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 service 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

Q2FY22 Result Highlights: For the quarter ending 31 December 2021 (Q2FY22), the company reported actual gold sales of 81,754oz and generated revenue of A$195 million. Over the quarter, the company reduced its hedge position to 140,000oz hedged at an average A$2,179/oz. Some of the other key highlights of the quarter are as follows:

• Production Update: For Q2FY22, the company reported record gold production of 66,688oz with C1 cash costs of A$1,466/oz and AISC of A$1,714/oz.
• Investment in Critical Spares: To ensure the continuity of its operations and to reduce industry wide supply chain risk, the company made a larger investment in critical spares and key consumables over the quarter.
• Commercial Production at The Bluebird Mine: Over the quarter, the company declared commercial production at the Bluebird mine and increased the output at Big Bell to 220,000 tonnes.

Key Takeaways from FY21 Results:

• Increase in Production: For FY21, the company reported total production of 245,411 ounces, up from the production of 235,196 ounces in FY20. Despite rising cost pressures, the company was able to manage its costs extremely well with cash cost of sales [C1] of A$1,158/oz and AISC of $1,527/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.
• Paid Maiden Cash Dividend: Prompted by the improved financial metrics, the company has paid a maiden cash dividend of 2.0 cents per fully paid share for FY21.

Revenue Trend (Source: Analysis by Kalkine Group)

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 45.50% 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 8.02%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)                                        

Operational Update on Paddy’s Flat Operations: On 20 December 2021, the company provided an update on the progress of its Paddy’s Flat operations at Meekatharra, wherein, it informed that the North Consol’s decline has reached the base of the historic Fenian’s workings. The company is now expecting the production to commence from Fenians in Q3FY22.

Change in Substantial Holding: On 24 January 2022, one of the company’s substantial shareholders, Van Eck Associates Corporation, reduced its holding in the company from 9.02% to 8.02%. Van Eck Associates Corporation now holds around 34,131,219 ordinary shares of the company.

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:  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. In FY22, the company is focused on maintaining operational delivery to fund the next stage of growth. For FY22, the company expects its total gold production to be over 270,000oz with C1 cash cost of between A$1,250 – A$1,400/oz and AISC of A$1,500 – A$1,700/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 last one month, the stock has corrected by ~12% and is currently trading lower than the average 52-week price level band of $1.575-$2.42, offering a decent opportunity for accumulation. 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 slight discount to its peers, considering the rising cost pressures, uncertainty surrounding the impact of COVID-19 pandemic and risks related to availability of labour. For the valuation purpose, peers such as Regis Resources Ltd (ASX: RRL), Dacian Gold Ltd (ASX: DCN), Perseus Mining Ltd (ASX: PRU), etc. have been considered. Considering the company’s decent production performance in Q2FY22, improved financial performance in FY21, modest outlook, current trading level and indicative upside in valuation, we give a “Buy” rating on the stock at the closing price of $1.780, down by ~1.93% as on 1 February 2022.

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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