A South African Gold company with Potential - West Wits Mining (WWI AU)

I am never much of a gold bug. After the mining conference a few weeks ago, I became fascinated by the potential of WWI.

Time stamp this.. Stock is trading at $0.57 (15th May 26).

WWI is a small listed miner (WWI AU) with market cap of $250M or so.

The first thing (and the most important thing) to note is WWI is a junior gold miner in South Africa. Buying WWI here means willingness to take on the South Africa risk.

Personally, I think the South Africa risk is OK to take on after doing some reading. Let's be honest, the "legal" environment hasn't been the best.  If I understand correctly, mining companies in South Africa do no own the mines but they have mineral rights to the mines. Each mines are also required to be shared with "local empowerment interests". Also infrastructure is shaky at best (think power supply reliability and all that).

With these negatives in mind, the mining industry is of importance to South Africa (contributes around 30-50% of exports). Unemployment is running around 30%. A rational government should be at least supportive of status quo.

In short, everyone has figured out the overall "climate" for mining companies is at best mixed (to be kind).

OK... So what i so interesting about WWI ? I chatted with several small Australian gold companies (MV $1-200M) at the conference. Most of them have gold contents like 1-2g/ton. Resource size would be say 1-2M oz. Cost/oz over A$2000.

Now compare with WWI.... It has resource of 7M oz @ 4g/ton. So in terms of bang for the buck, it is much more attractive.... For similar market cap, shareholder has access to much more gold. One important point to note is WWI owns 3/4 of the mine (1/4 is owned by the local empowerment interests). WWI's stake in the gold mine is still substantial.

The mine is located close to Johannesburg. One would hope power supply is reliable. Apparently, it is located in a very rich gold basin over the years.  It should have access to good infrastructure and people. One fine detail is it is processing its ores at a nearby third party processing plant... So first phase of the project is quite capital efficient. 

Another important characteristics of WWI is it is "funded" with its first phase of production i.e. it is not an exploration company... It is already mining for gold vs. most of the Australian smaller gold companies still having to raise money to build the mine and all that. WWI poured its first gold earlier in the year.

During the first phase of production, it aims to increase production to 70000 oz (steady state). It will take 2026/2027 to gradually ramp up production. If all goes according to plan, it will be producing 70000 oz from 2028 onwards. Mine life is about 17 years.

Importantly, all in cost is only around US$1300/oz. At current gold price of $4500, it will be plenty profitable comes 2028.

WWI is an ambitious company.  It is working on a plan to scale production to 200000 oz a year beyond 2028.

Let's run some numbers.... Let's say in 2028, it will be producing 70000 oz of gold...  It will have revenue of US$315M. Production cost would be $90M or so. So it has US$200M to pay for overhead/taxes/HQ staff etc etc.... And remember we will only keep 75% of that.... So it won't be nuts to imagine net profit of US$100M or so (very rough estimate by the way).

Now... Let's say beyond 2028, one day it gets to produce 200K oz of gold, we are looking at revenue of over US$900M.

I had a chat with management.... Its first phase of the project is shallow enough that management doesn't see phase 1 as particularly technically challenging. An interesting tidbit was if it has to dig deeper to mine gold in the future, its cost won't change that much because deeper mines can have more automation. 

Another number to play around is... If its resource has 7M oz of gold... Let's say it can eventually mine 5M oz, we are looking at value of over US$20bn in the coming decades. Its first phase of the project at 70000 oz over 17 years, we are only looking at mining the first 1.2M oz of gold vs. its total resource of 7M oz.

There are other potential upsides: i) it has access to an uranium resource (so let's see if it leads to anything), ii) it has potential to raise its stake in the mine by buying out the local interests for a reasonable sum, iii) exploration upside as it invests to define its resources better.

The CEO is a mining executive. He started his career at Anglo American. To quote from his bio: " He has extensive production experience in conventional narrow tabular underground mining, as well as open-cast mining, across various commodities, including Gold, PGMs, Copper, and Cobalt. Mr Deysel project-managed several brown- and greenfield mining projects in South Africa, the DRC and Ghana."  At the current phase of WWI, it needs a technical/mining operator type CEO to increase production. My gut feeling is management is capable and will deliver on its various goals.

In summary, investing in WWI is really about taking on the South Africa risk. As a small gold company by itself, it is highly attractive. The way I think about the key country risk is.. If it delivers on its operational goal of 70K oz in 2028, assume regulatory environment stays the same and gold price is roughly flat, there will be ample upsides as shareholders will look through the noise and see the cash flow and value the underlying rocks better than current valuation. It has the potential to be a multi bagger. Keep in mind the large gold miners are trading at around 10X PE with not much production growth....

PS. This is not financial advice. Personal opinion only. Do your own research. I may own the stock.