Western Areas Limited

Company Overview: Western Areas Limited (ASX: WSA) is a leading nickel producer in Australia, operating Flying Fox and Spotted Quoll mines - two of the lowest cost and highest-grade nickel operations in the world. The company has 100% interest in Forrestania nickel projects, located 400km east of Perth in Western Australia. The company also owns Cosmos Nickel Operation which lies in the heart of the prolific Leinster-Wiluna nickel camp, home to many high-quality deposits. The company is currently developing its third nickel mine at the Odysseus Mine at the Cosmos Nickel operation.

WSA Details

Positive Outlook Supported by Decent Demand Drivers for Nickel: Western Areas Limited (ASX: WSA) is Australia’s leading nickel producer with a portfolio of low-cost, high-grade operating nickel mines. The company’s main asset is its 100% Forrestania Nickel Project which is located 400km east of Perth in Western Australia. WSA’s key growth project is the Odysseus mine located at the Cosmos Nickel Operation. The company’s strategy is mainly focused on its core business of low cost, long life nickel production, new nickel discoveries and generating value for shareholders. Last year, i.e., FY20, the company had reported decent financial and operational performance with an increase in the average nickel price received for nickel sales resulting in higher revenues for the period. From 2016 to 2020, the company’s revenue has increased at a CAGR of 10.2%. Over the same period, the company’s bottom-line has also improved, rising from a net loss of $27.4 million in 2016 to a net profit of $31.9 million in FY20.

Top-Line & Bottom-Line Trend (Source: Company Reports)

Looking ahead, the company is focused on advancing its organic growth projects and continuing exploration plans. With recently announced equity raising of $100 million, the company seems well placed to complete development of Odysseus whilst maintaining flexibility to fund projects at Forrestania and Cosmos. WSA is optimistic about the outlook for nickel with supportive demand drivers over the medium and long-term. It currently has many projects in the pipeline to drive nickel production into the future.

H1FY21 Result Highlights: For the half-year ended 31 December 2020, the company reported mine production of 7,665 tonnes nickel and mill production of 7,291 tonnes nickel. Revenue and EBITDA for H1FY21 stood at $122.7 million and $24.03 million, respectively. H1FY21 results were impacted by reduced sales tonnes delivered to customers and increased unit costs. Cashflow from operations stood at $27.47 million. During the period, the company agreed to a credit approved term sheet with Commonwealth Bank of Australia (CBA) to establish a secured A$75m Revolving Credit Facility. During H1FY21, the company invested A$34.2 million into Odysseus mine development. The company maintained a healthy balance sheet in H1FY21 and ended the period with closing cash at bank of A$98.0 million

H1FY21 Results (Source: Company Reports)

Decent growth in FY20 Revenue and NPAT: For the year ended 30 June 2020, the company reported sales revenue of A$308.4 million, up from A$268.7 million in FY19, driven by stronger nickel price and reliable performance from the Forrestania operation. Mine production and mill production for FY20 stood at 23,391 tonnes nickel and 20,926 tonnes nickel, respectively. EBITDA for FY20 stood A$121.9 million, up from $80.8 million in FY19. During the year, the company accelerated construction activities at the long-life Odysseus project. In FY20, the company acquired 19.9% of Panoramic which enhanced WSA’s portfolio of quality nickel projects via exposure to the Savannah North mine in the east Kimberley region of Western Australia. NPAT for FY20 stood at $31.86 million, up 123% on FY19.

FY20 Results (Source: Company Reports)

Key Metrics: The company’s profitably margins have improved over the past five years, supported by decent production performance from its nickel operations. For FY20, the company’s gross margin stood at 44.2%, up from 33.5% in FY19. EBITDA margin for FY20 stood at 37.8%, up from 26.6% in FY19. Current ratio for FY20 stood at 3.0x.

Past 5-year Financial Performance for Year Ending 30 June, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 40.81% of the total shareholding while the top four constitutes the maximum holding. Perpetual Investment Management Limited and Dimensional Fund Advisors, L.P. are holding a maximum stake in the company at 14.63% and 5.98%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

$100 million Equity Raising: In March 2021, the company announced a $100 million equity raising comprising a fully underwritten institutional placement of $85 million and non-underwritten Share Purchase Plan of $15 million. WSA has already completed A$85 million at A$2.15 per share and has received strong support from existing and new investors, including high-quality domestic and offshore institutions. The company is now offering each Eligible Shareholder an opportunity to apply for up to A$30,000 worth of new fully paid ordinary shares in WSA to raise approximately $15 million under the SPP. The proceeds from the placement and SPP will be used to complete the Odysseus development, advance organic growth projects at Forrestania and Cosmos and continue exploration. The proceeds will allow the progression of studies with respect to the inclusion of AM6 in the Odysseus mine plan and New Morning in the Forrestania mine plan. SPP is going to close on 6 April 2021, and the allotment of new shares under the SPP will be done on 14 April 2021.

Sources and Uses of Funds (Source: Company Reports)

Key Risks: The company is exposed to the risk of fluctuations in the prices of nickel. Further, it is also exposed to the risk and uncertainty caused by the COVID-19 pandemic. Any delay in the delivery of the Odysseus mine would defer the realisation of future revenue and potentially increase project costs.

Outlook: WSA is advancing the exploration at Western Gawler, Metal Hawk JV and Cosmos / Forrestania whilst continuing to build Odysseus. The first concentrate production at Odysseus is targeted in mid FY23. The company plans to progress integrated mine plan study which incorporates AM6 reserve into Odysseus mine plan. Further, it intends to progress New Morning study at Forrestania. Due to the supportive medium and long-term demand drivers, the outlook for nickel seems positive. With a pipeline of organic growth projects, the company seems well placed to drive nickel production into the future.

A part of expected FY21 nickel production has been deferred into FY22, which has caused the company to adjust its FY21 production guidance. Nickel concentrate production for FY21 is now expected to be in the range of 16,000 to 17,000 tonnes, compared to prior guidance of 17,000 to 19,000 tonnes. Mine development expenditure guidance for FY21 is unchanged at A$25 million to A$30 million. The exploration expenditure in FY21 is expected to be in the range of A$14 million to A$17 million.

FY21 Guidance (Source: Company Reports)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 19.12% and is trading lower than the average 52-week price level band of $1.625 and $3.100, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$1.875 and resistance of ~$2.482. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight discount to its peer median EV/Sales (NTM Trading multiple), considering the reduced nickel prices, and impacts of COVID-19 pandemic. We have taken peers like Nickel Mines Ltd (ASX: NIC), Iluka Resources Ltd (ASX: ILU) and South32 Ltd (ASX: S32). Considering the company’s recent equity raising of $100 million, healthy balance sheet, modest long-term outlook, current trading and valuation, we give a “Buy” recommendation on the stock at the current market price of $2.03, down by 1.933% as on 17 March 2021. 

WSA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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