PORTFOLIO POINT: With nickel prices tipped to rebound and an exodus of producers with high-cost projects underway, Western Areas is in a prime position.
Western Areas (WSA)
Nickel earned its nickname “the devil’s metal” centuries ago due to the fact that it was difficult to separate from copper (the preferred metal of the day), and over the past few years it has lived up to this description. The metal’s price has crashed by about 70%, from close to $US25/lb to its latest price of $US7.73/lb – a fall which has wiped out the profits of all but the lowest-cost producers.
One of the survivors, thanks to its high-grade mines, is Western Areas, which has suffered a sell-off, but which is going against the trend of production cutbacks by boosting its output of nickel.
Over the next few months, as more high-cost mines are mothballed, Western Areas will become one of the “last men standing” in an industry which is proving too hot for even the biggest miners, with BHP Billiton considering the future of its involvement in nickel.
In addition to high-cost producers suffering, there is a political groundswell building in the country that has flooded the nickel market with cheap (but unprocessed) ore – Indonesia. The nation currently permits the export of low-grade material to China, but is clamping down on the practice, demanding that some processing occur before the ore is exported.
It is the combination of high-cost producers being driven out of the industry, and the potential for legal action in Indonesia, which could see a recovery in the nickel price over the next 12 months.
But even without a major price rebound, Western Areas will remain solidly profitable thanks to its ability to produce nickel at less than $US4/lb, with cash costs in the March quarter slipping to just $US2.48/lb.
The key to the company’s cost structure is ore in its Flying Fox and Spotted Quoll mines in Western Australia grading close to 5% nickel, which is well above the world average of less than 2%.
In a production guidance update filed last week, Western Areas upgraded its nickel output forecast for the current financial year from 24,000 tonnes to 25,000 tonnes, and the miner expects to sell even more (27,000 tonnes) as it runs down stockpiles.
Western Areas managing director Dan Lougher said the record rate of production was due to all of the company’s assets performing strongly.
“The quality of our assets allows us to remain profitable throughout the nickel price cycle, and that remains true today,” Lougher said.
On the market, Western Areas has retreated from a high of $6.47 in June last year to recent trades around $4.68, though stockbrokers who follow the stock are optimistic that the strong profit flow, even at a time of low world metal prices, is presenting a buying opportunity.
Perth-based broker Argonaut Securities told clients last week that Western Areas was “still good buying below $5”, with the stock having a price target of $7.25.
South Boulder Mines (STB)
It is easy to dismiss South Boulder as a company which has done its best work on the market, given its 80% price plunge over the past 15 months, from $5.50 to recent sales at 95c, a direct result of uncertainty about the future of the company’s flagship Colluli potash project.
The doubts evident in the stock’s share price are easy to understand. Colluli is located in a difficult country, Eritrea, in north Africa. Potash, after a burst of publicity for its properties as an essential potassium-rich fertiliser, has also been earning negative comments as BHP Billiton ponders whether to proceed with its ambitious Jansen project in Canada.
Neither the location of Colluli, nor any second thoughts about potash on the part of BHP Billiton, should necessarily be seen as negatives for South Boulder or potash, which is a key ingredient in the global scramble to boost food production.
The potentially low-cost Colluli project is attracting the attention of countries with heavy demand for potash, given its ability to boost crop yields from soils deficient in potassium. China, India, North America and Europe are the major markets for a variety of potash products, such as muriate of potash (MOP) and sulphate of potash (SOP).
The biggest advantage of Colluli is the near-surface nature of the orebody, making it one of the world’s only open-pit potash mines with a notional development cost of $US736 a tonne, compared with an estimated $US1505/t for Jansen, which will require deep underground mining techniques.
Colluli, as well as being less than 100 metres from the surface (compared with ore being mined at more than 1000 metres in Canada and Germany), is close to potential port sites on the Red Sea, and within short shipping distance of India and South East Asian markets.
Eritrea, however, is a country that worries most investors and the United Nations, which has been discouraging investment because of an ongoing dispute with neighbouring Ethiopia.
However, a recent event involving another Australian mining company active in Eritrea showed that it is possible to make a profit on an asset in that country without ever mining anything. Chalice Gold, which was planning to develop the Koka gold deposit, opted instead to sell the resource to a Chinese investor, taking around $80 million in cash from an early exit.
South Boulder is showing no sign of selling Colluli, yet, but the temptation will be there given the problems of attracting bank funding for a project in Eritrea.
At Colluli itself, work continues expanding the resource, and in finalising a mine and port feasibility study, with the aim of developing a project producing 1 million tonnes of potash a year from 2016, while also having a resource that could last for decades.
On the market, South Boulder has fallen back from a high last month of $1.30 to recent trades around 96.5c, valuing the company at $112 million.
Latin Resources (LRS)
The most interesting aspect of Latin Resources is that its primary exploration target of heavy mineral sands on the South American coast has been ignored for centuries, despite abundant evidence that it was waiting to be “discovered”.
The first clue that wave and tidal action up the Pacific coast of the continent ought to have left enriched pods of heavy minerals was found on the corresponding west coasts of Australia and Africa.
In South Africa and Namibia, the Atlantic Ocean and its associated Benguela current left immensely rich deposits of diamonds carried into the ocean by the Orange and other rivers, and then swept up a region tagged The Skeleton Coast for its shipwrecks.
The same force of ocean and tide created the titanium and zircon deposits along the west (Indian Ocean) side of Australia.
If nature did its job so efficiently in Africa and Australia, why not South America, with its fabulous copper mines in the Andes, and eons of erosion into the Pacific where the Humboldt current sweeps up the west coast?
The answer, which Latin is delivering from its exploration on the coast of Peru, is that it does work exactly as predicted, with early-stage drilling proving an initial resource of 119 million tonnes of material grading 5.7% heavy minerals, a mix of magnetite (iron ore), zircon, ilmenite and gold.
The latest testing of the thick beds of sand, which will be easy to mine and treat, has revealed gold grades of 0.32 grams a tonne – very modest by conventional mining standards, but much easier to extract, potentially making gold a valuable by-product.
Much more work is required by Latin to prove that it has a mine on the beach at a site called Guadalupito, but international interest is growing, with Chinese company Junefield acquiring a 16.8% stake in Latin, and providing funds to accelerate work on copper projects Latin has in Peru.
Because Latin is a grassroots explorer, it is a stock for sophisticated investors who understand the high-risk nature of its work. But with a Chinese company already on the share register, it is possible to see an exit strategy forming when sufficient value is created by exploration success.
On the market, Latin has risen over the past six months from 16c to recent trades at 28c, which values the stock at a lowly $33 million. Exploration news flow, rather than imminent development, will be the driver of any further upward movement.
Whitehaven Coal (WHC)
After paying a very handsome price to merge with Aston Resources, Whitehaven is now preparing to pay an equally handsome price to acquire another NSW coal stock, Coalworks, at a time when international coal prices are under pressure.
Over time, Whitehaven should emerge as one of Australia’s major coal producers, and perhaps a juicy morsel for a major miner keen to get a toehold in Australian coal.
But the downward trend in coal prices, especially for thermal coal used to generate electricity, is a negative factor hanging over Whitehaven, together with the timing of its expansion moves.
The biggest factor weighing on thermal coal is the potential flood of material out of the US, where electricity generators are shutting coal-fired power stations and switching to much cheaper natural gas, thanks to that country’s shale gas boom.
Some coal mines in the US are closing because of competition from gas, but others are redirecting the production onto the export market, directly threatening Australian coal miners which have seen the thermal coal price dip from last year’s record of $US129 a tonne to less than $US100/t.
Whitehaven, despite suffering a share price fall from $6.19 to recent trades around $4.67, probably has further to fall as coal prices adjust to the rising tide of US exports.