Western Areas Grade returns at Forrestania Ni production of 4,267t, up 21% QoQ, at Forrestania.
Cash costs down A$4.07/lb, down 13% QoQ on higher grades treated. If maintained, Western Areas Grade on track to achieve lower end of annual production guidance (16kt nickel) at higher end of cost guidance (A$4.25/lb) for FY21. Cosmos development on track and fully funded after capital raising in the period.
Recommendation moved from Hold to Add at a target price of A$2.61/share, with key forecast updates presented on page 4. Production lifts with grade at Forrestania WSA saw grade lift at Flying Fox (3.8% Ni, from 2.5%) and Spotted Quoll (3.5% Ni, from 3.0%), lifting nickel recovery and overall production despite lower tonnes mined and processed for the quarter.
The improved grade came from a return to mining the higher grade stopes at Flying Fox impacted by seismicity at the start of FY21, and lower ore dilution at Spotted Quoll as mining moved increasingly into stoping ore. Revised annual guidance maintained WSA reaffirmed its revised production guidance range of 16-17kt of nickel in concentrate at a unit cash cost of A$3.75/lb to A$4.25/lb.
WSA will need to improve production volumes and costs slightly in Q4 to achieve the bottom end of production guidance at near the top end of the cost range for the full year. We anticipate WSA will be able to achieve this, and it forms the basis of our short term production outlook at Forrestania. Cosmos development on track Cosmos development remains on track, with WSA reporting capital spending of A$22.6m in the quarter.
Underground development included 1,200m of lateral development, while back reaming of the hoisting shaft continued with 250m of the total 630m shaft now completed. First stage civil works for the hoisting head frame and winder were also completed. Cosmos is forecast to produce first concentrate in mid FY23.
Our view Successfully re-entering the higher grade zones at Flying Fox is a major step towards normalising production at Forrestania, and supports earlier comments by management that the ore was not lost, just delayed. The improving grade at Spotted Quoll is also welcome, suggesting the internal dilution issues experienced in the first half of the year may have been limited to zones of development ore.
In combination, these factors give us increased confidence the mine will be able to maintain a production rate of 16-17kt of contained nickel into FY22. While the raising undertaken this quarter was larger than expected, and aligned with a pull back in the nickel price, the company’s balance sheet is strengthened and should support WSA through to production from Cosmos, which drives value for the next decade. We move WSA to an ADD, at a target price of A$2.61/share, with nickel price sensitivity.
Company description Western Areas Limited (WSA) is an Australian-based nickel sulphide explorer and producer. Its core operating asset is the 100% owned Forrestania Nickel Operation which comprises of two operating mines Flying Fox and Spotted Quoll as well as the Cosmic Boy Concentrator. WSA are also redeveloping the Odysseus underground mine in Western Australia ahead of a planned resumption of production in late CY22
Key changes to our assumptions Key changes since the previous note on WSA are:
▪ Revised actual production figures for FY21 to date.
▪ Updated cost estimates based upon most recent quarterly reporting. The impact on forecasts compared to the previous estimate is shown below.
Sensitivity analysis A sensitivity analysis of share price to FX and nickel price is presented below. There has been no adjustment to the base case nickel price assumption since the previous update, though the AUD forecast has strengthened in the next 1-2 years by one cent.
-CIMB Bank Research