Company Overview: West African Resources Limited (ASX: WAF) is a gold mining company focussed on creating shareholder value through the acquisition, exploration, and development of gold projects in West Africa. WAF has 100% interest in Sartenga copper-gold-molybdenum project, which has a large tonnage porphyry system. WAF also holds 90% interest in the Sanbrado Gold Project, which is located 90km east-southeast of Ouagadougou, and it covers an aggregate area of 116km².

WAF Details

Expanding Resource Base to Support Future Growth: Despite the challenging operating conditions, WAF has continued its mining and milling operations at Sanbrado Gold Project while maintaining the necessary COVID-19 related guidelines. Notably, the company’s outlook is underpinned by the solid production performance from Sanbrado Gold Project.

• Growing Resource Base: As a result of the successful drilling campaigns and the acquisition of the Toega deposit during 2020, the company’s resource base has grown by 65% to over 5 million ounces of gold.
• Well Located Projects: The company’s projects are located in West Africa, which is considered as one of the most attractive mining regions globally with many of the world’s leading producers.
• Decent Long-term Production Outlook from Sanbrado: During FY20, the company commenced the gold production from its 90% owned Sanbrado Gold Project. The company now expects Sanbrado to produce over 200,000 ounces of gold per annum from 2021 to 2030.

Key Highlights of June 2021 Quarter:

• Rise in Gold Production: For the June 2021 quarter (Q2FY21), WAF reported total gold production of 63,610 ounces, up 14% on the previous quarter.
• Decline in Costs: The all-in sustaining cost (AISC) per ounce stood at US$928 in Q2FY21, down from US$957 in Q1FY21.
• Decline in Net Debt: During the quarter, the company repaid US$51 million of Taurus debt and paid US$18.6 million of CY2020 Burkina Faso income tax. As a result, the company’s notional net debt decreased by US$19 million in Q2 to stand at US$57 million.
• Progressing Significant Sustaining Capital Projects: During the quarter, WAF largely completed construction of the aggregate crusher and cement batching plant, accelerated tailings storage earthworks, and purchased slope radar monitoring system.

FY20 Result Highlights:

• Commenced Commercial Production: On 1^st May 2020, the company declared the commencement of commercial production from the Sanbrado Gold Project and during the year, it produced 136,476 ounces of gold at an AISC of US$1,021 per ounce.
• Rise in Revenue: For FY20, the company reported total revenue of $311.16 million, up from $1.23 million in FY19.
• Rise in Bottom Line: Due to the significant rise in revenue, the company’s earned a net profit of $98.9 million in FY20, up from the loss of $4.34 million in FY20.
• Acquisition of Toega Deposit: During the year, the company signed a definitive agreement to acquire 100% of the Toega gold deposit, which is located 14km southwest of the Sanbrado.

Bottom Line (Source: Analysis by Kalkine Group)

Key Metrics:

Due to the substantial rise in FY20 revenue and NPAT, the company’s reported substantially improved profitability margins in FY20, compared to FY19. EBITDA and net margin stood at 57.3% and 31.8%, respectively, in FY20. ROE for FY20 stood at 74%, compared to a negative 5.5% in FY19. Debt to Equity ratio for FY20 stood at 1.47x, down from 3.19x in FY19.

Key Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 43.74% of the total shareholding, while the top four constitute the maximum holding. Van Eck Associates Corporation and L1 Capital Pty Ltd. are holding a maximum stake in the company at 10.91% and 6.34%, respectively, as also highlighted in the chart below:

Source (Analysis by Kalkine Group)

Key Risks:

• Fluctuations in Gold Price: The fluctuations in the prices of gold can impact the financial performance of the company.
• COVID-19 Uncertainties: The company is exposed to the risk and uncertainties caused by the COVID-19 pandemic as it could cause temporary suspension of operations and could also impact the cost of doing business.
• Higher Trading Level: The stock is currently trading higher than the average 52-week price level band of $0.72 and $1.230. Due to the higher trading level, the stock has lesser chance of providing substantial returns.

Outlook:

Looking ahead, the company is focused on increasing its gold production and reducing per-ounce costs. For FY21, the company expects its total gold production to be in the range of 250,000 to 280,000 ounces with AISC between US$720 to US$800 per ounce. As a result of the substantial progress made on the company’s sustaining capital projects in H1FY21, the company expects a lower level of sustaining capital expenditure in H2FY21. In Q3FY21, the company plans to release Toega resource definition drilling results.

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

Source: 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: The stock of WAF has provided a return of 6.59% in the last three months and 7.69% in the last six months. The stock is currently trading higher than the average 52-week price level band of $0.72 and $1.230. We have valued the stock using the P/E 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 average P/E (NTM trading multiple), considering the company’s improved profitability margins in FY20, rise in gold production, and modest outlook. We have taken peers like AngloGold Ashanti Ltd (ASX: AGG), Antilles Gold Ltd (ASX: AAU), Aurelia Metals Ltd (ASX: AMI), etc. Considering the company’s improved performance in June quarter, reduction in net debt, decent production outlook, valuation and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the current market price of $1.04, down by ~6.307% as on 27 July 2021.

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

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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