• The company delivered an outstanding set of results for the full year ended the 30 June 2015 and the markets responded by pushing up share prices. The lowest cost nickel producer in Australia managed to achieve this despite the nickel price declining to levels last seen during the great financial crisis. The increased profitability led to increased dividends for shareholders. Net profit after tax (NPAT) was up by 37.5% to touch $ 35 million and this result must be considered exceptional in the background of the difficult nickel price environment when realised prices fell by 4% compared to the previous year. Operating cash flow for the year was $ 148.5 million an increase of $ 31.4 million over the previous year and demonstrated the significant impact of operational cost savings and interest expenses resulting from the repayment of convertible bonds at the beginning of FY 2015. Net cash increased by $ 60 to $ 70 million which places the balance sheet in its strongest ever position. A fully franked final dividend of 4 cents per share has been declared bringing total dividends for the year to 7 cents per share compared to 5 cents per share in the previous year. The payout ratio works out to 46.6% of NPAT and the directors believe that this is the right balance keeping in mind the nickel price environment at the moment and the investment for growth in FY 2016.

     
      Full Year Highlights (Source - Company Reports)

• Mill production (in tonnes of nickel) rose to 25,801 compared to 25,700 and recovery was 90% against 89% in the previous year. Sales volumes (in tonnes of nickel) rose from 25,756 to 26,036 while cash costs in dollars/lb fell from 2.50 to 2.31 and realise nickel prices in in dollars/lb fell from $ 8.20 to $ 7.87. Revenues were $ 312.68 million compared to $ 320.07 million, EBITDA was $ 155.93 million compared to $ 131.46 million and EBIT was $ 65.4 million compared to $ 69.31 million. Managing Director Don Lougher welcome the increase in earnings and the increased dividend payment and said that the year has been extremely successful for the company on several fronts including guidance fully delivered, a significantly reduced cost base and repayment of debt. The price base has been set low for FY 2016 and any price increase over the current price would have a positive impact on profitability. The consensus pricing for nickel is seen to be increasing in FY 2016. Total dividends for the year showed an increase of 40% over the previous year bringing the payout ratio to just under 50%. In FY 2016, the company is looking to grow the business and achieve further efficiencies. The acquisition of the Cosmos Nickel Complex will be finalised and exploration will commence while further investments in exploration should result in benefits when the anticipated price increase occurs.

     
     Income Statement (Source - Company Reports)

• Price volatility during delivery periods can have a material impact on revenues and consequently NPAT and this volatility is often reflected in quotational pricing which affects revenue recognition on sales. Therefore, the average spot nickel price on sales in any given month is ultimately determined by a future price between one and three months following delivery. The market price showed a downward trend during FY 2015 and after the year-end and quotational pricing resulted in reduced realised price during the year. The fall in realised nickel prices from $ 8.11/lb in the first half of the year to $ 7.63 /lb resulted in a negative QP adjustment of $ 10.7 million during the second half. Together with the revenue impact of $ 17 million reported in the first half, the total negative QP adjustments for the year amounted to $ 27.7 million. Conversely, a rising nickel price will see positive QP adjustments, revenue and profitability.

• Mine production (nickel in ore-tonnes) is expected to be in the range of 25,000 to 27,000 compared to 26,524 in FY 2015. Nickel in concentrate production (tonnes) should be in the range of 24,000 to 25,000 compared to 25,801 in FY 2015. Unit cash cost of production (in concentrate) is expected to be between $ 2.30/lb and $ 2.50 /lb compared to $ 2.31 /lb in FY 2015. Sustaining capital expenditure is expected to be $45 million compared to $ 57.5 million in FY 2015. Expenses on Forrestania and regional exploration are estimated at $ 15 million compared to $ 14.2 million in FY 2015. Mill enhancement is expected to cost $ 22 million compared to nil and Cosmos exploration and study work is expected to cost $ 7 million compared to nil.

      
        Cashflow Waterfall (Source - Company Reports)

• In formulating this guidance, the company has maintained its aggressive approach to cost management and the forecast range compares favourably with the original guidance for FY 2014. This also allows the flexibility to shift costs from capital costs to operating costs as sustaining capital requirements are reduced and the company moves to paste fill at Flying Fox. Sustaining capital reduces in FY 2016 primarily at Flying Fox because the bulk of the capital requirement at the mine has been completed. The next five years should see a continued decline in sustaining capital expenditure at Flying Fox and Spotted Quail and the sustaining capital forecast for Spotted Quail in FY 2016 includes a one-off expense of $ 6.7 million. The company also maintains flexibility to reduce its discretionary capital and exploration spending. For example, if it is required, mine development can be reduced because development of both mines is approximately 2 years ahead of mining reserves. The mine and mill guidance is broadly in line with FY 2015 at the company has the flexibility to increase production. However, given nickel prices in the short term, the optimum mining rate to maximise margins has been incorporated in the guidance.

     
       Nickel Price Movements (Source - Company Reports)

• We consider that the company scores well on many counts. It is debt free for the first time since 2004 after repayment of $ 125 million worth of bonds on 2 July 2015 which should provide annual interest savings of approximately $ 20 million. It is a low-cost producer which is producing close to its breakeven point. Liquidity is comfortable because it has $ 70 million in cash and an undrawn $125 million corporate loan facility. We consider this is the one of the best resource companies in Australia and have no hesitation in recommending a Buy at the current price of $2.60.

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