Company Overview: Westgold Resources Limited is engaged in exploration of minerals. The principal activity of the Company is operating gold mines in Australia. The Company’s projects include Central Murchison Gold Project (CMGP), South Kalgoorlie Operations (SKO), Fortnum Gold Project (FGP), Tuckabianna Project and Rover Project. The CMGP is located in the Murchison Goldfields of Western Australia around the regional towns of Cue and Meekatharra. SKO includes the HBJ underground mine, a number of open pits and the Jubilee Mill. The FGP is located in the western Bryah Basin approximately 150 kilometers northwest of Meekatharra with approximately 1 million tone-per-annum carbon-in-leach (CIL). The Rover Project is a postulated undercover repetition of the prolific Tennant Creek goldfield located 80 kilometers to the north-east.

WGX Details

Bottom-line Turned into Profit from a Loss in FY18: Westgold Resources Limited (ASX: WGX) is involved in the exploration, development and operation of gold mines, primarily in Western Australia, with its core businesses- Murchison region assets at Fortnum Gold Operations (FGO), Meekatharra Gold Operations (MGO) and Cue Gold Operations (CGO). Looking at the past performance over FY14 to FY19, top-line of the company has grown with a CAGR (compounded annual growth rate) of 21.03%. Group’s total revenue improved from $161.1 Mn in FY14 to $418.3 Mn in FY19. Group’s total revenue improved from $276.8 Mn in FY18 to $418.3 Mn in FY19 and posted a profit after tax of $14.1 Mn in FY19 as compared to the loss of $1.2 Mn in the previous year. 

Group’s heavy investment in the Murchison Region for several years is expected to bear fruit in the coming times. It now holds a massive control position over this region which has been estimated to have a large gold resource base. Moreover, it’s all plants are operating at full capacity leading to an increase in output and shrink in the capital investment. In future, the group plans a reduction in its capital levels, significantly lower than the past three years. Its financial result for FY19 highlights a robust balance sheet along with a strong corporate team. Its gold operations posted a massive $45.88 million turnaround in profits.

The coming years look bright with its biggest single mine Big Bell transitions to production as a low-cost sub-level cave mine with a long life. F20 group’s production, cash costs and AISC guidance has been estimated at 275,000 to 300,000 ounces, A$1,175/oz – A$1,230/oz and A$1,370/oz – A$1,420/oz, respectively.


FY19 Gold Production, Cash Costs and AISC Data (Source: Company Reports)

Key Highlights of September’19 Quarter: Group gold output for the quarter stood at 57,472 ounces at a Cash cost (C1) of A$1,173/oz and an All-In Sustaining Cost (AISC) of A$1,410/oz. Though the gold output was outside the physical guidance by 9%, it crossed fiscal (range midpoint) by 7% for cash costs (C1) and 2% for AISC. Group’s gold operation also benefitted from gold price of A$1,959/oz after delivering into hedges and pre-pay. Its mine operating cash flow from gold operations stood at $25.3 million.

Group closed its Cash and Bullion balance at $70.8 million. Its gold pre-pay debt reduced to 11,250 ounces, with around A$6.1 million amortising/ repaid over the quarter. Its gold hedge position at the end of the quarter was reported at 202,500 ounces with the average price of A$1,879/oz which also highlights 10,000 ounces per month until June 2021. Moreover, WGX held shares in other companies, i.e., RNC Mineral and Musgrave Minerals worth $29.4 million.


Quarterly Performance with YTD Performance (Source: Company Reports)

FY19 Key Highlights for the period ended June 30, 2019: WGX produced 255,221 ounces and sold 253,874 ounces of gold across the group, out of which 34,378 ounces were produced and 33,168 ounces were sold from the discontinued Higginsville Gold Operations. Group cash cost (C1) and AISC for the continuing operations were reported at A$1,234/oz and A$1,390/oz, following rolling back of ACM (internal contractor) costs and revenue into the operations.

On financial terms, group’s revenue increased by 51% to $418.32 million, of which $25.67 million relates to the third-party revenue from ACM’s external mining activities. Group’s overall NPAT grew by 1,307% to $14.13 million as compared to the previous year, following collective impairment of $17.1 million (exploration and accumulated mill scat write-offs) and gains on financial assets. Moreover, despite the sale of the Higginsville Gold Operations, the net assets grew by 9.3% to $443.49 million.

Cash and cash equivalents at the end of the period were reported at $67.2 million. Group’s cash flow from continuing operations and other activities was reported at $81.23 million, an increase of 452% on the previous year. Its operational profits turned from a loss of $25.46 million in the previous year to a profit of $10.24 million in FY19.

Under investing activities, expenditure on Property, Plant and Equipment was reported at $34.10 million as compared to $47.4 million in FY18. It included additions associated with a new village at Big Bell, new air strip and camp upgrade at Fortnum, and the bulk of the secondary crusher installation at the MGO plant. Investment in Mine Properties and Development for the period was reported at $89.33 Mn, as compared to $99.05 million in the previous year. The exploration and evaluation expenditure reduced from $25.52 million in FY18 to $16.41 million in FY19.

Under financing activities, group’s financing requirements reduced to a net of $22.32 million. Its key transaction included $20.85 million in proceeds from the gold loan (un-earned income amortisation); $22.32 million net raised from the placement of 26 million shares at $0.90/share; and $20.85 million repayments of equipment leasing costs (primarily related to the mining services division).


FY19 Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 47.62% of the total shareholding. Ruffer LLP and United Fiber System Ltd hold maximum interest in the company at 9.33% and 9.01%, respectively. Recently, Van Eck Associates Corporation became a substantial holder in the company with a stake of 5.01%, effective from December 27, 2019.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: Its gross margin, EBITDA margin and net margin for FY19 stood at 2.4%, 25.3% and 3.3%, better than FY18 results, which implies that the company’s fundamentals have improved during the period. Its ROE for FY19 stood at 3.2%, better than FY18 result of -9.0%. Its cash cycle for FY19 stood at 29.70 days, lower than the industry median of 46.6 days, which implies that the company efficiently managed its asset-liability balances. Its debt to equity multiple and long-term debt to total capital for FY19 stood at 0.08x and 3.8%, lower than the industry median of 0.13x and 6.2%, respectively.


Key Metrics (Source: Thomson Reuters)

Recent Updates:
On December 30, 2019, the company announced the appointment of Ms Lisa Smith as Company Secretary and General Counsel. Ms Smith is replacing Mr David Okeby who tendered his resignation on October 2, 2019. She holds degree of Bachelor of Laws and a Bachelor of Commerce and brings over 15 years of experience in wide range of areas such as commercial and corporate, regulation and compliance as well as experience with secretarial duties. Previously, she worked with a private resources industry services firm as principal lawyer.

Castile Demerger Gets Completed: On December 3, 2019, the company announced that it has completed its demerger of Castile Resources Ltd, where shareholders casted vote at AGM (November 25, 2019) with 99.9% in favour. The distribution of Castile shares to Westgold shareholders was approved on a one (1) for four (4) basis. Castile lodged a prospectus with ASIC (Australian Securities and Investments Commission) for a non-renounceable pro rata entitlement offer, which highlights that every Castile shareholder has the right not the obligation, to an additional share of Castile which was allotted at the time of demerger at a price of $0.20 per share. Moreover, Castile is committed to fulfil all requisites for ASX listing, which is expected by the end of January 2020.

On November 27, 2019, the market was informed that Fe Limited (ASX: FEL) entered into an agreement with Aragon Resources Pty Ltd, subsidiary of Westgold Resources Limited, to sell its 20% interest (held via FEL’s wholly owned subsidiary Jackson Minerals Pty Ltd) in tenements E52/1671 and E52/1659 located in the Bryah Basin. Upon completion of the transaction, FEL will receive 200,000 fully paid ordinary shares in WGX.
Key Risks: The company is exposed to interest rate risk, credit risk, equity price risk, liquidity risk, and commodity price risk. It usually undertakes aging analysis and monitoring of receivables to manage credit risk, liquidity risk, through the development of future rolling cash flow forecasts.

FY20 Guidance for FGO, MGO and CGO:

FY20 Production, Cash Costs and AISC Guidance (Source: Company Reports)

Gold Outlook: At the time of writing, Gold Spot (XAU/USD) traded at US$1559.84 (15:50 (UTC+11)), breaking its resistance (52-week high price) of US$1557.25, underpinned by recent war like situation between US and Iran leading to oil price rise. This feud in the middle east is expected to escalate further, which may support gold price rise in the time to come. A fresh gold price upside rally is expected to help the gold producers worldwide.


Gold Spot Price (XAU/USD) (Source: Thomson Reuters)
 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Cash Flow Multiple Approach (NTM):

Price to Cash Flow Multiple Approach (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock generated an excellent return of 163.33% in one-year period, while in the span of six months, it generated a return of 29.86%. The company has performed well on its top-line and posted a net profit after tax for FY19 as compared to a loss in the previous year. On the backdrop of decent cash position, ongoing projects and gold outlook, it is expected that the company will improve on its top-line and bottom-line performance. Looking at the prospects of the company over the long-term, we have valued the stock using three relative valuation methods, i.e., Price/Cash flow multiple, and arrived at a target price with lower double-digit growth (in % term). Hence, considering the aforesaid parameters and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $2.320 per share, down 2.11% on January 7, 2020.
 
 
WGX Daily Technical Chart (Source: Thomson Reuters)

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