Western Areas prepared for good and bad
AUGUST 21: While Australia’s 3rd largest nickel producer, Western Areas, believes nickel prices have reached the bottom of the current cycle and will rise over the next few months, the company has erred on the side of caution in casting its near term development and exploration plans.
The board would have seen the writing on the wall long before announcing a 66% fall in net after tax profit for the June 2012 year down to $A40.2M (2011: $135M) following a 30% drop in the nickel price and the strength of the $A against the greenback.
Western Areas has provided around $70M for fiscal 2013’s capex/mine development in Western Australia, which includes the big Forrestania nickel mill and concentrator expansion, and another $20M for exploration.
However, finance director Dave Southam says that if the nickel price falls below current levels, the company has plenty of room to move via a flexible balance sheet underwritten by good cash flow and cash costs still amongst the lowest in the world.
“We could cut back development and exploration very quickly. We could mine off reserves. This would take $20M out of the equation. We’ve got a number of levers to pull, but we don’t need to pull them yet,” he said.
However, MD Dan Lougher says the company is well placed for a potential upswing in global nickel prices. Chinese stockpiles have been run down, Indonesia has banned nickel laterite exports and other sources of supply are likely to withdraw from the market at current prices, which are marginal for many producers.
Western Areas saw its received nickel price fall to $US17,791t ($25,089t) and cash costs rise to $A2.43lb ($2.12lb), leaving its cash in the bank down to $165.5M from the previous year’s $209M, but still pretty handy. The final partially franked dividend was struck at 6cps, making 11cps for the year, compared to 25cps the year before.
Lougher says the primary focus in FY 2013 will be exploring for even more from its Forrestania Nickel Project, home of 2 of the world’s highest grade nickel deposits – Flying Fox and Spotted Quoll – just 6km apart.
Following the acquisition of the neighbouring Lounge Lizard project, 10 year-old Flying Fox has high grade resources of 115,000t nickel. Nearby Spotted Quoll has 3.1Mt at 4.2% containing 131,360t with drilling continuing in the underground ramp up to 10,000tpa nickel in 2012/13 and optimisation continuing towards 15,000tpa.
The crusher component of the current 550,000tpa Forrestania nickel concentrator, is already up to 1Mtpa with the preliminary high grade expansion study completed on taking overall production to 750,000tpa and then onto 1Mtpa. Nickel concentrate output is currently about 25,000tpa Ni for concentrate grades of around 14%.
The company’s 2-5 year plan is to get its Spotted Quoll and Flying Fox production up to 30,000tpa, establish a reserve for the nearby, high grade Sunrise discovery and bring it into initial production at around 5,000-10,000tpa. It is also expected that current drilling will advance Western Area’s 4th Forrestania mine, New Morning, to mineable reserves status to feed the expanded 750,000tpa mill.
From 5 years on, the company is looking to increase production to a base case 40,000-50,000tpa.
Lougher expects a new resources statement at the end of September/early October and for new offtake agreements – probably short term, minimum 1 year – to be completed by early November.
The reporter holds shares in Western Areas.
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