Last month, Western Areas Ltd (ASX: WSA) delivered a strong June quarter report, beating its previously issued production and cash cost guidance, but its share price is still trading around its 52-week low. Is this an opportunity to buy?
Reading through the quarterly report, mill throughput at 157,913 tonnes was a record and resulted in the highest quarterly production of the year at 6,676 tonnes of nickel-in-concentrate.
Full-year production was 25,801 tonnes of nickel-in-concentrate which exceeded the company's guidance of 25,500 tonnes.
The mill's out-performance assisted in delivering the lowest quarterly unit cash cost of production for the year at $2.19 a pound.
Full year unit costs at $2.31 a pound, significantly betters the full year guidance range of $2.40 a pound to $2.50 a pound.
Western Areas said, "The Company had again generated free cashflow for the quarter despite the nickel price retreating to below $US6 a pound".
"The strong cashflow generated over the entire financial year has allowed the company to become debt free for the first time since 2004 with the repayment of $125 million of convertible bonds on July 2."
Despite this strong operational result, Western Areas' shares continue to trade around their 52-week low of $2.66 last month, off a 52-week high of $5.30 in September last year.
There's a lot to like about Western Areas:
It has a strong earnings per share (EPS) outlook.
Its return on equity (ROE) is around 10% and forecast to improve.
Its net debt to equity is decreasing.
Its cash balance exceeds its debt.
Its long-term operating cash flow compared to profits is strong.
It has repaid $125 million of convertible bonds using existing cash reserves, resulting in the reduction of approximately $12.5 million in borrowing costs for FY16 compared to FY15.
Verdict
As the chart below shows, the reason that Western Area's share price remains around its 52-week low is because of the soft nickel price $/LB. This chart shows that around September last year, the nickel price $/LB was at its 52-week high at the same time as Western Area's share price was at its 52-week high. And, how the share price has trended with the nickel price over the past 12 months to reach its 52-week low last month.
This just goes to show, that even though the company appears to be doing everything right, it's share price will always be at the mercy of the nickel price, and that's why I'll be keeping it on my watch list for the moment.
