Western Areas is an Australian-based nickel sulphide explorer and producer. The core asset is the 100% owned Forrestania Nickel Operation which comprises two operating mines; Flying Fox and Spotted Quoll. Western Areas’ (WSA) home office is located in Perth with a majority of their business occurring in Western Australia.

Key Fundamental Drivers

Cash Holding

Western Areas has a current market (22nd April 2020) of approximately $570 million AUD. Western Areas also has an outstanding cash holding of $184.9m (As at 31st December 2019) with no debt. In the companies 1H FY20 report, it stated that it had $189.4m of cash at the bank and also a positive free cashflow of A$40.6m for the first half’s results. The company was able to produce Revenues of A$156.2m for the first half FY20 and an Earnings Before Interest and Tax (EBIT) of $34.6m and a Net Profit After Tax (NPAT) of $24.7m.

This means Western Areas was able to produce a EBIT/Revenue ratio of 22.17% and a NPAT/Revenue ratio of 15.81%. These numbers are outstanding. In simpler terms, for every dollar Western Areas was able to sell (Revenue) it was able to collect $0.1581 in profits after paying tax (NPAT). Those are some enviable numbers if they are able to continue with those percentages.

Western Areas was able to increase it’s cash holding to $184.9m from $134.3m the year before, an increase of $50.6m year on year.

Nickel Supply/Demand

Western Areas stated in their FY19 report that their cost to produce was $2.98 AUD per pound of Nickel. In the 1H FY20 they stated it was at a cost of $3.07 AUD per pound, although the AUD/USD rate fell, meaning in terms of cost production (in USD) fell. Using the conversion rates provided by Western Areas we can estimate costs to produce and show potential profits. The graph above shows approximate costs to produce Nickel per pound and the green highlighted section is the potential profit per pound. The cause for the drop in cost to produce is a lower FX, namely a lower AUD/USD.

The guidance that the company has given is quite extensive. You are able to see the estimated Nickel Tonnes to be produced, the companies estimated cost of production and other expenditures. If the company is able to continue to keep cash cost of production low, and the Nickel price remains steady then Western Areas could become an interesting company to watch.

Risks

There are always certain risks when it comes to mining companies. These risks include, not having enough cash flow to continue the business – this is counteracted with Western Areas large cash holding.

Another risk is the desire for Nickel in the market – this can only be estimated but I personally believe the demand for Nickel will continue to climb with the adoption of Electric Vehicles.

Cost of Nickel has to be much lower than the spot price of Nickel. As seen in the graph above, Western Areas has acheived a low cost of production but has capitalised on higher cost per pound when it comes to selling Nickel. The average price of Nickel has since declined since the H1 FY20 report and doesn’t look to be trending up or down.

Charts

The chart above, shows some minor resistance at the $2.20 level which has been reached and then retracted and a major resistance at $2.69. A very low significant support at $1.66. The MACD shows a minor bullish signal, which could possibly change to a major bullish signal if the MACD line stays above the signal line and the MACD is above 0.

Discussion

While there are definitely some risk involved with all mining companies, I believe the strong cash holding and continuing operation of Western Areas presents significant opportunities. If Western Areas is able to continually output their Nickel, while keeping costs low and selling at current levels, the company should see moderate Revenue and EBIT. With the potential for future use in electric vehicles, Nickel mining in Australia could become quite profitable.

Disclaimer

The information in this article is for general purposes only and should not be considered as advice to any persons. No monies should be invested based on what is contained in this article. I do not currently own Western Areas (ASX:WSA) at time of writing this article.



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