Company Overview  - Western Areas Limited is an Australia-based producer of nickel. It is engaged in mining, processing and sale of nickel sulphide concentrate, the continued assessment of the feasibility and development of nickel mines and the exploration for nickel sulphides, other base metals and platinum group metals. It operates the Forrestania project, which consists of Flying Fox and Spotted Quoll nickel mines and the Cosmic Boy Concentrator, which treats the high grade ore and produces nickel concentrate for sale. Its project portfolio includes Carbon Disclosure Project, Mt Gibb Project (joint venture with Great Western Exploration Limited), Lake King Joint Venture and Musgrave Nickel-Copper Joint Venture. The Company’s subsidiaries include Western Platinum NL, Australian Nickel Investments Pty Ltd, Bioheap Ltd and Western Areas Nickel Pty Ltd.

Demonstrated solid financial performance, strengthened balance sheet: Western Areas Ltd (ASX: WSA) managed to improve its net profit after tax by 37.5% yoy to $35 million for the fiscal year of 2015, as compared to $25.5 million for the fiscal year of 2014, driven by decreasing in operating and borrowing costs. The group’s revenues fell by 25% yoy to $312.7 million from $320.1 million in FY14, impacted by the group’s realized nickel prices which slumped over 4% or $0.33/lb against last year. However, Western Areas improved its operating cash flow to $148.5 million during the period, against $117 million in 2014 fiscal year, as the company reduced its absolute costs and working capital. Operating costs reduction and decline in interest expenses contributed to the operating cash increase. Subsequently, the net cash surged to $70.4 million in FY15, as compared to $10.3 million in the corresponding period of the last year placing the group’s balance sheet in a very flexible and strong position. Meanwhile the Operating cashflow (post capital expenditure) rose to $76.7 million during the period against $ 63.7 million in fiscal year of 2014. Western Areas reported a fully franked final dividend of 4 cent per share, resulting in the total dividends of 7 cents per share for the fiscal year of 2015, as compared to 5 cent per share in the earlier corresponding year. This is a solid payout ratio of 46.6% of NPAT during the year. 


     Net profit performance (Source: Company Reports)
 


Improved production to offset commodity price volatility: Western Areas mill production rose to 25,801 tonnes of Ni during the fiscal year of 2015, as compared to 25,700 tonnes of Ni in the fiscal year of 2014. Recovery slightly improved to 90% during the year against 89% during last year. Meanwhile, the sales volumes slightly rose to 26,036 tonnes of Ni, from 25,756 tonnes Ni. However, the group achieved a record decline in unit cash costs since three years to $2.31/lb during the year, against $2.50/lb in FY14, boosting its overall profitability. On the other hand, the Nickel price volatility during the delivery periods is adjusted via quotation pricing (QP) adjustments that would in turn affect the group’s revenue recognition. The average spot of the nickel price for any given month is calculated by the future price of one and three months subsequent to the delivery. Accordingly, the falling nickel prices led to the slump of the group’s realized nickel prices, which decreased to $7.63/lb during the second half of the fiscal 2015, against the $8.11/lb in the first half of the year. This decrease led to the negative QP adjustment to revenue of $10.7m during the second half of the FY15. Overall the, total QP adjustments led to the fall of $27.7 million of revenue for the fiscal year of 2015, with $17.0 million of revenue impact coming from the first half.


Nickel prices impact on revenues (Source: Company Reports)

Achieved Zero Lost Time Injury Frequency Rate (LTIFR):The group’s ongoing safety improvement efforts has been paid off, achieving a zero LTIFR as at June 2015. Flying fox is LTI free from more than 720 days, while spotted quoll is LTI free since greater than 1,538 days. Exploration was LTI free for > 2,555 days, while Cosmic Boy Concentrator was LTI free for > 737 days



LTIFR performance (Source: Company Reports)

Mines highlights: The flying fox mine added 596nickel tonnes after depletion of 12,904 nickel tonnes as of June 2015. The mine witnessed an effective increase of 20,500 nickel tonnes during the period. High Grade Mineral Resource (without disseminated sulphide resource)has1.9Mt at 5.2% Ni comprising 101,493 Ni tonnes. The mine’s production was 264,339t @ 4.9% Ni for 12,904t nickel tonnes during fiscal year of 2015. The mine added OTZ South Massive Zone with 182,898t @ 4.1% Ni for 7,417 nickel tonnes. With regards to the spotted quoll mine, MineralResources had 2.7Mt @ 5.7% Ni comprising 150,073 Ni tonnes, while ore reserve had 2.7Mt @ 4.1% Ni comprising 110,147 Ni tonnes. The mine has a 10 year life on reserve. The mine witnessed 275,929t @ 4.9% Ni for 13,620t nickel tonnes during fiscal year of 2015. Forrestania nickel concentrator had a capacity of 550,000 tpa of ore, while throughput is above 10% capacity. Nickel concentrate has over 25,000tpa Ni output, while concentrate grades has over 14.0% Ni. The concentrator has more than 1400 sealed shipping containers, with 25 trucks used for concentrate transportation.


Flying fox mine and spotted quoll (Source: Company reports)


Mill recovery enhancement project highlights: The project was approved during July 2015. The group intends to increase the average nickel recoveries to 5% over the life of mine as compared to 3%. The project’s development is estimated to incur over $22 million during 6 months construction. Western areas appointed GR Engineering under EPC with guaranteed maximum price arrangement. Meanwhile, the mill’s unit cash operating cost was $2.42/lb in concentrate. The project is estimated to deliver an internal rate of return of 39% while the payback period is expected to be over 39 months using consensus pricing (US$8.68lb @ A$0.80). Meanwhile, the Sulphide precipitation circuit produces a high grade nickel sulphide product (which is over 50% nickel)


Mill recovery enhancement project (Source: Company Reports)

FY16 Outlook: Western Areas estimates to improve its cost for the next fiscal year and forecasts a range of A$2.30/lb to A$2.50/lb (aggressive approach), against the guidance of A$2.70/lb to A$2.80/lb during the fiscal year of 2014. There would be shifts in costs from capital to operating, as a part of the group’s initiatives to decrease capital as well as move to paste fill at Flying Fox. Western Areas is diversifying investments in promising capital growth projects like Mill Enhancement and Cosmos exploration and study work during this year. Most of the development work is completed at the Flying Fox mine, helping the group’s target of reduction in capital expenditure during fiscal year of 2016. Accordingly, the group estimates to witness a decrease in the sustaining capital for Flying Fox and Spotted Quoll over the next five years. The group incurred a capital, mine development and exploration expenditure of $71.7 million during the fiscal year of 2015, which is the lower end of the full year FY15 guidance range of $70 million to $80 million.  Western Areas also built a flexible balance sheet and also making efforts to decrease discretionary capital and exploration spend. Earlier, the group stopped the mine development at Flying Fox during FY14 for six months when AUD was trading high on par as well as above the USD. Although the group has option to ramp up its production further, western areas wants to be conservative and intends to achieve an optimal mining rate to maximize margin, due to short term nickel price volatility.


WSA Daily Chart (Source - Thomson Reuters)

Stock Performance: Western Areas stock plunged more than 43.8% during the last fifty two weeks, while tumbled more than 31% in the last six months, impacted by the falling commodityprices. On the other hand, Western Areas have demonstrated a solid financial performance even during the tough market conditions. Accordingly, the investor’s sentiment on the stock also got boosted over last five days, which delivered more than 11.7%. Moreover, the steady nickel prices estimated increase during the FY16, would result to positive QP adjustments. Western Areas also built a debt free balance sheet as well as has the flexibility to decease capitalexpenditure. Based on the foregoing, we give a “BUY” recommendation on the stock at the current price of $2.62

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