Western Areas Increasingly Well Positioned

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-Robust offtake interest
-Stronger correlation to nickel price
-Upside from mine extensions
 

By Eva Brocklehurst

Western Areas ((WSA)) has proved its consistency once again, delivering FY14 results which revealed a net cash position for the first time in 10 years. The nickel miner should be debt free by mid 2015. The story of nickel remains on a strong trajectory, with prices set to improve as global stockpiles diminish in the wake of Indonesia's ban on ore exports. Western Areas is extremely well placed to benefit. The stock attratcs four Buy ratings on the FNArena database and three Hold. The three Hold are largely premised on the fact that positives from this year's surge in the nickel price have largely been factored in.

Still, there could be more. UBS describes the company's track record on operations as enviable. It is a preferred exposure because of this record, as well as for strategic value in the company's nickel concentrate that is not yet contracted. BA-Merrill Lynch notes strong interest in non-contracted concentrate offtake – 25 participants are lined up for the Jinchuan offtake tender – which the company aims to complete in the December quarter. The company expects 1-2 year agreements and improved terms.

To Citi, the company's long history of conservative management and a reputation for consistently meeting or beating guidance is reassuring. In a rising nickel price environment the broker envisages options to leverage lower grade deposits and approve expansion projects. The broker believes the company can leverage its contract terms and use cash flow to fund growth options.

A final dividend of 4c per share was a pleasant surprise and larger than many brokers expected. This signals the board's willingness to ramp up the dividend as financial strength improves, and the outlook for nickel becomes more constructive, in JP Morgan's opinion. Production guidance of 24,500-25,500 tonnes of nickel in concentrate appears readily achievable. JP Morgan retains a Neutral stance as the positive impact from near-term nickel forecasts has been priced into the stock.

Credit Suisse suspects a lower pay-out ratio is likely in future, given higher exploration spending to extend the Flying Fox mine life. The stock remains the broker's preferred nickel exposure in the Australian market. Macquarie, too, believes exploration will be a high priority and to this end the company has raised its expenditure forecasts for FY15 to $20m. With production not likely to surprise brokers, the potential catalyst comes from exploration, particularly near Forrestania. Positive results from near-mine drilling could translate to mine life extensions and provide upside to the stock.

UBS notes Western Areas does not have a formal dividend policy but has suggested a 30% pay-out ratio is reasonable. The broker believes the equity performance is likely to have a closer correlation to nickel price sentiment now the balance sheet is improved. Despite the potential, the broker considers the recent share price performance suggests most of the upside is priced in.

Deutsche Bank expects Western Areas will have a flat production year as FY15 guidance is slightly lower than the 28,700 tonnes achieved in FY14. The broker notes Western Areas continues to mine above reserve, and recoveries should improve through further leaching, but expects slight declines back to reserve grade over time. Brokers have highlighted the importance of the company's concentrate to BHP Billiton's ((BHP)) Nickel West business. Regardless of BHP's decision on Nickel West there is still plenty of demand for Western Areas' concentrate, in Merrills' view. Deutsche Bank expects an offtake agreement for the 13,000t per annum out-of-contract to be signed within six months.

Other catalysts include mill recovery enhancement, to lift recoveries to 93% from 89%, which is still in the scoping stage. A positive outcome on that front could be meaningful. The company also expects large interest expense savings in FY15 and FY16. UBS also notes Western Areas is also looking to partner with juniors that are starved of funds but have potential in their nickel resources.

London Metal Exchange inventories continue to place "psychological" pressure on the nickel price, despite the underlying fundamental support. Citi points out that, as the LME only accounts for one third of the global nickel market, and remains the metal of last resort, this should be viewed in context. The rest of the market – scrap and ferronickel – is tight. A sustained deficit is expected by the end of the year but Citi cautions this is unlikely to affect LME inventories until later, perhaps the first quarter of 2015.

The consensus target price on the FNArena database is $5.27, suggesting 8.7% upside to the last share price. Targets range from $4.45 to $6.00. Dividend yield on FY15 and FY16 forecasts is 3.5% and 4.9% respectively.
 

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