Australia | Oct 24 2018
Western Areas' Odysseus nickel project is now much larger and the economics have improved substantially.
-Deposit upgraded, higher processing capacity indicated
-Could underpin nickel production for the next decade or more
-Alternative source of income as Forrestania diminishes
By Eva Brocklehurst
Confidence has improved following the definitive feasibility study (DFS) for the Odysseus project and Western Areas ((WSA)) has made a decision to mine. Brokers suggest the DFS has outlined a robust cash generating operation under most scenarios for the nickel price.
The project is now larger and mine life is projected to be longer. Higher initial capital expenditure is required because of the construction of a haulage shaft, while life-of-mine operating costs are revised lower.
Macquarie explains that using a haulage shaft, as opposed to a decline, reduces cash costs and adjusts estimates to match the feasibility study. Hence, the economics appear robust and should underpin the company's nickel production for the next decade or more.
Processing capacity has increased to 900,000tpa from 750,000tpa. Now the net present value has risen to $418m from $292m using US$7.50/lb nickel. UBS believes the market is pricing in a long-term nickel price of around US$6.00/lb and, therefore, Odysseus is fully valued while still carrying development risk.
Initially, Shaw and Partners assessed the company's long-term price forecast as a little high but having revisited the commodity outlook is reassured that a number in the mid to low US$7/lb region is fair and, removing outliers, the long-term market expectation is closer to US$7.50/lb.
First concentrate is scheduled in 2022 and the mine is extended to the 2030s although UBS believes this could edge towards 2040. Life-of-mine nickel in concentrate has increased 49% to 130,000t. A maiden reserve of 164,000t nickel was declared while the resource remains the same is in June, at 199,000t.
While incorporating the latest estimates extends the long-term outlook, Macquarie notes a later start for Odysseus and some adjustments to the final two years of Flying Fox and New Morning flattens the medium-term view. Production is forecast to remain in the 20-25,000tpa range through to the end of FY23.
UBS suspects there will be a high degree of bidding tension surrounding the concentrate because of demand for electric vehicles and a lack of other supply. While the broker likes the nickel exposure the share price appears to reflect the valuation.
Finance
To finance Odysseus, Western Areas has several options including cash of $152m as of June 30, 2018 as well as bank debt or a potential sell-down. From a risk perspective, if the nickel price were to underperform forecasts, UBS estimates much of the expenditure could be stopped or delayed.
As a result, while there has been some concern in the market about funding the project the broker is not unduly worried. Credit Suisse is also unconcerned, believing a challenging nickel price can be addressed by deferring the higher capital development phase and preserving the orebody for a better price in the future.
Furthermore, the broker believes the commitment to Odysseus addresses the issue regarding the short reserve life at Flying Fox and the visibility on long-term production.
Shaw and Partners, not one of the eight stockbrokers monitored daily on the FNArena database, believes the acquisition of the Cosmos property, which includes Odysseus, was one of the best deals in recent years. It appears to be a sensible deployment of cash to a project that provides longevity beyond Forrestania and options in terms of extending mine life well into the 2030s.
Odysseus also has significant adjacent deposits, with optimisation studies to commence on the potential of bringing the AM5 and AM6 into production, comprising a large resource of 2.5mt at 2.6% nickel.
Shaw and Partners suspects the announcement regarding Odysseus might impart some further zest to the valuation of Western Areas, maintaining a Buy rating and $3.40 target. The database shows five Buy ratings, one Hold (UBS) and one Sell (Morgan Stanley). The consensus target is $3.19, suggesting 36.1% upside to the last share price.
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