BUY – Western Areas Ltd (ASX:WSA)
Western Areas Ltd (WSA) is an Australian-based nickel producer and exploration business. The business has two production assets at Cosmos and Forrestania, producing over 20t tonnes of nickel annually at a cash cost of around AUD $3.10 per pound.
Nickel reserves sit at around 280t tonnes, with a resource base of some 900t tonnes of nickel.
Net cash on the balance sheet, along with profits from production, is more than adequate to fund development requirements on ongoing exploration costs. Additionally, WSA has been a consistent dividend payer over the last 10 years, although those dividends have fluctuated depending on the prevailing nickel price, given that they are a predominantly unhedged producer of Nickel.
Management is highly regarded and has consistently delivered on expectations over the years. The company has a strong balance sheet, a mine-life outlook in place for the next 10-12 years, and strong exploration potential through a new discovery in the western Gawler ranges.
We are attracted to the stock due to the sound fundamentals mentioned above, recent positive exploration news, and a medium-term view on nickel given the increased usage of the metal in EV battery production in future years that could see the metal rise strongly in price – a development that WSA is highly leveraged to. Bloomberg reported recently, that Tesla is in talks with BHP regarding a nickel supply deal as the electric car maker targets higher production and seeks to avoid a supply crunch, highlighting the significance of nickel in the future.
With recent market weakness, we see this as an opportunity to add a position in Western Areas (WSA) to your portfolio. This view is also supported by the reporting of the FY20 financials in late August which were in line with market expectations. Additionally, the business has just confirmed a maiden ore reserve addition to the Odysseus mining reserve which will extend the future life of that project and builds value for the company.
Brokers have been upgrading their price targets for the stock in recent days, closer to $3 per share, which we would still see as a conservative price target for the stock.
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