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WSA VIDEO



 

Stock Of The Day - WSA (BUY)

In today’s daily we cover Western Areas (WSA), which is a diversified metals and mining’s company with high grade nickel production assets in Australia and base metals development projects across Australia, Canada and Finland. The company has geared its production around two highest-grade underground nickel mines in the world, Flying Fox and Spotted Quoll in Western Australia. On 15 April 2015, the company announced its quarterly activities reports, whose highlights included an improvement in Nickel in concentrate production and reduction in unit cash production cost. Production from Flying Fox mine was 72,144 tonnes of ore mines at 4.6% for 3,330 tonnes of contained nickel. Similarly, production from Spotted Quall mine was 70,590 tonnes of ore mines at 4.8% for 3,372 tonnes of contained nickel. Flying Fox massive sulphide Resource underwent a remodelling that led to an increase of 11,394 tonnes of nickel at an average grade of 5.4% nickel. The Cosmic Boy concentrator has been reported to be operating above nameplate capacity which has been annualised for the quarter to about 584Ktpa while the plant availability was 97% owing to mill reline. Mill throughput was 145,933 tonnes of ore at an average grade of 4.7% nickel with 90% recovery.


Mine and Mill Production and Cash Costs (Source – Company Reports)

The company also declared the fully franked interim dividend of 3 cents. Further, the free cash flow from operations was $15.4 million and the net cash position surged to $68.0 million at 31 March 2015 which is above $57 million reported at 31 December 2014. We do note that a planned mill shutdown in February did affect the concentrate production and cash costs for the quarter with production down by 4% quarter-on-quarter (6,180t Ni) and cash costs up 4% on a quarter-on-quarter basis. ($2.32/lb).

In 2014, the unit cash cost of Nickel in concentrate fell to $2.50/lb from $ 2.68/lb in 2013. The trend in cost reduction continued with Year to Date (YTD) cost falling to $2.36/lb. The reasons for cost reduction were cited as a reduction in all major operating contracts, productivity improvements and positive reconciliation at reserve particularly at Flying Fox. The reduction in costs is critical to the strategy of the company since it needs to maintain a healthy balance sheet to survive the fluctuation in Nickel prices. The sales of the company increased from $306 million to $320 million over the period of 2013 to 2014. During the same period, cost of sales declined by approximately 9.6% from 259 million to 234 million. The relative increase in sales and decline in cost of sales led to an improvement of gross margins from 15% to 26.5%. The trend of improvement in gross margins is expected to continue this year, which will result in higher dividend, a trend likely to have a positive impact on the stock prices. The company strengthened its balance sheet last year as a result of $105 million of capital raising and $15 million of convertible bonds. At the end of 2014, WSA was in a net cash position (i.e. having more cash than debt on the balance sheet) for the first time in ten years.


Mine Development_Flying Fox (Source – Company Reports)

The company’s finances have also been favoured by external factors. The exchange rate fell from $1.03 to $0.91 (US $ per AUS $) during the period 2013 to 2014, and has further declined to $0.86 (US $ per AUS $) by 15 April 2015.

Another factor favouring the company is increase in the price of Nickel. The increase in Nickel prices happened due to a supply side constrain created by a ban by the Indonesian government on Nickel export. The objective of the ban was to encourage the development of a domestic processing industry, rather than seeing raw product shipped off to other countries for value adding processing. Indonesia was previously a major supplier of nickel laterite material, accounting for as much as a quarter of world supply and as such the ban has seen a significant structural change to the supply side of the nickel industry. The Indonesian product was also the primary source of supply for the Chinese Nickel Pig Iron Industry. With such a ban most likely a long-term policy measure, the price on Nickel is expected to remain high for some time.

There are some other factors (apart from change in the global Nickel supply due to Indonesian ban) that are pointing to a Nickel price rally in the second half of 2015, representing a bullish case on the WSA stock. Chinese Indonesian laterite ore stocks may run out mid-year, with ore stocks on the decline. Chinese Nickel Pig Iron production is likely to be more than expected, creating demand for Nickel. Further, stainless steel demand remains strong in China.


Flying Fox (Source – Company Reports)

We also make a note of the announcement by Monax Mining Limited about the securing of funds for a collaborative drilling program under the South Australian Government’s Plan for Accelerated Exploration (PACE) initiative. WSA, the a farm-in partner, is also eligible for up to $100,000 under the PACE grant for drilling on Monax’s Western Gawler Craton Project, which is planned for June quarter 2015.

 
Projection of the Mt Hope Area (Source – Company Reports)

As part of the guidance commentary, the company lowered cash cost guidance from $2.70-2.80/lb to $2.40-2.50/lb. Further, WSA reconfirmed the production guidance of 24.5-25.5kt of nickel in concentrate. In fact, the year to date production of about 77% of the guidance mid-point has already been achieved. Therefore, the guidance looks achievable.

The WSA Stock is trading around a price close to $3.78 at a price to earnings ratio of 17.430 and a dividend yield of 2.68%. The current price is close to the average of a 52-week high and 52 week low.


WSA Chart (Source - Thomson Reuters)

Given the continuation of favourable trends in the company operations like reduction in unit cash cost of Nickel Concentrate, increase in overall production levels, reduction in injuries, improvement in the gross margins and balance sheet of the company, and positive external factors like increase in the price of Nickel and improvement in the exchange rate favouring the business model of the company, we put a BUY recommendation for this stock at the current price of $3.78.