Company Overview: Westgold Resources Limited (ASX: WGX) is a gold production company with operations in the Central Murchison region of Western Australia. The company 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). WGX is the owner-operator of all functions in its open-pit and underground mines enabling the internalisation of typical mine service/contractor margins.

WGX Details

Top Line Growth Supported by Decent Production Performance: Westgold Resources Limited (ASX: WGX) is an explorer and developer of gold mines operating in the prolific goldfields of outback Western Australia. As on 11 May 2021, the company’s market capitalisation stood at $915.52 million. Despite the increased capital expenditure of $178 million in FY20, the company saw an improvement of 175% YoY in its net profit after tax and delivered a substantially improved cash balance at the year-end. The company continues to make large investments in developing assets which position it well for future gold output. Over the past four years, WGX has made a substantial investment to build its overall dominance in the Central Murchison area. From 2016 to 2020, the company’s revenue grew at a CAGR of 12.74%.

Looking ahead, WGX is focused on accelerating regional exploration and growth opportunities. WGX intends to aggressively pursue greenfield exploration and growth targets across the region. From FGO, WGX continues to target long-term production of 65,000 – 75,000oz per annum. The targeted long-term production for MGO is 105,000 - 120,000oz per annum. The company is optimistic about its long-term outlook, supported by the long-term production profile which continues to provide massive opportunity for the company’s shareholders to realise returns.

Improved Cash Position in Q3FY21: Despite the COVID-19 related impacts, seasonal weather impacts and one-off issues restricting access to planned mining areas, WGX achieved gold sales of 63,139oz in March 2021 quarter and outperformed its cost guidance. For the quarter, the company reported mine operating cash flow of $56.2 million with net mine cash flow of $12.0 million. Total capital expenditure for gold operations during the quarter stood at $56.2 million. In March 2021, WGX completed the sale of its lithium assets, including a royalty over the Mt Marion Lithium mine and exploration and development rights on adjoining tenure to Reed Industrial Minerals for $17.5 million in cash. WGX’s cash position grew by 9% over the previous quarter to $178 million in Q3FY21.

Q3FY21 Results (Source: Company Reports)

Improved Financial Outcomes in H1FY21: During H1FY21, WGX witnessed decent improvement across all fiscal outcomes compared to the previous corresponding period (pcp), underpinned by the advancement of the Group’s gold operations to steady-state levels. The company reported total gold sales of 125,197oz for H1FY21, up 8% on pcp. WGX saw a steady increase in gold output during H1FY21 with significantly improved revenue, culminating in higher profits and reduced unit operating costs when compared to pcp. Total revenue for H1FY21 stood at $301.8 million, up by 32% on pcp. As a result of the rise in gold sales and increase in the average gold sales price of $442 per ounce, the company’s profit after tax grew by 390% YoY to $47.5 million. Over the period, the company repaid all its corporate debt.

H1FY21 Results (Source: Company Reports)

Key Metrics: For H1FY21, the company reported a gross margin of 24.2%, up from 7.8% in H2FY20. Net margin for H1FY21 stood at 15.8%, up from 9.4% in H2FY20. Current ratio for H1FY21 stood at 2.18x, up from 1.87x in H2FY20, demonstrating that the company has improved its ability to pay short-term obligations.

Liquidity Profile & Profitability Metrics; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 45.06% of the total shareholding while the top four constitutes the maximum holding. Ruffer LLP and Van Eck Associates Corporation are holding a maximum stake in the company at 9.01% and 9.02%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Risks: The company is exposed to the risks associated with the fluctuations in the prices of gold, as it could impact the company’s overall profitability. Further, the company is also exposed to the risks and uncertainties caused by the COVID-19 pandemic, as it could cause temporary suspension of the company’s operations.

Outlook: Over the remainder of 2021, WGX expects to continue to improve its physical and financial outputs. The company is on track to deliver its CY2021 guidance of 270,000 – 300,000oz at C1 Cash costs of $1200-$1300/oz and AISC of $1450 - $1550/oz.

WGX currently has substantial mining and exploration tenure, and it continues to consolidate its strategic holdings across the Central Murchison region. It has established a new Exploration and Growth business unit that is focused on exploring, developing and acquiring additional resources within the region that allows WGX to leverage its extensive infrastructure and maximise the return on Group investment. In the coming years, the company expects its growth capex to reduce significantly to sustainable replacement levels. This is expected to translate to greater cash generation for its shareholders. With an improved cash balance and no corporate debt, the company seems well placed to deal with any future issues or interruptions to operations such as those presented by the COVID-19 pandemic.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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 21.96% and is currently trading lower than the average 52-week’s price level band of $1.855-$2.980, offering a decent opportunity for accumulation. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer median EV/sales (NTM trading multiple), considering the modest long-term outlook, improved results in H1FY21, and rising cash balance. We have taken peers like Dacian Gold Ltd (ASX: DCN), St Barbara Ltd (ASX: SBM), and Resolute Mining Ltd (ASX: RSG). Considering the company’s decent long-term production profile, improved top-line and bottom-line in H1FY21, healthy balance sheet, modest long-term outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $2.060, down by 4.630% as on 11 May 2021.

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

Note: 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.

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