Company Overview: Westgold Resources Limited (ASX: WGX) is an explorer, mine developer, operator, and gold producer that operates various underground mines and open pits across the Central Murchison area, which provide feedstock for three processing plants strategically located to serve the region. The company’s Murchison operations comprise three operating segments, Fortnum Gold Operations (FGO), Meekatharra Gold Operations (MGO), and Cue Gold Operations (CGO). The company was listed on ASX on 6 December 2016.

WGX Details

Key Takeaways from FY21 Results:

• Increase in Production: For FY21, the company reported total production of 245,411 ounces, up from the production of 235,150 ounces in FY20. Despite rising cost pressures, the company was able to manage its costs extremely well with cash cost of sales of A$1,158/oz and AISC of $1,414/oz in FY21.
• Improved Top and Bottom Line: WGX reported total revenue of $571.2 million in FY21, up 16% on FY20, driven by the increase in gold sales. NPAT for FY21 stood at $76.8 million, up 122% on the previous year, supported by the rise in gold sales and strong cost management initiatives.
• Increase in Net Assets: During FY21, the company’s net assets increased by more than 16% YoY to $607 million.
• Improved Cash Balance: At the end of FY21, the company had a cash balance of $150.7 million, up 10% from the cash balance of $137.6 million as at 30 June 2020.

Revenue Trend (Source: Analysis by Kalkine Group)

Update on the Off-market Takeover for Gascoyne Resources Limited: On 30 September 2021, Westgold Resources Limited announced an off-market takeover offer to acquire all of the shares in Gascoyne Resources Limited. As per the offer, the shareholders of Gascoyne Resources Limited will receive one WGX share for every 4 (four) Gascoyne Shares, subject to satisfaction or waiver of the Conditions to the Offer, including, inter alia, a minimum acceptance condition of 50.1%. The main highlights of the offer are mentioned below:

• Improved Production Capacity: With the combination of WGX and Gascoyne’s exploration assets, the production capacity of the combined entity could expand above 350,000 oz of gold in FY22 with excess ore from WGX’s Cue operations extending Dalgaranga’s operating life.
• Pipeline of Near-term Development Projects: The combined entity will also have a pipeline of near-term development projects that can drive the company to +500,000 oz of gold per annum over the medium term.
• Expanded Resource base: The proposed acquisition will result in a combined exploration portfolio of ~3900km² across the Murchison and will significantly increase the combined company’s Mineral Resource base to ~9.1 Moz.
• Important Dates: On 15 October 2021, WGX lodged a bidder’s statement in relation to the offer with AISC. The offer is expected to close on 29 November 2021.

Key Metrics:  Net margin for FY21 stood at 13.4%, up from 7% in FY20. EBITDA margin for FY21 stood at 44.5%, up from 33.5% in FY20. ROE for FY21 stood at 13.6%, up from 7.2% in FY20. Current ratio for FY21 stood at 1.88x, slightly up from 1.87x in FY20. Cash cycle days for FY21 stood at 14.5 days, down from 16 days in FY20.

Liquidity Profile and EBITDA Margin (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 45.08% of the total shareholding, while the top four constitute the maximum holding. Ruffer LLP and Van Eck Associates Corporation are holding a maximum stake in the company at 9.07% and 8.99%, respectively, as also highlighted in the chart below:    

(Source: Analysis by Kalkine Report)       

Change in Substantial Holding: On 15 October 2021, L1 Capital Pty Ltd, one of the substantial holders in the company, increased its holdings in the company from 5.07% to 6.11%.

Key Risks:

• COVID-19 Uncertainties: The COVID-19 pandemic has caused border restrictions, which has created problems in acquiring skilled labour. These challenges have the potential to impact the company’s overall production.
• Fluctuations in Gold Price: WGX is also exposed to the risks related to the fluctuations in the gold price as it could impact its financials.

Outlook: For FY22, the company expects its total gold production to grow to more than 270,000 oz with AISC of between A$1,500 – 1,700/oz.  Looking ahead, the company is focused on lifting mine grades to ensure reliable and continuous delivery of its operational targets. Further, the company is also focused on achieving growth and expansion from greenfield and brownfield exploration or regional growth through acquisition. If the proposed acquisition of Gascoyne Resources Limited is completed, it will result in expanding the company’s total resource base and it will also increase the company’s production capacity to above 350,000 oz of gold in FY22.

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 last six months, the stock has corrected by ~15.43% and is currently trading lower than the average 52-week price level band of $1.575-$2.98. The stock has been valued using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount to its peers, considering the rising cost pressures, uncertainty surrounding the impact of COVID-19 pandemic and risks related to the availability of labour. For the valuation purpose, peers such as Dacian Gold Ltd (ASX: DCN), Resolute Mining Ltd (ASX: RSG), and Regis Resources Ltd (ASX: RRL), etc., have been considered. Considering the company’s improved financial performance in FY21, modest long-term outlook, rising cash balance, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $1.91 as on 19 October 2021, 11:40 PM (GMT+10), Sydney, Eastern Australia.

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. 

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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