Australia | Jan 23 2013
-Solid quarterly production
-Well managed
-High quality mines
-Nickel price the stumbling block
By Eva Brocklehurst
Nickel miner Western Areas ((WSA)) hit all the right notes with the broking community after its solid December quarter production results and evidence of being well managed. However, the nickel price is out of the company's control and on that hangs the tale.
BA-Merrill Lynch notes the company is on track to beat its guidance in terms of production for FY13 but cash costs are rising and will be a concern going forward. Underground mining at Spotted Quoll will ramp up but weak prices translate to weak cash flow. This is despite WSA being in the lowest quartile on the global cost curve, BA-ML notes. The broker says WSA is fairly valued at current prices and, unless there are fundamental improvements in the nickel price, the key driver of long term value will be further exploration success. The broker keeps a Hold rating but notes, if WSA is successful in achieving its production targets, it can generate strong returns given its mines are higher grade, hence lower cost, compared with its peers.
Nickel-in-concentrate production was up 9% in the December quarter at 6,722t versus BA-ML's forecast of 6,142t and JP Morgan's forecast of 6,100t. JP Morgan still maintains WSA as its preferred nickel play and has a Buy recommendation, noting the company is still generating cash in a subdued pricing environment. As the broker expected, WSA declared a maiden reserve for Lounge Lizard, helping boost Flying Fox mine reserves by 49%. Whilst the reserve increase was expected, JP Morgan believes deposit size remains open and should grow further over time.
UBS calls WSA Australia's default nickel stock and maintains a Buy recommendation. The broker has lowered its FY13 earnings estimates by 34% from a combination of pushing through mark-to-market commodity prices and the higher costs implied from the December quarter. From a production perspective, first half output of 1.45m tonnes of nickel-in-ore implies that WSA is on track to beat its full year guidance. UBS believes the company's assets could ultimately provide strategic value to a global nickel producer. On the positive side too, the broker contends that the lack of significant sulphide discoveries and reliance on high-cost, underperforming laterite deposits will eventually lead to a shortfall of quality nickel concentrates around the globe.
Other brokers covering the stock on FNArena's database have echoed these sentiments with Macquarie keeping WSA as its key pick in the sector. Macquarie believes the Forrestania asset base is outstanding and WSA a reliable producer. Nevertheless, the nickel price dominates the outlook. Deutsche Bank likes the stock but cites the nickel price, hence its Hold call remains in place. Citi also finds the nickel price a problem but sticks with a Buy recommendation. All-in-all the recommendations on the FNArena database stand at four Buys and three Holds. The price target ranges from $4.29 (Deutsche) to $5.60 (Citi).
So where to for the nickel price? Citi has lowered its nickel price forecasts for 2013 to US$8.30/lb (current spot US$7.90) and this has driven downgrades to earnings estimates for WSA of 17.3% for the year. Deutsche is also bearish on the short-medium term nickel price, which impacts its valuation of the stock. This broker's discounted cash flow valuation is based on a long-term nickel price of US$8.17/lb.
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