Shares of Western Areas [ASX:WSA] fell by 2.22% on Wednesday, closing at $4.85. The share price has nearly doubled since the beginning of this year.
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.
Saying this, Joko’s view is still unclear and could change at any moment. As a result, the nickel price has declined 6.9% over the last month. If the nickel ban continues, analysts have predicted a supply shortage of the metal leading into next year.
But recently, Vale SA [SA:VALE5] was given the green light to recommence operations at one of its largest nickel processing plants by the New Caledonia government. This is relieving the supply shortage concerns somewhat. Adding to this, LME nickel inventories grew 7% just in June, breaking past the 300,000 tonnes mark for the first time in history.
Free Reports:
The nickel spot price continues its volatile climb.
After reaching a two-year high of almost $22,000 a tonne in May, Spot nickel closed at $18,339 per tonne last night. The metal is up just around 54% for the year.
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.
Jason Stevenson+
Resources Analyst, Money Morning
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