Western Areas NL – Sell Stock


Western Areas NL (WSA) is an Australian-based nickel sulphide producer which owns the Forrestania Nickel Project, along with development projects in Canada and Finland. It was listed as a share to sell in our traders report on September 30th 2013.

The company has two producing nickel mines, Flying Fox and Spotted Quoll. The primary discovery at Flying Fox, is one of the highest grade nickel deposits in the world.

Along with Spotted Quoll, these operations are some of the lowest cost nickel mines in the world.

Key Points:

>>Revenue of $306 million, down 7% from FY12, hurt by a fall in nickel prices
>>Underlying profit of $6 million, an 87% decline on the prior year
>>On a reportable basis, the group lost of $94 million on the back of a $99.7 million impairment relating to exploration write-offs
>>Cash flow from operations did decrease 27% over the year, whilst cash on hand halved to $80.7 million. Despite the fall the group did repay $105 million of convertible bonds and a $45 million corporate loan facility during the year
>>This recent fall coincides with data out of China, which showed copper imports (a widely accepted barometer of economic activity) declined 20% over the month of August
>>This data coupled with today’s lower-than-expected final read from the HSBC manufacturing index (actual 50.2 versus forecast 51.2) paints a bleak picture immediate picture for Chinese demand

Outlook

WSA has great long term prospects, with quality assets an low cash costs.

Sensible management has seen the company lower its exploration and capex guidance for FY14, with certain expansion plans deferred.

This is a good move given the depressed state of the nickel market, and a $110 million bond repayment due in 12 months.

Given there is another $115 million bond maturing in July 2015, we see all the groups cash flow being diverted to the repayment of these notes for the next few years, thus limiting WSA’s growth and by extension share price growth.

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