This is Western Australia's premier nickel company and is a high-grade low-cost producer with a strong organic growth portfolio. It has a lost time injury frequency rate of zero and is a dividend paying company while being debt free and generates positive cash flow even at the current prices of nickel. It has a robust balance sheet which leaves it well positioned for growth and has been leveraged take advantage of the forecast price rise in the price of nickel. It currently has a market capitalisation excess of approximately $ 700 million. The main asset is the 100% owned Forrestenia Nickel Project 400 km east of Perth and the company is the second-largest sulphide nickel miner in Australia and produces approximately 25,000 t per annum nickel ore from the Flying Fox and Spotted Quail mines.
 
 
Nickel is a cyclical commodity and the market is currently at the bottom of the commodity cycle though the company continues to remain cash flow positive. It is building a platform for future growth by using a mix of near-term development and excellent discovery opportunities in proven areas and also plans to cash in on the upside from the green field joint ventures in which it is participating. It believes that building the platform now will set the stage for future returns across the entire price cycle and any upswing in price will magnify the extent of the future returns.


Location of operations (Source - Company Reports)


The nickel market
 
The price drivers which influence the market include the inventories at the LME, the cost and capacity of nickel pig iron (NPT) production in China, the ban on nickel laterite exports from Indonesia and the response from the Philippines and the global demand for stainless steel. The company believes that stockpiles of Indonesian laterite ore will run out by the end of 2015 and that, though exports from the Philippines have been increasing but the export of high-grade materials is declining. The producers of NPT are using blended ores but the cost of production has increased to the point where they are not making money currently. The stockpiles at the LME after increasing significantly have now flattened out and are beginning to show a falling trend. On balance, demand for stainless steel in China has remained strong significant destocking has taken place over the first half of 2015. The market fundamentals point to favourable prospects for a price rally in the fourth quarter of this year.
 
Indonesia occupies a unique position with respect to the production of high nickel grade low Fe product but the ban in that country appears to be permanent. Meaningful production there appears to be some years away and, as a result, deficits are likely to be seen in the nickel market towards the end of 2015 assuming that demand grows by 4%. Ore from New Caledonia is used incountry and only exported to the owners in Japan and Korea. The decline in the export of high-grade ores from the Philippines is raising costs for Chinese NPT producers.
 
Quarterly results to 30 June 2015
 
The company reported strong performance across all its operational metrics including safety, costs and continued positive cash generation. Guidance for the full year in terms of all metrics was surpassed and this reflects the resilience of the company in operating in the low nickel price environment. Mill throughput was a record at 157,913 tonnes and resulted in the highest quarterly production of 6670 t of nickel in concentrate. The full-year production was 25,801 t of nickel in concentrate which is higher than the full-year guidance of 25,500 t. The company also outperformed in delivering the lowest unit cash costs of $ 2.19/lb and full-year unit cash costs amounted to $ 2.31/lb which was significantly lower than the guidance of between $ 2.40/lb and $ 2.50/lb.
 
Despite the nickel prices dropping to below $ 6 /lb, free cash flow was generated and the strength of this cash flow allowed the company to become debt free for the first time since 2004 with the repayment of $ 125 million of convertible bonds on set in July 2015. Other highlights for the quarter included Flying Fox mine production of 62,975 t of ore at 4.97% for 3075 nickel tonnes and Spotted Quail production of its 68, 569 t of ore at 5.1% for 3489 nickel tonnes. Pre-consolidated cash at bank grew by $ 3 million to $ 193.7 million which includes the interim dividend payment of $ 6.7 million and the impact of negative quotation period pricing.
 
The Cosmos acquisition
 
The strategic reasons for the acquisition included playing to the core strengths of the company, a different approach to exploration, the potential for a second operation because of full infrastructure and facilities, low-cost entry and the ability to fund the transaction from existing cash. The transaction was a 100% asset acquisition and the purchase price was $ 24.5 million with deferred payments. $ 11.5 million was payable on closing with $ 7 million payable nine months after close and $ 6 million 18 months after close. Cosmos has 26 mining and infrastructure tenements with a 70 km long ultramatic sequence and a high tenor nickel sulphide belt with up to 30% nickel similar to Forrestania.
 
There are a number of things we like about the company such as its strong outlook for EPS, the return on equity which is 10% and forecast to improve and it' s extremely creditable performance in the low price environment. It is likely that the market has been put off by the low prices of nickel which is why the share continues to trade near its 52 week low. An additional important feature is the ability to generate positive operating cash flows at the bottom of the commodity cycle and the fact that it is debt free. Given that the nickel prices according to the company's focus should show an uptrend by the end of 2015 we believe that the current price represents an excellent opportunity to enter the stock. We would rate the stock as a Buy.

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