Company Overview: West African Resources Limited (ASX: WAF) is an unhedged gold mining company focussed on creating shareholders' value through the acquisition, exploration and development of gold projects in West Africa. WAF holds 90% interest in the Sanbrado Gold Project, which is located 90km east-southeast of Ouagadougou, and covers an aggregate area of 116km². WAF has 100% interest in Sartenga copper-gold-molybdenum project, which has a large tonnage porphyry system. In 2020, WAF acquired Toega Gold Project existing resource of 1.1 million ounces of gold at 2.1 g/t Au (non-JORC).

WAF Details

Expanding Mineral Resource Base Underpinned by Drilling Campaigns and Acquisition: West African Resources Limited (ASX: WAF) is a gold mining company with 90% interest in Sanbrado Gold Project, Burkina Faso. As on 9 March 2021, market capitalisation of the company stood at ~$686.31 million. The company’s strategy is focussed on creating shareholders’ value through the acquisition, exploration and development of gold projects in West Africa. Notably, West Africa is one of the most attractive mining regions with several world’s leading producers. The company poured its first gold on 18 March 2020 at its Sanbrado Gold Project. Last year, the company witnessed a 65% increase in Sanbrado Mineral Resources to 81 Mt at 2.0 g/t for 5.1 Moz gold, underpinned by successful drilling campaigns and the recent acquisition of the nearby Toega deposit.

Sanbrado Mineral Resources growth since 2014 (Source: Company Reports)

Looking ahead, the company is focused on maintaining continuous operations, increasing gold production, and reducing its per-ounce costs. In FY21, the company plans to conduct 25,000m RC & Diamond drilling, 30,000m auger drilling, and Toega resource definition drilling, with test work and permitting. The average annual production for the next 10 years is expected to be around 216 koz per annum with an average of 197koz/year over the 13-year mine life.

Profitably Achieved in H1FY20: During the half-year ended 30 June 2020 (H1FY20), the company completed construction and commissioning activities in all areas of the Sanbrado Gold Project. The company poured its first gold on 18 March 2020 at the Sanbrado Project and declared commercial production in Q2FY20. Over the half-year period, the company processed total ore of 937kt at a mill head grade of 1.5 g/t Au, with a gold recovery of 92% for 40,458 ounces of gold produced. In April 2020, the company signed a definitive agreement to acquire 100% of the 1.1 Moz Au Toega gold deposit from B2Gold Corp and their partner GAMS-Mining F&I Ltd. Total revenue for H1FY20 stood at $58.84 million, up from the $768k in the previous corresponding period (pcp). For H1FY20, the company reported a profit after tax of $3.75 million, compared to the loss of $3.49 million in the pcp.

H1FY20 Result (Source: Company Reports)

December 2020 Quarter Highlights: During the December 2020 quarter (Q4FY20), the company’s  gold production grew by 10% (QoQ) to 50,299 ounces at an all-in sustaining cost of US$992/oz. This took the total YTD gold production to 136,476 ounces. The unhedged gold sales stood at 51,688 ounces for Q4FY20 at an average price of US$1,923/ounce. For the quarter, the company reported total gold revenue of A$135.87 million, taking the total YTD revenue to $309.85 million. During Q4FY20, the company generated A$54 million of operating cash flow and made an early US$25m debt repayment. As at 31 December 2021, the company’s cash on hand stood at A$95 million and notional net debt stood at US$101 million.

Quarter Production Trend (Source: Company Reports)

Key Metrics: EBITDA margin for H1FY20 stood at 46.8%, higher than -657% in H2FY19. Net Margin for H1FY20 stood at 6.4%, higher than -179% in H2FY19. ROE for H1FY20 stood at 3.7%, up from -1.4% in H2FY20.

* Year End 30 June, Past 5-year Financial Performance; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 41.67% of the total shareholding, while the top four constitutes the maximum holding. Van Eck Associates Corporation and L1 Capital Pty Ltd. are holding a maximum stake in the company at 11.26% and 5.35%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

High Grades and Extensive Visible Gold Intersected at M1 South: In December 2020, the company announced the intersection of high grades and extensive visible gold in the deep diamond drilling beneath reserves at the M1 South deposit, Sanbrado Gold Project, Burkina Faso. The results include 6.5m at 16.1 g/t gold and 6m at 20.5 g/t gold approximately 950 vertical metres below surface and more than 400m below current ore reserves.

Key Risks: The company is exposed to the risks related to the fluctuations in the prices of gold. Further, the company is also exposed to the risk and uncertainties caused by the COVID-19 pandemic. The company is also exposed to foreign exchange currency risk.

Outlook: In FY21, the company expects its gold production to be between 250,000 and 280,000 ounces with adjusted operating costs of US$530 – US630/oz and all-in sustaining costs (AISC) of US$720 – US800/oz. Exploration expenditure for FY21 is expected to be around US$12.5 million. Over the next 10 years (2021 to 2023), the company expects its average annual production to be around 216,000. In the first quarter of FY21, the company is focused on maintaining continuous operations, increasing gold production, and reducing its per-ounce costs. Further, the company intends to continue its drilling campaign for Toega feasibility study. During 2021, the company will continue to optimize the milling circuit with the aim of increasing the throughput rates and gold recoveries of the harder fresh ore.

Long Term Production Target including Inferred Mineral Resources (Source: Company Reports)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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 last three months, the stock of WAF has corrected by 22.72% and is trading below the average of its 52-week price band of $0.365 and $1.230, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$0.722 and resistance of ~$0.911. We have valued the stock using the P/E 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 a slight premium to its peer average P/E (NTM trading multiple), considering the expanded resource base and improved gold price environment. For the purpose, we have taken peers like Regis Resources Ltd (ASX: RRL), St Barbara Ltd (ASX: SBM), and Westgold Resources Ltd (ASX: WGX), etc. Considering the company’s decent performance in December 2020 quarter, FY21 production guidance, expanded resource base, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $0.780 as on 09 March 2021.

WAF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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