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EV Batteries Spark Interest In Western Areas

Australia | Oct 23 2017

Increasing demand for nickel in the battery market has provoked interest in Western Areas. Some brokers, but not all, are on board with this theme.

-Market outlook compelling but is the stock fully valued?
-Exploration success presents material upside catalysts
-Record of upgrading initial guidance as year progresses

 

By Eva Brocklehurst

Nickel miner Western Areas ((WSA)) presents several growth options and has commenced FY18 with its projects on time and on budget. The company has suggested the nickel market is demonstrating strong growth from both Chinese stainless steel and electric vehicle battery demand.

Nickel features in the componentry for the electric vehicle/battery market and this is driving positive interest in Western Areas. Yet UBS is also witnessing elevated short interest, with investors trading off the lifting of nickel demand and price expectations versus what price is actually factored into the stock. Increasing battery demand for nickel is not just expected to lift prices but there is also the potential for this stock to pay out more as well.

Hence, while the market outlook may appear compelling, the broker also considers the stock expensive based on what is known currently, and notwithstanding the risk of a short squeeze and higher nickel prices that skew the profile to the upside.

September Quarter

The company made a soft soft start to FY18, with production of nickel in concentrate down -7% quarter on quarter. This was in part because a drop in ore mined at the high grade Spotted Quoll mine and a -5% decrease in Flying Fox grade. Combined, this reduced the mill grade to 4.0% nickel, the lowest since 2010. While reserves have declined as ore is mined, mine life extensions are likely but will require reinvestment.

In summary, UBS suggests the market may be getting ahead of itself. While the stock is for those investors that want exposure to electric vehicles, in that it offers a high degree of leverage, the broker retains a Sell rating based on valuation and a long-term nickel price of US$6.00/lb.

Macquarie is more confident, rating the stock Outperform and believing exploration success that extends the mine life at both Flying Fox and Spotted Quoll, or improves the economics at Odysseus, presents material catalysts for the stock.

Release of the Odysseus definitive feasibility study and the commissioning of the company's mill recovery enhancement project (MREP) are both expected in the next six months. MREP is on time for commissioning late in the March quarter of 2018. The nickel product from this facility is amenable to the electric battery market.

Macquarie already includes a development of Odysseus in estimates. The company is now looking at developing an open pit a New Morning which, combined with tailings reprocessing, could boost output by 4,000tpa of contained nickel.

Mine Extensions

Credit Suisse finds the key challenge, outside of nickel prices and rising FX, is the short life at the company's mines which need capital and exploration success to avoid depletion before the materially lower-grade, deeper Odysseus option ramps up. The broker concedes the improved nickel price reduces the risk for the Odysseus investment, with more cash likely to be generated to fund the project and greater potential returns to be extracted.

Management has cautioned that resource conversion outside of the reserve at Flying Fox probably needs more than just drilling. Conservative nickel price assumptions appear to constrain lateral extension opportunities, Credit Suisse suggests.

FY18 guidance is considered easily achievable and the broker acknowledges that the company has a history of meeting, or exceeding, guidance and a record of upgrading initial guidance as the year progresses and certainty increases. FY18 is unlikely to be any different.

Credit Suisse observes the sudden enthusiasm for electric vehicles and nickel's association, along with a more supportive price, signals the company is more than likely to commit to Odysseus in a phased manner. The broker also notes that, absent external cost pressures, the unit cost outlook should be reasonably stable.

The company outlaid its lowest-ever exploration expenditure in FY17, conserving cash. The broker models an increase to $12m in FY18, consistent with guidance, in order to extend the Flying Fox mine life beyond the current reserve and resume greenfield projects.

Canaccord Genuity is also favourably disposed towards the company's operating track record, balance sheet and project pipeline. The broker believes the company's innovations bode well for capitalising on the emerging battery market.

While tailwinds exist for the nickel price, based on the broker's current metal pricing and FX, the rating is downgraded to Sell from Hold. Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, observes the current share price is implying a nickel price of US$6.30/lb versus the spot price of US$5.30/lb.

In contrast, Shaw and Partners, also not one of the eight monitored daily on the database, has a Buy rating, given the tailwinds. Moreover, Western Areas looks attractive versus Australian mining peers, and more so if an incentive nickel price that is 50-100% higher than the current price is envisaged. The broker has a target of $3.75.

Shaw and Partners observes the nickel market has positive growth, highlighting the company's commentary that it is yet to fully receive the recent price uptick, given payment settlement is one month after the price is contracted.

The database shows four Sell ratings, two Hold and one Buy (Macquarie). The consensus target is $2.57, signalling -12.9% downside to the last share price. Targets range from $1.95 (Morgan Stanley, yet to update on the quarterly) to $3.70 (Macquarie).
 

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