WSA 3.33% $3.10 western areas limited

western areas: grade quality and corp appeal

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    Western Areas- Grade, quality & corporate appeal
    29/02/2008 By: Geoff Muers

    Global mining mega-mergers look set to continue, with the potential US$100b merger between Xstrata and Vale looking like it is already placing pressure on world No.1 nickel producer, Russia’s Norilsk Nickel. However, Perth-based nickel sulphide explorer and producer, Western Areas (WSA), would be one company flying under the radar of the big industry players.

    The West Australian mid-cap appears cheap based on recent industry transactions or impending transactions including Jubilee Mines Limited (JBM) and Allegiance Mining Limited (AGM).

    WSA is attractive for the following reasons:

    Planning to produce 30ktpa of nickel by 2011, would make it one of the lowest cost and highest grade Australian producers (5-6% Ni). Looks cheap compared to recent takeovers: AGM & JBM;
    Vale/Xstrata merger would create the largest Ni producer in the world, with control of 30% of major development projects, 23% of mine production and 27% of refined output, placing pressure on other companies to grow to maintain scale;
    WSA are planning to produce more than 30ktpa of nickel from at least three separate mines over the next 3-4yrs, giving them diversity, scale and significant cashflow, becoming Australia’s largest independent producer;
    Funding should be sufficient for more than $200m of growth capital. Recently announced intention of maiden dividend by FY09.

    Executive Summary

    Western Areas (WSA) has been an outstanding performer on the market over the last few years, led by the development of the high grade Flying Fox nickel mine. Resources continue to grow with depth, grade improving to an impressive 6.8% Ni at the T5 resource, located about 1 kilometer underground.

    Whilst current production levels and cashflow are relatively modest, WSA plan to increase production at Flying Fox towards 12-14ktpa over the next two years, with plans to ultimately produce 20ktpa of nickel from the mine being examined.

    In addition to Flying Fox, WSA are conducting a feasibility study into the Diggers South Project ([email protected]%Ni) which could be brought into production late 2009 at a rate of 1mtpa (5kt Ni) and are examining mining options at the Spotted Quoll prospect, where drilling continues to uncover encouraging intercepts including [email protected]% Ni. Due to shallow depths (<200m), there is considered potential for open cut mining. Initial resources are due 2Q08, with the company targeting 30kt contained Ni to 200 meter depth.

    WSA presently have an offtake agreement with Norilsk Nickel to process their ore into concentrate for export to a smelter in Finland, however they are presently building their own plant with ultimate potential to process over 650ktpa of ore. Initial capacity of 250ktpa is anticipated to be reached 2H08.

    WSA should be one of WA’s lowest cost nickel producers in coming years, with potential costs trending below US$3.00/lb when the concentrator is operational. With recent corporate activity in fellow sulphide producers Jubilee Mines (JBM) and Allegiance Mining (AGM) the corporate appeal of WSA cannot be understated.

    Nearby partner Norilsk acquired the local operations of LionOre International last year (US$5bn), and controls around 20% of global nickel mine production and 22% of refined output. A combined Xstrata/Vale would steal this crown with 23% and 27% respectively, placing pressure on Norilsk (also currently under offer) to grow in defence.

    Western Areas has what many other nickel miners (such as IGO) in WA don’t have, that is a large resource base with long mine life, increasing grade with depth and a pipeline of other growth projects which have the potential to add to the production base and keep costs low going forward. WSA is the second largest listed Nickel producer on the TSX.

    Flying Fox Mine

    The main asset of WSA is the Flying Fox mine, which is the highest grade nickel mine in Australia at around 5.5% Ni. At current spot nickel prices, the value of this ore is in excess of US$1100/t, and the resources continue to grow, currently [email protected]% Ni (95kt Ni). A resource for the T4 orebody is pending, with potential for this to take total contained nickel over 110kt or 2mt of ore.

    Presently, the mine is progressing development and stoping at around 400-500m below surface, with total resource identified down to over 1km depth, with grade increasing. The T5 Orebody (at ~1km down) currently has indicated resources of [email protected]% Ni.

    Accessing ore below T1 will require development through the T3 fault zone, only a minor risk going forward as indications are the fault is welded, and contains no water.

    The company plans to increase production to around 20kt per month in 2008 (8kt contained Ni) then towards 12-14kt of contained Ni by 2010. Studies are underway looking at the potential for shaft haulage operations, with the feasibility results due in March 2008.

    This should see costs decrease and production levels increase beyond what is currently projected. We have production at 250kt for FY09, increasing towards 350kt over the next two years. Drilling is ongoing at Flying Fox, with the group having a large exploration budget.

    Currently the company has a toll treatment arrangement with Norilsk Nickel’s Lake Johnson processing facility in WA (acquired from Lionore Mining), with this arrangement expected to continue until late 2008/early 2009 until the Cosmic Boy processing facility is operational.

    Other Projects

    Diggers South is the next main project of WSA, aside from the construction of a nickel ore processing plant at nearby Cosmic Boy. Results from feasibility work into the Diggers South resource ([email protected]%Ni including [email protected]% Ni) are anticipated to be released in coming months, with approvals due by the end of March and concentrate offtake agreements currently being negotiated.

    The project, estimated to commence ore production by 2H09, could produce up to 8ktpa of nickel in concentrate. The mine will likely be high cost, due to the grade, and require a favourable offtake agreement and strong medium term nickel price to get it off the ground. A higher grade (2.5%Ni) part of the resource exists, and may offer options at improving the potential cash flows.

    A scoping study is underway into developing a third mine at the New Morning/Daybreak deposit ([email protected]%Ni inferred resource) and the Spotted Quoll prospect is beginning to look like a high grade open cut deposit. A maiden resource for the deposit is due 2Q08, and previous drilling intercepts have included [email protected]% Ni.

    The resource is shallow in depth, and the company has announced a target of 30kt of contained nickel to 200m depth. Based on a brief review of the data, we believe resources of up to 0.5mt are feasible, lending support to the 30kt target. Average grade in drilling to date is over 8% Ni. Based on company indications, we have modeled a 3-4year operation producing up to 8ktpa of nickel (200ktpa ore) by the end of 2009 for total Ni recovery of 27kt.

    The operation would likely be low cost, and generate healthy margins. Depending on result of feasibility studies, there is potential for the company to target underground production first. The company believes there may be more nickel at depth, with a similar geological setting to flying fox. Drilling rigs are being mobilised to test the theory, and drill out the shallow deposit.

    Resources also remain at the location of the proposed plant (Cosmic Boy) and feasibility work is anticipated to commence later in 2008 looking at open cut and underground extraction. Current resources are [email protected]%Ni for 5kt Ni.

    Further expansion of operations to include additional mining projects such as Spotted Quoll will require expansion of the concentrator facility above the initial 250ktpa capacity, as Flying Fox is predicted to be generating this amount of ore by early 2009. Expansion to a capacity above 650ktpa is anticipated by early 2010, enabling additional ore feed to be processed.

    WSA has nickel exploration joint ventures with Reed Resources, Troy Resources, Polaris Metals and BHP. Canadian interests including 19% of Mustang Minerals Corporation (feasibility on Maskwa Nickel project), the McBride Lake zinc project and Lynn Lake nickel project.
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