What Happened to the Western Areas Share Price?
Shares of Western Areas [ASX:WSA] fell by 3.41% on Wednesday, closing at $5.05. The share price has nearly doubled since the beginning of this year. This compares with the nickel price which is up 41% this year. Saying this, today’s share price fall follows the nickel decline of 5% overnight.
Why Did This Happen to Western Areas?
Western Areas is Australia’s second largest sulphide nickel miner, producing 25,700 tonnes per year of nickel in-ore from its Flying Fox and Spotted Quoll mines.
The WSA share price has increased since Indonesia, the world’s top supplier of the metal, began talking about a ban on nickel exports (now enforced). And with Indonesian elections now ended, the new President, Joko Widodo, is expected to continue with the unrefined nickel export ban.
If the nickel ban continues, analysts have predicted a supply shortage of the metal leading into next year. And now the Philippine government wants to enforce similar bans; however, these bans won’t come in for at least another five years.
As such, the nickel spot price continues its volatile climb.
After reaching a two-year high of almost $22,000 a tonne in May, the three month forward nickel price closed at $18,925 per tonne last night.
What Now For Western Areas?
Everyone is looking at Indonesia and the nickel price. This will determine the future for shareholders.
But fundamentally, the company’s nickel assets look good — very high grade and low cost.
Flying Fox is a very high grade mine with a current reserve estimate of 1.5 million tonnes at an average grade of 4% nickel.
But with the company mining Flying Fox at a production rate of roughly 300,000 tonnes of nickel per year, the remaining mine life is just 4.5 years.
Saying this, there is significant exploration upside at deeper depths for the company, which could materially upgrade its mine life.
At the Spotted Quoll operation, nickel production rose 31.8% on last year to 13,973 tonnes. The Spotted Quoll mine is also very high grade nickel, at roughly 5.5%. The mine life and reserves are likely to extend beyond 10 years.
The increased nickel price has been good for the company. It moved from a net debt position to a net cash position of $10.3 million. Full-year cash costs were 7.4% below guidance at $2.50 per pound.
Nonetheless, the share price has nearly doubled since the Indonesian nickel export ban was enforced. Furthermore, with speculative interest focusing on nickel, the price is volatile.
The market is concerned about supply, mostly because of Indonesia’s export ban. If Indonesia decided to reverse its ban, Western Areas’ shareholders could be in for a lot of pain.
Western Areas looks like it will continue to be a rollercoaster ride on the nickel price. Shareholders seem reluctant to pay more for the company than they are doing so now.
Resources Analyst, Money Morning