their own drilling that exposed the Parallel, Block 93, Edna and other apparently rich veins. Not finding sufficient (or suitable) ore remains a longer term risk. A mitigation is that the initial drift will be able to access four adjacent veins (Parallel, Custer, Block 93, and Edna), and the areas not historically mined are of high grade by today’s standards. In addition, Winston’s method of quickly and inexpensively bringing narrow vein gold mines into production is also a strong mitigation, and they are already scouting for their next opportunities.
- Underground mining is in progress and as with any underground work there are safety risks. A serious incident could be damaging but likely not catastrophic. Winston has an experienced team in place which considerably reduces this risk.
- Cost over-runs could cause erosion of profits. The Monte Carlo analysis above accounts for this to some degree. Winston’s mining team’s experience and knowledge of local mining costs is reassuring.
- The current gold price is strong but could soften, although unlikely in the near, and foreseeable, future.
- There appears to be sufficient funding to start bulk testing and processing. More funding is needed, by our estimates $2 to 3 million. Inability to raise this funding could be problematic, although unlikely in this market.
- Management failure, which could be the misappropriation of funds, poor use of funds, poor technical decisions, poor financial decisions, loss of investor confidence, inadequate focus on the current project, etc. This seems unlikely based on the track records of the management team.
Winston’s recent breakout from US$0.06 to US$0.09 shows that their stock is being noticed as the price of gold rises and Winston moves into production. From our somewhat conservative analysis, we see that Winston has sound fundamentals and with a strong gold price could quite easily increase in price to between US$0.50 and US$1.00.
Disclosure: I am/we are long WGMCF.
Additional disclosure: We have independently researched and written this article and have not received any payment from any entity to do this work.