huntley likes wsa sec buy

Huntley ( which is very conservative) has finally decided to place a recommendation on WSA, and has given it a spec buy with a valuation of $5.85. This was before the latest find:

See Huntley's comments below:

Recommendation: Speculative Buy
WSA is an emerging nickel miner focused on the Forrestania nickel belt, 400km west of Perth. Focus is on the spectacular Flying Fox underground mine, host to 96,000t of contained nickel resources grading 6.5%. Production has begun in lower grade ore and should increase towards the end of 2007 with first high grade ore from the T1 reserve. WSA aims for 12-14,000t of nickel a year from the low cost Flying Fox mine. Deep drilling looks promising and may allow capacity double over an aspitational 10 year life. Diggers South contains 80,000t of lower grade nickel with output of 5,000t a year targeted from 2009. New Morning/Daybreak could be a third mine. It is smaller but management is enthusiastic about deep exploration potential.

Event
Last Update - 19/10/2007
In Flying Fox, WSA is sitting on an excellent nickel deposit. High grades and expected low cash costs should deliver strong margins. Reserves contain 65,000t of nickel at the bonanza grade of 5.6%. Resources continue to grow, both at depth at Flying Fox and at WSA's other key deposits Digger South and New Morning/Daybreak. Exploration is feverish with expenditure of $3.5m a month and six drill rigs operating. Regional potential is exciting.

The plan is to produce approximately 13,000t of nickel in concentrate by 2010 from Flying Fox. Cash costs will be very low around US$2.50/lb before royalties. Development is fully funded with production just starting to hit its straps from the lower grade top of the orebody. Grades and widths will improve with depth. Development to the highest grade T5 orebody at Flying Fox will take about two years. WSA is extremely enthusiastic about potential for extensions to the orebody at depth in the T6 and T7 areas.


Business Impact: Our $5.85 a share valuation assumes US$10/lb long term nickel, an A$/US$ exchange rate of 0.80 and a 10% discount rate. Flying Fox represents the majority of our valuation with Diggers South, New Morning/Daybreak and the Canadian interests viewed as option value. Expect additional drilling and feasibility studies to move the deposits towards mining. Our FY08 NPAT forecast of $23.4m assumes a conservative start to production with a nickel price of US$14.20/lb. The FY09 NPAT forecast of $59.9m assumes US$13.50/lb.

Forecast Impact: --

Recommendation Impact: We would prefer to buy at a lower nickel price and a lower share price, but the danger is missing out on a high quality play with tangible upside. Smaller cap companies with mines of this quality in rare. WSA's assets are attractive to the WA nickel majors. BHP is the third largest global producer and Norilsk number one. Conservative investors may happily sit on the sidelines, waiting for a bargain, but we think there is more in the share price from here and initiate coverage with a Speculative Buy. (Last updated: 19/10/2007

Event Analysis

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In Flying Fox, WSA is sitting on one of the best nickel deposits you will see. It is the Jubilee story all over again. High grades and expected low cash costs should deliver strong margins. Reserves contain 65,000t of nickel at the bonanza grade of 5.6%. Resources continue to grow, both at depth at Flying Fox and at WSA's other key deposits Digger South and New Morning/Daybreak. Exploration is feverish with expenditure of $3.5m a month and six drill rigs operating. Regional potential is exciting. The company almost exclusively holds a 50km long belt at Forrestania. Hedging is limited to 1,500t at US$4.70/lb with management to close this out.

Risk is an unforseen production issue, always possible when a mine is yet to establish a track record. As a single commodity producer, the ride could well be bumpy depending on prevailing nickel prices. Nickel is historically the most volatile of the LME traded metals. Some of those risks have been priced in by the market, providing an opportunity. We would prefer to buy at a lower nickel price and a lower share price, but the danger is missing out on a high quality play with tangible upside. Smaller cap companies with mines of this quality in rare. WSA's assets are attractive to the WA nickel majors. BHP is the third largest global producer and Norilsk number one. Conservative investors may happily sit on the sidelines, waiting for a bargain, but we think there is more in the share price from here and initiate coverage with a Speculative Buy.


The plan is to produce approximately 13,000t of nickel in concentrate by 2010 from Flying Fox. Cash costs will be very low around US$2.50/lb before royalties. Development is fully funded with production just starting to hit its straps from the lower grade top of the orebody. Grades and widths will improve with depth. Development to the highest grade T5 orebody at Flying Fox will take about two years. WSA is extremely enthusiastic about potential for extensions to the orebody at depth in the T6 and T7 areas. Additions at T5 type grades are as good as money in the bank. The discovery hole into T6 and T7 intersected 22m @ 1% nickel, 3.6m @ 2.9% and 7.3m @ 3.3%. Not quite the 6% bonanza hits of T5, but potential is there. Management thinks better located holes will bring reward. WSA hopes to have enough drilling by Christmas to make a decision on a shaft. This would see production double to 20-25,000t a year by 2010 but more reserves are needed to justify the $50m plus and 2.5 year investment.


Other key assets are the nearby New Morning/Daybreak and Diggers South deposits. Diggers South is lower grade and needs relatively favourable prices to go ahead. A nice option with drill results improving at depth. WSA aims for 5,000t a year from 2009. The resource contains 95,000t of nickel grading 1%. New Morning/Daybreak contains 31,000t at 1.4%. Half is contained in an attractive higher grade core of 3.7%. Management thinks a mine is viable but wants more resources to improve economics. The hope is for a Flying Fox style orebody. High class drill results include 20m @ 6.8%.


WSA has exploration interests in Canada. Strategy is to focus on deposits with potential to produce at least 5,000t of nickel a year within two to three years. Of primary interest is 100% ownership of the old EL mine which produced 1Mt of ore grading 3.3% nickel and 1.1% copper. The top has been mined to about 200m depth. There is potential for remnant ore, but the main game is depth extensions.


Our $5.85 a share valuation assumes US$10/lb long term nickel, an A$/US$ exchange rate of 0.80 and a 10% discount rate. Flying Fox represents the majority of our valuation with Diggers South, New Morning/Daybreak and the Canadian interests viewed as option value. Expect additional drilling and feasibility studies to move the deposits towards mining. Our FY08 NPAT forecast of $23.4m assumes a conservative start to production with a nickel price of US$14.20/lb. The FY09 NPAT forecast of $59.9m assumes US$13.50/lb.