Delays And Costs Will Stifle Production But Preserve Gold Potential

Key Takeaways

• Heavy reliance on Burkina Faso heightens risks from regulatory changes, political disruptions, and volatile operational costs, limiting future earnings stability.
  
• Rising site-sustaining costs and uncertain energy supply threaten margin gains, despite increased production potential and long-term gold price support.
  
• Heavy reliance on Burkina Faso, gold price volatility, and rising costs expose the company to operational, regulatory, and profitability risks that may constrain long-term growth.

Catalysts

Engages in the mining, mineral processing, acquisition, exploration, and project development of gold projects in West Africa.

• While the ramp-up of the Kiaka Gold Project ahead of schedule and under budget is set to drive a material increase in gold production and revenue, this growth is contingent on timely grid power connection by the government. Any protracted delays or uncertainties around grid access could restrict output, inflate costs from extended diesel generation, and undermine expectations for near-term cash flow expansion.
  
• Although robust gold sales at unhedged market prices and strong operational cash flow have strengthened the company's balance sheet, West African Resources faces persistently rising site-sustaining costs due to higher royalties, shutdowns, and industry-wide inflation, threatening net margin expansion even as revenues rise.
  
• While global macroeconomic instability and increasing demand for gold as a safe-haven asset should provide long-term price support and underpin revenue growth, accelerating ESG pressure and tightening regulations in emerging markets could raise financing costs and trigger higher operating expenditures, particularly given West African Resources' focus on Burkina Faso.
  
• Despite ongoing resource conversion drilling and the forthcoming 10-year production plan, which may extend mine life and improve future earnings visibility, significant concentration of assets in a single jurisdiction leaves the company exposed to regional political or regulatory disruption that could jeopardize long-term production reliability.
  
• While diversification across two unhedged producing mines leverages the secular trend of rising gold demand from emerging markets and a growing global middle class, West African Resources' limited output diversification and increasing exposure to volatile energy and labor costs may constrain future net earnings growth relative to peers with greater geographical and commodity diversification.

West African Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on West African Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming West African Resources's revenue will grow by 40.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 30.7% today to 22.5% in 3 years time.
• The bearish analysts expect earnings to reach A$453.9 million (and earnings per share of A$0.39) by about August 2028, up from A$223.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, down from 13.6x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 14.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

West African Resources Future Earnings Per Share Growth

Risks

• Heavy reliance on Burkina Faso exposes West African Resources to geopolitical and regulatory risks, including potential resource nationalism and changes in taxation or operating permits, which could disrupt operations and reduce long-term revenue and earnings growth.
  
• Persistent capital-intensive development, such as the ramp-up at Kiaka and transition to owner mining at Sanbrado, creates execution and budget overrun risks; delays in power connection or equipment delivery could escalate costs and compress net margins.
  
• Increasing global ESG scrutiny and evolving sustainability standards may restrict access to capital and elevate financing costs for gold miners operating in emerging markets, thereby placing ongoing pressure on profit margins and shareholder returns.
  
• Continued dependence on gold as the sole commodity increases exposure to gold price volatility; secular trends such as changing monetary policy, declining investor appetite, or growth in recycled gold could dampen long-term gold prices and directly impact revenue and cash flow.
  
• Escalating costs industry-wide due to declining ore grades, heightened competition for skilled labor and specialized equipment, and rising sustaining costs at Sanbrado threaten to erode future operational profitability, limiting growth in net earnings over time.

Valuation

• The assumed bearish price target for West African Resources is A$3.3, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of West African Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.7, and the most bearish reporting a price target of just A$3.3.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$2.0 billion, earnings will come to A$453.9 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of A$2.67, the bearish analyst price target of A$3.3 is 19.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.