Company Overview: West African Resources Limited (ASX: WAF) is engaged in the development and exploration of gold at its key assets Sanbrado Gold Project in Burkina Faso. The company owns a 90% beneficial interest in Société des Mines de Sanbrado SA, which owns 100% of Sanbrado. The government of Burkina Faso possesses a 10% equity interest in SOMISA.
WAF Details
Acquisition to Aid the Future Gold Production: FY21 proved as a record year for the company with a production of 289,719 ounces of gold, which surpassed upper end of guidance. WAF recorded gold sales in excess of 295,000oz for the year. The company seems to be on a growth path, evident by the acquisition of the Kiaka Gold Project in Q4FY21. The said acquisition aided the company to achieve a growth of 127% in mineral resources to 11.6 million ounces of gold as on 31 December 2021 and has consolidated an exciting 2,000 km2 exploration land package. In addition, it also wrapped up the acquisition of Toega, a 1.3Moz gold resource, during the quarter. On the back of acquisitions, the company is expecting to produce gold of over 400,000 ounces per year by 2025. The company is optimistic about the average annual production of 208koz for the next five years and 198koz in the next 10 years from the inferred mining resources Sanbrado.
Key Takeaway from Q4FY21 Results Highlights:
- The company witnessed a decent performance in the quarter ended 31 December 2021, evident from the growth of 7% in gold production to 87,324 oz at an all-in sustaining cost of US$721/oz. WAF recorded unhedged gold sales of 86,516 oz at an average price of US$1,812/oz.
- During Q4FY21, the company paid US$109.5 million, which resulted in full repayment of the Taurus debt and gold offtake fee arrangement.
- The company raised A$136 million (before costs) via an equity placement of 101,000,000 Shares at an issue price of $1.25 per share to institutional and sophisticated investors and raised A$10 million (before costs) with 8,000,000 shares being issued at a price of A$1.25 per share via Share Purchase Plan (SPP).
- WAF closed the quarter with a cash balance of A$183 million against A$130 million at the end of Q3FY21. As a result, the notional net cash rose by US$129 million to US$137 million at the end of the quarter.
Gold Production Trend (Source: Analysis by Kalkine Group)
Recent Updates:
- Recently, WAF announced that L1 Capital Pty Ltd has ceased to become a substantial holder in the company.
- As announced on 10 February 2022, the company has finished Tranche 2 of its non-underwritten placement with the issue of 96,000 fully paid ordinary shares at a price of A$1.25 per share, resulting in the capital raising $120,000 (before costs). The company would use the funds for exploration programs and working capital, including transaction costs.
Insights into 1HFY21 Result:
- During the half-year ended 30 June 2021, the company’s revenue rose by 354% to ~A$266.77 million against ~A$58.84 million in 1HFY20. This was backed by the growth of 411% in gold sales to 113,632 oz.
- As a result of higher revenues, profit after tax for the period amounted to ~A$73.25 million against ~A$3.75 million in 1HFY20.
- The company recorded a free cash inflow of ~A$48.81 million against an outflow of ~A$43.98 million. WAF closed 1HFY21 with a net debt position of ~A$88.43 million.
Top 10 Shareholders: The top 10 shareholders together form around ~43.75% of the total shareholding, while the top 4 constitute the maximum holding. Van Eck Associates Corporation and Sprott Asset Management LP are holding a maximum stake in the company at 12.53% and 5.29%, respectively, as also highlighted in the chart below:
Top 10 Shareholders (Source: Analysis by Kalkine Group)
Key Metrics: During 1HFY21, the company recorded an EBITDA margin of 59.3% as compared to 40.2% of the industry median. It posted a net margin of 27.5% in 1HFY21 as compared to the industry median of 17.4%. On the leverage side, the company recorded a debt-to-equity ratio of 0.70x in 1HFY21 as compared to 3.71x in 1HFY20.
Margin & Leverage Profile (Source: Analysis by Kalkine Group)
Key Risks:
- Price Risk: The company’s operational and financial performance could be impacted by the adverse movement in the spot prices of gold.
- Forex Headwinds: WAF is exposed to risks arising from unfavourable movement in foreign exchange, which could directly impact its topline.
- Climate Change Risk: The company’s growth could be affected by the extreme change in climate, which could pause its operation temporarily.
Outlook: The company is optimistic about the strong performance of Sanbrado in 2022, with an expected unhedged production in the range of 220,000 to 240,000 ounces of gold at an AISC of US$1,040 to US$1,100 per ounce. The company added that the exploration drilling in 2022 is likely to test targets along strike underground at M1 South and within trucking distance of Sanbrado and Kiaka, as the company is seeking to underpin long term production at both projects. For FY22, the company anticipates adjusted operating costs in the ambit of US$750 - US$830/oz. Growth expenditure for FY22 is expected of between US$45 - US$75 million. The Kiaka feasibility study has scheduled to be completed by the end of Q2FY22, and the company will make a formal investment decision after that. WAF believes that the open-pit mine plan for 2022 would witness the completion of the high-grade M1 South open-pit and M5 South Stage 1 pit during 1HFY22. The company is likely to release FY21 results on 25 March 2022.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Source: 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: The stock of WAF is trading below its 52-week low-high average of $0.720 - $1.465, respectively. The stock has been corrected by ~19.15% in the past three months. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ median P/E multiple, considering the COVID-19 uncertainties and price volatility impacting cash flows. For the purpose of valuation, a few peers like Westgold Resources Ltd (ASX: WGX), Perseus Mining Ltd (ASX: PRU), and OceanaGold Corp (ASX: OGC) have been considered. Considering the expected upside in valuation, decent production in 2021, synergies from the recent acquisitions, optimistic long-term outlook, current trading levels and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.055, as on 01 March 2022, 12:30 PM (GMT+10), Sydney, Eastern Australia.
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
WAF Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV
Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.
Technical Indicators Defined: -
Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.
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.
Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.
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