Australia | Aug 21 2012
– Weak nickel markets impact on earnings for Western Areas
– Operating cash flow was strong, solid margins to continue
– Low cost operations has the company well placed when conditions improve
– Buy ratings dominate despite UBS downgrade
By Chris Shaw
Western Areas ((WSA)) yesterday delivered a full year profit result of $40 million, which was 70% below FY11 numbers but broadly as the market had expected. While much of the shortfall can be attributed to a weak nickel market during the period, the company still managed to generate strong free cash flow of $35 million in FY12.
Citi liked the result, pointing out operating cash flow of $159 million achieved in a weak market highlights the attractive cost position of Western Areas' assets. Given current nickel price weakness this cost positioning is important in Citi's view. With two years until debt maturities are due, Western Areas appears well placed to ride out tough market conditions.
At the same time Western Areas is continuing to look for growth options, as BA Merrill Lynch notes a key focus in the coming year will be exploration in the Forrestania area. Given the prospective nature of the region BA-ML expects further discoveries will likely add to mine life and production upside.
Given the low cost nature of the operations of Western Areas, any exploration success should see continued generation of solid margins and returns in the view of BA-ML, even allowing for currently weak nickel prices.
Accompanying the result was updated production guidance, with Western Areas now looking to produce 26,000 tonnes of nickel ore in concentrate in FY13. Recoveries should be around 90%, while cash cost guidance is for a result below $3.00 per pound.
This guidance was something of a disappointment for UBS as it was a little below what had been expected. Some cuts to earnings forecasts result, UBS lowering its FY13 net profit after tax forecast by 28%. In contrast, for Macquarie guidance from Western Areas was exactly as expected.
In earnings per share (EPS) terms UBS is now forecasting 8c in FY13 and 20c in FY14, which compares to consensus EPS estimates according to the FNArena database of 18.5c and 34.6c respectively. Part of the difference can be explained by the likes of Citi maintaining production expectations for FY13 above current guidance.
Looking forward, the key for Western Areas in the view of Macquarie is the company has established itself as a high grade, low cost producer. This is at a time when the current nickel price means more than 30% of current nickel supply is losing money at present.
Indonesian export bans, delays to new projects and an improving global economic outlook are all possible catalysts for higher nickel prices going forward, but as Citi notes the timing of any improvement in the market remains uncertain.
This means the ability of Western Areas to maintain its cost position and to wind back capex without impacting on production has the company well placed. This supports a Buy rating for Citi, as does the upside on offer relative to the broker's price target of $6.10.
Others in the market agree, as the FNArena database shows four Buy ratings for Western Area against two Hold recommendations. Among the Hold ratings is UBS, who downgraded its rating on Western Areas from Buy post the profit result. The downgrade reflects recent share price appreciation, as UBS points out the stock has rallied almost 30% since the end of July. BA-ML sides with UBS and rates Western Areas as Neutral, this given the poor shorter-term outlook for nickel prices.
Price targets for Western Areas range from Credit Suisse at $4.70 to Citi at $6.10, with a consensus target of $5.20. This is down from $5.28 prior to the result.
Shares in Western Areas today are lower in a stronger overall market and as at 11.50am the stock was down 10c at $4.28. This compares to a range over the past year of $3.41 to $6.07. The current share price implies upside of around 21% relative to the consensus price target in the FNArena database.
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