Westgold Resources Limited

Company Overview: Westgold Resources Limited (ASX: WGX) is an Australian gold production company with a dominant landholding in the Murchison region of the Mid-West.  The company owns a vast infrastructure and a procession of growth projects. The company’s Murchison operations comprise three operating segments, Fortnum Gold Operations (FGO), Meekatharra Gold Operations (MGO) and Cue Gold Operations (CGO). The company’s wholly-owned subsidiary, Minterra Pty Ltd, serves as the group's specialist underground mining service provider.

WGX Details

Output from Murchison Gold Projects to Drive Future Growth: Westgold Resources Limited (ASX: WGX) is a gold production company with operations concentrated in the Central Murchison region of Western Australia. As on 22 June 2021, the company’s market capitalisation stood at ~$856.18 million. Despite the challenges caused by the global COVID-19 pandemic, WGX was able to report 32% YoY growth in its H1FY21 revenue and 388% YoY growth in net profit, driven by the increase in gold sales and average gold sales price. During Q3FY21, the company saw lower output due to COVID-19 related workforce availability and mobility, seasonal weather impacts and one-off issues restricting access to the planned mining area. However, the company solidly outperformed its cost guidance, marking Q3FY21 as the third consecutive quarter, beating cost guidance.

Revenue Trend (Data Source: Analysis by Kalkine Group)

Looking ahead, the company is focused on increasing its output, improving its margins, and reducing its capital expenditure. Although the company is continuing to witness the impact of COVID-19 related travel restrictions and labour availability, its overall growth from its core Murchison gold projects is moving in a positive and upward trend. The growth in the output from Murchison gold projects is expected to continue into FY22. Moreover, WGX is expected to meet the June quarter cost guidance. With its long-life mines, robust balance sheet, and continued focus on managing cost, the company seems well placed for long-term growth.

Improved Revenue and NPAT in H1FY21: For H1FY21, the company reported gold sales of 125,197oz, up 8% on the previous corresponding period (pcp). Due to the rise in gold sales and an increase in the average gold sales price of $442 per ounce, the company’s total revenue grew by 32% YoY to $301.8 million. Further, the company’s profit after tax grew by 390% YoY to $47.5 million. Cash flow used in investing activities stood at $108.38 million in H1FY21, which included investment in property plant and equipment of $16.73 million, mainly associated with underground and surface mining plant.

NPAT Trend (Data Source: Analysis by Kalkine Group)

Q3FY21 Result Highlights: During Q3FY21, WGX achieved gold sales of 63,139oz and solidly outperformed its cost guidance. For the quarter, the company reported mine operating cash flow of $56.2 million with net mine cash flow of $12.0 million. Over the quarter, the company completed the sale of its lithium assets, including a royalty over the Mt Marion Lithium mine and exploration and development rights on adjoining tenure to Reed Industrial Minerals for $17.5 million in cash. In March 2021, WGX’s cash position grew by 9% over the previous quarter to $178 million in Q3FY21, leaving the company in a decent fiscal position with no corporate debt.

Key Metrics: For H1FY21, the company’s gross margin stood at 24.2%, up from 4.4% in H1FY20. Net Margin for H1FY21 stood at 15.8%, up from 4.3% in H1FY20. Current ratio for H1FY21 stood at 2.18x, up from 1.05x in H1FY20, demonstrating that the company has improved its ability to pay its short-term obligation.

Liquidity Profile & Profitability Metrics (Data Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 45.10% of the total shareholding, while the top four constitutes the maximum holding. Ruffer LLP and Van Eck Associates Corporation are holding a maximum stake in the company at 9.10% and 9.02%, respectively, as also highlighted in the chart below:        

Data Source: Analysis by Kalkine Group

Increase in Shareholding for Alto Metals Limited: WGX recently increased its holding in Alto Metals Limited from 12.10% to 13.81x. The company currently holds 62,187,580 ordinary shares of Alto Metals Limited.          

Key Risks: The company is exposed to the risks associated with the impact of COVID-19 pandemic. In a recent trading update, WGX highlighted that the knock-on effects of COVID-19 related travel restrictions and labour availability is impacting the company’s business. The company is also exposed to the risks related to the availability of operational personnel, haulage constraints, and weather conditions.

Outlook: During H1FY21, the company reported substantial capital expenditure as the Group’s major growth projects progressed. Looking ahead, the company expects the growth capex to drop significantly to sustainable replacement levels, which will translate to greater cash generation for its shareholders. The company’s objective is to return profits to its shareholders with a dividend policy of 30% of NPAT. WGX is expected to report a net profit before tax of $110 million in FY21, marking a significant positive inflexion point and turnaround year for the Group after several years of heavy capital investment in its Murchison assets.

In a recent trading update, the company notified that its June quarter output is expected to be between 56,500 – 61,500oz, which is below expectations. This was mainly due to impacts of haulage constraints, weather conditions and mine plan sequencing issues. FY21 total production is expected to be in the range of 245,000 – 250,000oz with AISC of $1,460-1,560/oz.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the three months, the stock has corrected by 6.27% and is trading lower than the average 52-week price level range of $1.855 -$2.980, offering an opportunity for accumulation. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at some discount to its peers, considering the continued impact of COVID-19 pandemic, lower than expected June quarter output and also taking into account that the company has been trading at a discount in the past 3-years over its peer median. We have taken peers like OceanaGold Corp (ASX: OGC), Regis Resources Ltd (ASX: RRL), and Dacian Gold Ltd (ASX: DCN). Considering the company’s improved financial performance in H1FY21, decent long-term production profile, robust balance sheet, current trading level and valuation, we give a “Buy” rating on the stock at the closing price of $1.980, down by 1.981% as on 22 June 2021. 

WGX Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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