Company Overview: Westgold Resources Limited (ASX: WGX) is a gold production company in Australia with a dominant landholding in the Murchison region of the Mid-West.  The company owns a vast infrastructure and a procession of growth projects. The company’s wholly-owned subsidiary, Minterra Pty Ltd, serves as the group's specialist underground mining service provider. The company’s Murchison operations comprise three operating segments, namely, Fortnum Gold Operations (FGO), Meekatharra Gold Operations (MGO), and Cue Gold Operations (CGO).

WGX Details

Key Takeaways from FY21 Results: Westgold Resources Limited has continued to build its production profile since listing and in FY21, it reported total gold production of 245,411 ounces from its Fortnum, Meekatharra, and Cue Gold operations. The company has recently released its financial results for the year ending 30 June 2021. Major highlights of the results are as follows:

• Rise in Revenue: For FY21, the company reported total revenue of $571.2 million, up 16% on the previous year, driven by the increase in gold sales.
• Increase in NPAT: 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.
• Maiden Cash Dividend Declared: Due to the improved financial metrics in FY21, WGX Board has declared a maiden cash dividend (unfranked) of 2.0 cents per fully paid share for FY2021. The final dividend has a record date of 1 October 2021 and a payment date of 15 October 2021.
• Established New Exploration and Growth Division: During FY21, WGX established a new Exploration and Growth division to explore and assess the next suite of potential gold mines in the Murchison region of Western Australia.
• Improved Cash Balance: As at 30 June 2021, 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)

Key Metrics:  EBITDA margin for FY21 stood at 44.5%, up from 33.5% in FY20. Net margin for FY21 stood at 13.4%, up from 7% 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 conversion cycle for FY21 stood at 14.5 days, down from 16 days in FY20.

Liquidity Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 45.19% 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 9.10% and 9.02%, respectively, as also highlighted in the chart below:      

(Source: Analysis by Kalkine Group)

Latest Developments:

• Board Changes: The company’s founder, inaugural Managing Director, and current Executive Chairman, Mr. Peter Cook recently became a Non-executive Chairman of WGX. WGX has also announced the appointment of Mr. Wayne Bramwell as Executive Director of the company.
• Revised DRP Rules: At the time of declaring the final dividend for FY21, WGX had notified that it will establish a Dividend Reinvestment Plan (DRP). It recently revised its DRP policy to incorporate change to the ASX Listing Rules that have come into effect since the DRP Rules were first adopted.
• Recommenced Operations at Bluebird Underground Mine: Due to labour issues caused by the COVID-19 pandemic, the development work at the Bluebird Underground mine at Meekatharra was temporary suspended. The operations at the Bluebird Underground mine have now recommenced.
• Commenced Mining at Triton: On 21 July 2021, WGX announced that it has commenced stope mining within the Triton North area of the South Emu-Triton underground mine at the Meekatharra Gold Operations.

Key Risks:

• COVID-19 Uncertainties: The company is exposed to the risk related to the knock-on effects of COVID-19 related travel restrictions and labour availability.
• 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 increasing its dominance across the Murchison region. It is also focused on lifting grade and cost optimisation within its mines to continue building financial strength to fund its organic and regional growth aspirations. For FY22, the company expects its total gold production to grow to more than 270,000 oz as Big Bell, Bluebird and the South Emu-Triton mines achieve higher levels of output. AISC for FY21 is expected to be in the range of A$1,500 – 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 three months the stock has corrected by ~20.68% and is currently trading lower than the average 52-week price level band of $1.64-$2.98, 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 a slight discount to its peers, considering the uncertainty surrounding the impact of COVID-19 pandemic, rising cost pressures, 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 Ramelius Resources Ltd (ASX: RMS), among others, have been considered. Considering the company’s improved financial performance in FY21, rising cash balance, the commencement of stope mining within the Triton North area, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $1.725 as on 7 September 2021, 3:40 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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