Western Areas mines out a small profit

Nickel miner Western Areas (ASX: WSA) has swung to a net loss of $94 million for financial year 2013, down 334% from a $40 million net profit in 2012. The loss was mainly a result of a $99 million non-cash impairment related to past exploration efforts.

Aside from the impairment, the company reported a $5.6 million underlying net profit after tax, below broker expectations of above $10 million. Consequently, shares in Western Areas were sold off, down 9% on Tuesday and ended the week down 14%, after a small recovery on Friday following the announcement of a high grade nickel find at the company’s ‘New Morning’ site.

As a result of the net loss Western Areas opted not to pay a final dividend. The full year dividend of 2 cents per share was down from 11 cents per share the year previously.

Western Areas managing director was pleased with the result, noting that the company had still achieved record sales and strong cashflow through difficult market conditions. Cutting costs had been key, as the received nickel price during the 12 months decreased from US$8.07/lb in 2012 to US$7.31/lb, below the long term sustainable average around US$9/lb. A 30% reduction in exploration expenditure for the coming year was announced to help maintain profitability.

Western Areas operates two high-quality mines in the Forrestania belt, east of Perth, and has cash costs per pound of around US$3, putting it in the lower half of the international cost curve. Sustained low nickel prices have put pressure on many competing, higher-cost, miners and analysts believe some strength in the price could eventuate by the end of 2013 as loss-making operations either reduce output or shut down.

This will give Western Areas the ability to focus more heavily on exploration at its nearby sites as its current mines approach the end of their expected life. The Flying Fox and Spotted Quoll mines are underground mines with reserves of 250,000 tonnes of nickel. At the current mining rate of 25,000 tonnes per year, the mine has less than 10 years of life remaining. The quality of the company’s other mine sites are a relative unknown at this stage, though a high grade find at ‘New Morning’ will give hope that the site will be viable in the future.

Foolish takeaway

While Western Areas generated record sales and cut costs successfully during the 2013 financial year, it received a significantly lower price for mined nickel and has been forced to cut costs in the coming financial year to maintain profitability. Investors willing to take on extra risk may consider Western Areas, as the company has significant upside if the nickel price recovers and exploration sites are proven.

More interested in dividend yield than growth? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned in this article.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.