ASX Code: WSACompany: Western AreasShare Price: $5.41Current...

ASX Code: WSA
Company: Western Areas
Share Price: $5.41
Current Recommendation: Accumulate
Current Risk Rating: High
ASX Code: WSA

Mid cap WA nickel producer, Western Areas N L (WSA) has reached agreement to purchase the nickel assets of Kagara (KZL, not covered) for $68m in cash. In addition, KZL will receive fair value for high grade ore stockpiles.
The principal assets being acquired are:
? The Lounge Lizard nickel deposit at Forrestania currently being mined under agreement by WSA; and
? 300km2 of exploration tenements in the Forrestania project area, many adjacent to WSA areas.
The Lounge Lizard deposit is an extension to the Flying Fox orebodies being mined by WSA at Forrestania, WA. The Lounge Lizard deposit consists of a total high grade resource of about 1Mt averaging 5.6% Ni of which there is an Indicated Resource of 743,000t averaging 5.8% nickel containing 43,000t of nickel with the balance being an Inferred resource of 218,000t averaging 4.9% nickel. There is also an Inferred Resource of lower grade disseminated mineralization amounting to 4.4Mt averaging 0.8% nickel containing 36,000t of nickel. Currently WSA mines about 50,000t averaging about 3.8% nickel of Lounge Lizard ore per annum and processes this for KZL through the WSA’ nickel concentrator at Forrestania to produce about 1,800t of nickel in concentrate under an agreement with WSA. KZL’s nickel concentrate is marketed by WSA under its existing concentrate sales arrangements. We estimate KZL’s cost of production at Lounge Lizard in 1H12 was around A$4.48/lb (US$4.67/lb) in terms of payable metal.
KZL’s exploration tenements occur in the surrounding Forrestania project area, with many of KZL’s tenements occurring immediately adjacent to existing WSA tenements. When KZL’s tenements are added to WSA’s existing Forrestania tenement holdings, the combined area is over 900km2.
We previously thought that WSA was the logical and most likely buyer of the KZL nickel assets and that the assets might be sold to WSA for up to $65m so we view the proposed transaction as a reasonable one. In addition to the Lounge Lizard deposit and exploration tenements, we understand KZL will receive fair value for high grade ore stockpiles, which were 7,883t averaging 3.71% Ni containing about 292t of nickel metal at December 2011.
WSA is currently undertaking studies into the expansion of its Cosmic Boy treatment plant at Forrestania and we believe having ownership of the Lounge Lizard deposit will simplify and underpin the likely expansion process.
The purchase of KZL’s nickel assets is subject to the final terms of the agreement being formally documented. It is a public holiday in WA today and so we have not been able to speak to WSA management about the transaction. We are reviewing our WSA forecasts in light of the acquisition of the KZL assets but at this stage we do not envisage major changes to our forecasts.
Against the backdrop of our generally flat outlook for the nickel price, we remain cautious on the outlook for the nickel sector but we continue to point out that WSA is one of the lowest cost producers and accordingly we are more positive about the outlook for the company, based on its substantial, long life low cost production. We retain our “Accumulate” with High Risk recommendation and regard the market’s reaction to the KZL nickel assets purchase, which has seen WSA’s share price decline by almost 5% currently, as a misplaced over-reaction .
Our base case valuation is $5.65 and upside valuation is $7.39. Our price target of $5.85 is retained.