Australia | Jul 24 2013
-Cost cutting plans welcomed
-Break even despite nickel price
-Needs catalysts
By Eva Brocklehurst
Australian nickel miner, Western Areas ((WSA)), is one producer that has impressed brokers with a consistent line on guidance. Moreover, the company's ability to keep costs under control and generate cash, despite the fall in the nickel price, has also been welcomed.
The company reported production of 66,000 tonnes in the June quarter with cash costs falling to US$2.44/pound from US$2.86/lb. Cost reductions of 15% were due to lower average unit rates of mining and the increased proportion of material from the lower cost Spotted Quoll ore. This enabled the company to generate $23 million in free cash flow, which for Citi shows just how good Western Areas' operations are. Forecast cash generation combined with the undrawn $125m debt facility leaves the company well placed to repay its first $110m in convertible bonds due in July 2014.
What also impressed was that management has decided to forfeit a minimum of 50% of bonuses with a salary freeze that will stay in place for a further 12 months. This equates to 10-20% reduction in remuneration for senior management, in Macquarie's estimate. UBS also hailed the decision to defer expansion of the plant to 750,000tpa from 550,000tpa, but still assumes a September 2015 start.
Deutsche Bank expects Western Areas to spend $15m in FY14, largely focused on the New Morning region. If a meaningful ore body can be defined over time a 3km or thereabouts lateral drive from Flying Fox could be developed. A maiden resource is also expected soon for Sunrise as well as an update on Spotted Quoll. Macquarie believes this ability to deliver drilling results is a key potential catalyst and Western Areas is the broker's preferred nickel play. BA-Merrill Lynch also notes the potential for resource extensions and awaits the update on Spotted Quoll. The broker is forecasting FY14 production of 266,000 tonnes but is awaiting the FY14 guidance before reviewing long-run forecasts.
Received nickel prices averaged $6.84/lb at an average exchange rate for the Australian dollar at US99c. This was a good quarter, admittedly, but Credit Suisse has calculated free cash flow break even at a $5.50/lb nickel price and cash break-even at just below $6.00/lb. Current prices are US$6.35/lb, or $6.87/lb at spot rates at US93c conversion. The broker thinks Western Areas is well placed for any uptick in nickel prices.
UBS took a slightly different tack to the others, deciding to cut production forecasts without having any FY14 guidance at this stage. UBS also downgraded the stock to Neutral from Buy. This is largely on valuation and because nickel lacks catalysts at the moment. While the Forrestania operations are performing well, the broker believes the nickel sector lacks any significant positive catalysts for the next 6-12 months. The persistent fall in the nickel price is being met with production cuts worldwide but, in the broker's view, a lot of projects have an overhang which caps the medium-term outlook.
Western Areas' high cost underground development at Flying Fox is the main negative. As a result of the soft nickel price the company is looking at the cost structure and cost cutting plans will include reducing underground capex as well as a review of all major site contracts. Merrills expects that the company's decision to process more Spotted Quoll ore instead of Flying Fox ore indicates a preference for the higher margin tonnage at Spotted Quoll. This leads the broker to expect slower underground mine development at Flying Fox mine in FY14. The August financial report will be scrutinised for guidance on capex.
Western Areas has three Buy ratings on the FNArena database and four Hold. The consensus target price is $3.54, suggesting 13.2% upside to the last share price. The target prices range from $2.90 to $4.80.
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