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Stock Of The Day - Western Areas (BUY)

WSA has consistently delivered in-line production results over the past three years and the 3QFY15 was no different. The quarterly report showed the year-to-date totals for the mining operations. Flying Fox reported ore tonnes mined of 201,363 tonnes of 4.9% grade making a net of 982t tonnes, the numbers for Spotted Quail Underground were 207,360, 4.9% and 10,131 making a total of 408,723, 4.9% and 19,959. The ore processed amounted to 451,814 t with a grade of 4.7% and an average recovery of 90%. The nickel in the concentrate amounted to 19,125 t and the total is sold was 19,346 t. The financial statistics were mining cost per pound of $ 1.67, haulage of $ 0.06, milling of $ 0.45, administrative cost of $ 0.20 and by-product credits of ($ 0.03). The cash cost of nickel in concentrate per pound was $ 2.02 and the exchange rate of the USD to the AUD was $ 0.86. 


Exports from Philippines & Indonesia (Source - Company Reports)

It should be noted that unit cash costs for the year to date are running below the guidance at $ 2.36 per pound. The management of grades and waste dilution is resulting in the strong reconciliation of reserves in particular at Flying Fox. Production and other physical factors have been noticeably constant and the mill continues to exceed its rated capacity by 10%.


High  Grade Mines (Source - Company Reports)

Updated guidance for FY 2015
 
Mine production (nickel in ore) had an original guidance of 25,000 to 27,000 t and the recommended guidance is now the middle of the range. Nickel in concentrate production was originally guided at 24,000 to 25,500 t and the recommended guidance is now at the upper end of the range. The unit cash cost of production of nickel in concentrate was originally guided at $ 2.70 to $ 2.80 per pound and the recommendation is now $ 2.40 to $ 2.50 per pound. There is no change in the original guidance of $ 50 million to $ 60 million for capital expenditure and mining development costs. Similarly, exploration expenses also remain unchanged at $ 20 million. There are a number of points worth noting. Nickel in concentrate production is at the upper end of the guidance range. The unit cost guidance has been reduced to around $ 0.30 per pound which works out to an annual cost savings of around $ 18 million. Cost reductions have been achieved in all major operating contracts and there have been productivity improvements and positive reserve reconciliation. Unit costs are now expected to be at the lower end of the guidance range.


FY15 Guidance (Source - Company Reports)


The nickel market
 
There are a number of factors which have an influence on the price. These include the level of global supply, the cost and capacity of nickel pig iron (NPI) production in China, the export ban in Indonesia of laterite exports and the response from the Philippines, the global demand for stainless steel and political influences in the short term. The company believes that the Chinese stockpiles of Indonesian laterite may run out by the middle of the year and that the monsoon season has reduced exports from the Philippines. The stockpiles of producers in China are larger than expected and hidden stocks are coming into the market. Stainless steel demand in China remains strong. Stainless steel continues to dominate the demand for the use and the growth for nickel and there have been large reductions in the fourth quarter of 2014 of production from Europe, Japan, Korea and Taiwan.


Stainless use of nickel (Source - Company Reports)
 
Indonesia is in a very strong position when it comes to high grade nickel and low iron products. There has been a very strong message sent out by the Indonesian government that the export ban is likely to be permanent. The reduction of Chinese NPI and Japanese ferronickel of approximately 300,000 t per annum has had its impact. Any meaningful new production is five years away and a market deficit is set to begin on the resumption that on the assumption that demand will grow at 4% annually and that the Indonesian ban will continue.


World Saprolite Resources (Source - Company Reports)

If you remember, in the six months to 31 December 2014, the company recorded impressive NPAT growth of 774% over the same period in the previous year and 3.5% sequentially. This result may be attributed to the initiatives to reduce operating costs and the increase in nickel prices following the ban from Indonesia. This is also boosted its cash generation from operations and transformed its balance sheet in terms of debt and net cash and it is expected to be debt free by July 2015. We see a number of positives in the company.


WSA Daily Chart (Source - Thomson Reuters)

The higher grades equate to higher margins enabling the company to survive even in low price environments. The company is now positive in terms of cash generation meaning that investors can look forward to healthy dividends. The company has consistently met or exceeded its guidance which means that management has a good deal of credibility. Finally, the expected shortage in the nickel market because of the Indonesian ban should pay off handsomely especially in in view of productivity gains and cost control initiatives. It is rare to find a company dealing in commodities and metals that has such positive growth prospects in the face of the general gloom and doom for commodity companies. We believe that this company is going to reward investors at this point in time in terms of the future upside and have no hesitation in placing a Buy recommendation on the stock at the current price of $3.56.