Can Western Areas Lift Its Dividend?

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-Consistent performance in Mar qtr
-No major near-term capex needs
-Strong margins despite low prices

By Eva Brocklehurst

Nickel miner Western Areas ((WSA)) remains well placed to meet or exceed its FY15 guidance on the back of the March quarter production numbers. An increased likelihood of stronger dividends was also flagged by brokers. On FNArena’s database the consensus dividend yield forecast is 2.8% for FY15, rising to 6.4% for FY16.

UBS believes Western Areas is the top nickel producer for investors in Australia because of its operational stability, low cash costs, net cash position and ability to maintain a consistent dividend stream. On the latter subject, UBS highlights that with no immediate material development projects in the pipeline other than $20m for a mill recovery project, there is increased scope for Western Areas to lift its dividend pay-out ratio. Aside from that prospect, the broker believes the industrial action at BHP Billiton’s ((BHP)) Cerro Matoso mine in Columbia could underpin the nickel price in the short term.

Western Areas produced a consistent performance on the cost front, with Morgan Stanley observing cash costs of $2.32/lb. Nickel production is on track to reach the upper end of FY15 production guidance at 24,500-25,500 tonnes and the lower end of cost guidance of $2.40-2.50/lb. Morgan Stanley acknowledges the possibility the company could beat on costs over the full year.

With Australian dollar nickel prices currently below the broker’s base case assumptions, running spot prices through the model reveals a 9.0% FY15 earnings risk. Should year-to-date cost performance remain static over the June quarter this risk could be reduced by 2.0%, Morgan Stanley estimates. Given the absence of major near-term capex requirements and a relatively conservative stance on costs, an Overweight rating is maintained.

The production result highlighted a strong mining performance despite lower grades and a major planned shutdown, Bell Potter observes. The net impact of the updated outlook is an increase to the broker’s earnings forecasts of 12% in FY15, 20% in FY16 and 14% in FY17. Goldman Sachs also upgrades earnings forecasts for FY15-17 as a result of the production numbers and better cash cost outcomes.

Deutsche Bank expects reduced cash flow in the June quarter but continues to have a positive view on the stock. Further cost cutting opportunities are considered limited and production is likely to be flat unless a rising nickel price justifies further investment. Still, the strong cash position allows the company some flexibility around exploration and investment opportunities. The broker considers the current nickel price of US$5.65/lb is unsustainable, given it results in 40% of global nickel operations making losses on forecasts. Deutsche Bank estimates the marginal nickel pig iron cash cost is around US$7.25/lb and retains a base case for a deficit in the global market in FY15, with second half price rises.

Western Areas has a full quarter of production before its remaining convertible bond falls due on July 2, 2015 and, with consolidated cash of $193m, is well able to make the $125m repayment. Citi also highlights strong margins, which should be generated even at spot nickel prices.

Slight grade increases were made to Flying Fox and Spotted Quoll deposits, although the Spotted Quoll resource decreased by 10% because of losses in the conversion of lower confidence material to indicated/measured categories. Netted out after depletion, the resource falls 1.1%, in Citi’s calculations. Bell Potter notes the company’s high-grade, low-cost nickel sulphide production is of strategic importance to offtake customers such as BHP and Jinchuan. Western Areas could also participate in any Western Australian nickel industry consolidation and Bell Potter retains a Buy rating.

There are six Buy ratings and one Hold on FNArena’s database. Western Areas has a consensus target of $4.73, suggesting 41.6% upside to the last share price. Targets range from $4.00 to $5.50.
 

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