Australia | Jul 23 2019
This story features WESFARMERS LIMITED. For more info SHARE ANALYSIS: WES
Western Areas is currently benefiting from a surge in the nickel price, although there are questions over whether the increase is sustainable in the short term.
-Nickel reserves and resources increase at both Flying Fox and Spotted Quoll
-Less than three years remaining for Flying Fox before low-grade option needs to be pursued
-Odysseus could provide the answer as Flying Fox declines
By Eva Brocklehurst
Nickel miner Western Areas ((WSA)) is highly leveraged to the nickel price and is currently a beneficiary of the 23% surge in nickel pricing since June. Hence, an improving cash position signals to brokers the funding of the Odysseus project is now more assured.
Going forward, cash may also be boosted by the $33m in proceeds from the sale of shares in Kidman Resources ((KDR)), if the takeover bid by Wesfarmers ((WES)) is completed.
UBS calculates that with spot nickel prices at US$6.60/lb, this implies cash margins for Western Areas of around US$2.00/lb. Yet, while Western Areas is ideally placed for a lift in nickel usage, based on 1-3-year view regarding electric vehicle demand, the broker does not believe the latest surge in nickel prices has fundamental backing.
Hence, there could be a short-term risk of nickel prices returning below US$6/lb in the second half of 2019. Eventually, the broker forecasts a substantial lift in the company's net profit in FY21, driven by nickel price appreciation to US$8/lb.
Western Areas has produced an updated reserve and resource statement for Flying Fox and Spotted Quoll. Reserves and resources have increased at both deposits. Net of depletion, nickel tonnage has increased 9% at Flying Fox while grades improved 6%.
Yet, Credit Suisse was disappointed there was no economic extension found from exploration at Flying Fox, as reserves now support less than three years of remaining life before a low-grade strategy needs to be pursued.
A replacement ore source needs to be defined to use the mill capacity that becomes available as Flying Fox is depleted and, the broker points out, this could be available in the Diggers South area, where there is a permit to mine that is waiting capacity as well as a satisfactory nickel price.
Diggers South has a 2mt reserve at 1.5% nickel for 29,000t that the broker suggests may have a lower expenditure option for extraction. While Diggers is a large-scale project, New Morning is considered a more logical lower-risk opportunity to prove and optimise heap leaching and MREP (mill recovery enhancement project) production, which still needs to be demonstrated commercially.
Credit Suisse notes progress with the MREP is materially behind expectations, as hydrometallurgical challenges continue to be encountered. While not the main focus for production, this process can unlock value from lower grade ore.
On the other hand, exploration was positive at Spotted Quoll, with the company confirming depth extensions. Increases to reserve and resource estimates for Spotted Quoll have driven an increase to Macquarie's assumptions for the life of the mine, with mining expected to finish in the second quarter of FY24.
Production in the June quarter was in line with expectations with nickel in concentrate produced and sold at 5400t and 5900t, respectively. Milled tonnage, grade and recoveries were also broadly within expectations. Western Areas is set to commence offtake discussions for agreements due to expire in early 2020. The outcome of these discussions could represent a key catalyst for the company in FY20.
Meanwhile, Odysseus is on track and on budget, with early works completed. Credit Suisse assesses, with a three-year lead time to first production, the mine could be up and running against a declining mine life at Flying Fox.
Credit Suisse downgrades Western Areas to Neutral from Outperform on valuation. The stock is also trading in line with the UBS valuation that includes full value for Odysseus, which still carries development risk. There are two Buy ratings and four Hold on FNArena's database. The consensus target is $2.53, signalling 7.4% upside to the last share price.
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