Company Overview: Westgold Resources Limited (ASX: WGX) is involved in the exploration, development and operation of gold mines, primarily in Western Australia. The company has three process plants with a combined total capacity of four million tonnes per annum. They are divided into three hubs referred to as MGO – Meekatharra Gold Operations; CGO – Cue Gold Operations; and FGO – Fortnum Gold Operations. MGO covers the central part of Murchison portfolio and the historic gold mining centres of Paddy’s Flat, Yaloginda, Nannine and Reedys. On the other side, CGO covers the southern part of the Murchison portfolio and FGO covers the northern extremities of the company’s Central Murchison tenure.

WGX Details

Growth in Top-Line: Westgold Resources Limited (ASX: WGX) is an Australian gold production company with a massive control position in the Murchison Region. In FY18, the company came up with its strategy of simplifying its asset portfolio and concentrating more on the Murchison Region. As a result, the company has purged the complex and de-focussing parts of its business to focus on the main game. The company has divested its older high-cost operations including South Kalgoorlie Operations and Higginsville Gold Operations. It has also de-merged its Gold-Copper and other Polymetallc NT assets and listed Castile Resources. Although the company has shrunk in size, its topline has significantly improved over the last five years. From 2015-2019, the company’s revenue has grown at a CAGR of 15.78%.

Revenue Trend (Source: Refinitiv, Thomson Reuters)

Amid COVID-19 Pandemic, the company’s mine sites, and all processing plants are operating at near full capacity. The company has already set up plans to address any supply chain issues that may arise in the future due to COVID-19, ensuring that the operations remain undisrupted. With a decent portfolio of internal mining options and regional processing control, the company seems well-positioned for growth in the Murchison region.

FY19 Results Highlights: In FY19, the company’s annual gold output stood at 255,221 ounces at a cash cost (C1) of $1,253 per ounce and an all-in-sustaining cost (AISC) of $1,408 per ounce. From Meekatharra Gold Operations, the company’s gold output for the year stood at 94,280 ounces with C1 Cash Cost of $1,264 per ounce. From Cue Gold Operations, the gold output stood at 68,255 ounces at a C1 Cash Cost of $1,338 per ounce and an all-in sustaining cost of $1,449 per ounce. From Fortnum Gold Operations, gold output for the year stood at 58,308 ounces at a C1 Cash Cost of $1,064 per ounce and an all-in sustaining cost of $1,224 per ounce.

The continued expansion of the company’s activities in the Murchison Region and the rationalisation of group assets to focus on the core Murchison assets, allowed the company to achieve a net profit after income tax of $14.13 million in FY19, as compared to a loss of $1.17 million in FY18. For the full year, the company recorded consolidated revenue of $418.32 million, up 51% on the previous year. During the year, the company generated a cash inflow of $81.23 million from operating activities. During the year, the company divested its Higginsville Gold Operations to RNC Minerals and recognized a gain on sale of $16.435 million with an after-tax profit of $642,925 from the discontinued operations.

FY19 Income Statement (Source: Company Reports)

H1FY20 Results Highlights: During the first half of FY20, the company witnessed substantial improvement in its financial outcomes compared to the previous half year. For H1FY20, the company reported consolidated gold production of 120,127 ounces, up 17% on the previous corresponding period (pcp). Further, the company experienced an 8% reduction in C1 Cash costs to $1,236/oz.

The company’s revenue from ordinary activities stood at $228.86 million in H1FY20, up 18% on pcp. Over the period, the company observed strong performance from mining segments of Meekatharra Gold Operations (MGO) and Fortnum Gold Operations (FGO), allowing the company to earn an NPAT of ~$9.75 million, up 155% on pcp.

During the half-year period, the company made a significant capital investment at CGO to re-establish Big Bell, the company’s largest mine, to support long term production. The company also commenced a third underground mine at MGO (Bluebird Mine). Cash inflows from operating activities stood at $54.392 million in H1FY20.

H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 46.25% of the total shareholding. Ruffer LLP and L1 Capital Pty Ltd. hold maximum interest in the company at 8.87% and 5.11%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For H1FY20, the company’s gross margin and net margin stood at 4.4% and 4.3%, respectively. The company has a current ratio of 1.05x and quick ratio of 0.57x. The company’s debt to equity ratio at the end of 1HFY20 stood at 0.09x, lower than the industry median of 0.21x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

March Quarter Update: During the March quarter, the company implemented substantial measures to ensure the safety of employees, contractors, suppliers and the community from COVID-19 pandemic. During the quarter, the company produced 55,234oz of gold at Cash Costs (C1) of $1,275/oz and AISC of $1,525/oz. The company sold 53,265oz of gold at an average price of $2,087 per ounce, deriving revenue of $111 million in during the quarter. In addition, the company generated Mine Operating Cash Flow of $28 million. During the quarter, the performance of CGO was impacted by a delay in the onset of sub-level cave production at the Big Bell mine, resulting in lower than expected tonnes of high-grade ore feed to the process plant.

$45 million Placement: On 20 May 2020, the company placed 20 million shares at $2.25 per share to raise a gross $45 million. Proceeds from the placement will be used for the acceleration of growth within the company’s Central Murchison Gold Project (MGO + CGO) operations. This will also help the company in expanding its internal mining services division to handle the increased workflow requirements for both internal and external opportunities.

Re-entering the S&P All Australian 200 Index: Last year in June, WGX was removed from S&P All Australian 200 Index due to a reduction in its rolling market capitalisation. However, this year in June, WGX re-entered the S&P All Australian 200 Index, validating the refocus of the organisation on its core Murchison assets and the efforts of its staff and stakeholders in its gold operations.

Trading update: In an update provided on 2^nd July 2020, the company reported total gold sales of ~65,000 oz for the June quarter. The company has now repaid its outstanding gold-loan debt, representing the equivalent of around $9 million in gold revenue in the June quarter. At the end of the June quarter, the company had cash amounting to $137 million (unaudited) reflecting a strong cash build with solid contributions from its operations, a net $42.5 million from a placement and the divestment of non-core assets.

What to Expect: At the time of announcing its FY19 results, the company had issued a forward-looking guidance for FY2020, as per which, the total gold production in FY20 was expected to be in between 275 - 300,000 oz. However, later the company informed that it does not expect to achieve its market guidance until the Big Bell mine moved into the ramp-up mode post mass blasting. Due to the uncertainty surrounding the impact of COVID-19, the company believes it is not prudent to provide any forecast or guidance predictions. As per the recent trading update, at the Big Bell mine, ore is flowing well from the northern draw-points of the sub-level cave. The company expects the monthly output to increase as caving in the southern section comes online.

As the company has repaid its outstanding gold-loan debt in full, it now expects an equivalent improvement to the bottom-line in the upcoming quarter. Further, the company seems well-positioned to achieve growth in the Murchison Region with its portfolio of internal mining options and regional processing control. The company expects to release a detailed June quarter report on 23^rd July 2020.

Key Risks: Although the impacts from COVID-19 have so far been limited, there still remains the potential for unforeseen impacts to the company’s operations. Further, the company is exposed to the risk of fluctuations in the gold prices as it could create revenue uncertainty. The company deals in various financial instruments which expose it to interest rate risk, credit risk, equity price risk and liquidity risk.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters) 

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

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: In the last one and three-months period, the stock of WGX has provided a return of 11.33% and 8.65%, respectively. The recent placement along with the company’s transition to cash flow generation gives WGX ample cash to continue unlocking the value of its operations and growth within the Murchison region and to expand its internal mining services division to handle the increased workflow requirements for both internal and external opportunities. We have valued the stock using the Price to Earnings multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). For the purpose, we have taken peers like Resolute Mining Ltd (ASX: RSG), Dacian Gold Ltd (ASX: DCN) and St Barbara Ltd (ASX: SBM). Considering the company’s decent production and financial performance, recently conducted placement, resilient performance amid COVID-19 pandemic, and a strong focus on the Murchison region, we give a “Buy” recommendation on the stock at the current market price of $2.16, down by 4.425% on 14 July 2020. 

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

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