West Wits Mining receives valuation of up
to 12.1 cents from Pitt Street Research as
it begins gold production

“We have now re-rated the stock to 6.1 cents per share base case and 12.1 cents per share optimistic case on the back of revised project estimates from the scoping study of March 2022,” said the report.

West Wits Mining Ltd (ASX:WWI)has become the latest ASX-listed gold producer, producing first gold from Qala Shallows prospect in South Africa, as it embarks upon the development of the Witwatersrand Basin Project (WBP).

The news has prompted Pitt Street Research to place a buy recommendation on the small cap Australian miner. Early works will produce between 5,000 and 8,000 tonnes of ore, eventually building up to 53,000 ounces per annum.

DFS for Qala Shallows

The definitive feasibility study (DFS) for Qala Shallows reported a 17-year life-of-mine (LOM) and 7.3 million tonnes at 2.81 g/t gold for 663,000 ounces recovered gold.

Qala Shallows is just one mining target at the project and the analysts believe there is potentially further upside.

Across WBP’s five mining targets, there is a JORC resource of 4.28 million ounces at 4.58 g/t gold – 69% of which is measured and indicated.

The report said: “We would note the current production at Qala Shallows was not included in either the WBP JORC resource or Qala Shallows DFS – it is a bonus.”

Scoping study outlines optimal model

In March 2022, WWI released a scoping study that outlined an optimal development model. It forecast a 27-year LOM with 16.1 million tonnes at a run-of-mine (ROM) grade of 3.1g/t for 1.61 million ounces of gold.

With the gold price tipping US$1,750 an ounce, this provides free cash flow of US$511 million and a post-tax net present value (NPV) of US$160 million at a 7.5% discount rate.

WWI hopes to annually produce 92,000 ounces from WBP by the sixth year of operation and is working to realise further upside with a plan to kickstart the rest of the WBP project, having recently hired financial advisory firm Taurum to facilitate debt finance strategies and options.

It is also looking to increase the LOM even further from the 27-year base case in the scoping study.

Range of 6.1 cents to 12.1 cents

“In our initiation on WWI from January 2022, we valued the company at 5.4 cents per share base case and 7.6 cents per share in an optimistic case,” said the report. “We have now re-rated the stock to 6.1 cents per share base case and 12.1 cents per share optimistic case on the back of revised project estimates from the scoping study of March 2022.”

“We note that our DCF valuation of WWI in January 2022 was based on the assumptions of the DFS for Qala Shallows released in September 2021.

“We have upgraded our valuation range from previously 5.4–7.6 cents per share (base case to bull case) to 6.1–12.1 cents per share after factoring in the latest details of the scoping study released in March 2022.”

Changed parameters

The report said that the parameters that changed materially related to production, revenue and capital costs. The overall result of the changes is improved economics, including the NPV and payback period.

The revised valuation incorporates the benefits and costs of the optimal development model

All other valuation assumptions including funding mix and discount rate have been kept similar to the January 2022 valuation approach.

“In our view, the DCF valuation for WWI continues to be a conservative estimate as it doesn’t consider the various possibilities for further upside,” the report continued.

The key difference between the base and optimistic valuations is the gold price assumption – US$1,750 per ounce in the base case, US$1,900 per ounce in the optimistic case. The valuation would also vary depending on the extent – expressed in percentage of full capacity – of the extraction ramp up.

Upside factors

Pitt Street Research sees the stock being re-rated to its valuation range if certain conditions are present:

• Ramping up of production at Qala Shallows;
• Commencement of production at other prospects at WBP;
• Granting of the new prospecting licence enabling WWI to reinstate a substantial proportion of the project’s original MRE;
• Sustained high gold prices, underpinned by renewed concerns about global economic recovery and COVID-19 variants; and
• Exploration success at the Mt Cecelia project.

Challenges and risks

The analysts see the following as key risks to their investment thesis:

• WWI is exposed to underlying commodity price risk, which depends on macroeconomic factors and demand and supply dynamics of the underlying commodity, gold;
• Any project delays in mining activities, due to funding or operational challenges, will affect the cash flows and viability of the project – the scoping study found that WWI would require US$77 million in funding over the LOM; and
• Challenges in ore processing would also change the risk profile of the project.

The primary premise of low capital outlay for WWI is that the company will be able to process ore on a toll-treatment basis by leveraging the capacity of neighbouring plants. While the company has a small-scale toll treatment arrangement with Gold Plat, which should be sufficient for its early mining initiative, it will require larger scale arrangements in the future.

There could be operational complexities in such arrangements that could arise in the future and affect costs or capital requirements.