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IGO paying ‘full value’ for Western Areas, say analysts

Stuart McKinnonThe West Australian
Fri, 17 December 2021 9:57AMComments
Stuart McKinnon


A truck emerges from the Spotted Quoll underground mine at Western Areas nickel operations at Forrestania.Credit: KIM CHRISTIAN/AAPIMAGE

Analysts say IGO has overpaid with its $1.1 billion takeover deal struck with Western Areas, making it less likely that a rival bidder might emerge.

The reaction comes after the two companies revealed on Thursday an agreed cash takeover valuing Western Areas shares at $3.36 each.

The deal provides IGO with an advanced development opportunity in Western Areas’ Odysseus underground mine, which offers an initial eight-year minelife and the potential scale for a downstream nickel processing plant that could provide more direct exposure to the electric vehicle battery market.

The price represents just a 3.7 per cent premium to Western Areas’ last closing price of $3.24 and a 35.5 per cent premium to its last traded price before news emerged of takeover talks between the two players in August.


RBC Capital Markets analyst Kaan Peker reduce his target price on IGO by 50¢ to $9.75 based on the transaction price.
“There is strategic rationale with consolidating WA nickel sulphide producers, and while we see IGO as the natural owners, the company has overpaid for Western Areas, in our view,” he said.
“On our numbers the transaction is value dilutive.
“Our pre-deal valuation for Western Areas was about $730m ($2.30 per cent).
“Including about $150m in tax and cost synergies, this lifts our Western Areas deal valuation to $880m, which is still below the $1172m consideration paid, including transaction costs.”
Mr Peker said the transaction implied a long-run nickel price range of $US9.40-$US9.80 a pound, above spot at $US8.70/lb and RBC’s long-term estimate of $US8.8/lb.

Morgan Stanely’s Rahul Anand said the price paid by IGO “seems quite full, given our discounted valuation for Western Areas is $1.90 a share or $618m and our price target, which reflected the premium for a potential bid, sits at $2.95”.
“We note that Western Areas is pricing in $US11/lb nickel at current share price with the deal potentially requiring future developments in the company’s portfolio to justify the price,” he said.

Bank of America analyst Jack G abb said the cash offer represented a premium to net present value and therefore might be considered full value.

JP Morgan analyst Lyndon Fagan said on Thursday he did not expect another party to bid higher than IGO “given the competitive price put forward”.
However, punters appear to think differently with Western Areas trading up 1.5¢ at $3.435 at 9.55am on Friday, well above the $3.36 offer price.

Both Andrew Forrest’s Wyloo Metals and BHP have been speculated as potential rival bidders for Western Areas.
Wyloo recently boosted its holding in the stock to more than 6 per cent and has declined to reveal its intentions in relation to the IGO offer.
The company’s chief executive Luca Giacovazzi told The West Australian this week the company was setting itself for a consolidation of the WA nickel sector that could rival the dominant position held by BHP’s Nickel West.

However, other analysts were more favourable with Shaw and Partners senior resources analyst Peter O’Connor saying the deal should be acknowledged for timing and prescience and would give IGO a covert long tail in WA nickel production.

Daniel Morgan, of Barrenjoey, estimated the acquisition price was a premium to the asset value of about $1 billion based on a $US7/lb long-term nickel price but said he continued to think IGO was undervalued and maintained on “overweight” rating.

IGO managing director Peter Bradford on Thursday argued no suitor had performed more due diligence on Western Areas and the consensus valuation of the stock did not attribute any downstream processing potential.