Australia | Feb 15 2012
– Western Areas interim falls short of expectations
– Nickel price a short-term issue for earnings
– Exploration offers longer-term upside
– Stockbroker opinions mixed
By Chris Shaw
The market had been expecting an interim profit for nickel play Western Areas ((WSA)) of as much as $40 million but the company fell short of this, reporting earnings of $24 million. The result reflected lower received nickel prices and a negative quotational pricing adjustment during the period.
On the plus side production remains solid, as guidance is for output for FY12 of 24,000 tonnes of nickel. Deutsche Bank expects guidance will prove conservative, as year-to-date the company has produced 13,000 tonnes.
The medium to longer-term production outlook also remains solid, Deutsche expecting annual output from Spotted Quoll of around 15,000 tonnes annually and a further 10-15,000 tonnes per year from Flying Fox.
Production risk appears to the upside, Deutsche noting Western Areas is also aiming for around 5,000 tonnes per year from Diggers South and a similar amount from the region between Spotted Quoll and New Morning. Another attraction is low costs, Deutsche expecting cash costs of less than US$4 per pound for the next 10 years.
But for FY12 the big issue for Western Areas in the view of BA-Merrill Lynch will be nickel prices, as there appears downside risk to earnings estimates if the nickel price remains weak through the second half. As evidence of this, while BA-ML is forecasting a 2H12 nickel price of US$8.05 per pound, consensus estimates stand around US$9.00 per pound.
Beyond FY12 lifting mine life from a current eight years would be an important catalyst according to BA-ML, so exploration results in coming periods will attract attention from the market. Deutsche Bank agrees but suggests success is likely given a FY12 exploration budget of $30 million and a good track record of discovery.
Another possible positive catalyst for investors would be a decision in plant expansion, Deutsche noting there is scope for an expansion to 750,000 tonnes per year from around 550,000 tonnes now. Such an expansion would cost around $10 million and a further expansion to one million tonnes per year is expected in the future.
Post the interim result, equity brokers have made some changes to earnings estimates, ranging from minor adjustments from Deutsche Bank to cuts to Credit Suisse's earnings per share (EPS) estimates of 29% and 44% in FY12 and FY13. Consensus EPS estimates for Western Areas according to the FNArena database now stand at 35.9c for FY12 and 45.2c for FY13.
No broker has adjusted its rating on Western Areas post the interim result, but the database shows opinions remain mixed given two Buy ratings, three Holds and one Sell recommendation. Credit Suisse continues to rate the stock as Outperform given an attractive combination of high grade assets and low cost production.
BA-ML is less bullish and rates the stock as Neutral, this a reflection of few obvious catalysts to drive the share price higher. This reflects caution both over potentially soft nickel prices and a lack of production growth beyond the current suite of assets.
While an acquisition could address this, and the Lounge Lizard project is a possibility, BA-ML suggests Western Areas would need additional capital to complete any such acquisition.
UBS argues the Sell case on Western Areas, taking the view weak nickel prices and a strong Australian dollar are not a good combination for group earnings. The other issue for UBS is valuation, as the broker suggests exploration success is already being priced into the stock at current levels.
Shares in Western Areas today are weaker and as at 11.00am the stock was down 10c at $5.46. This compared to a consensus price target of $5.97 and a range over the past year of $4.05 to $7.48. The current share price implies upside of around 7.5% to the consensus target in the FNArena database.
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