"Short sellers target Western Areas’ nickel odyssey"
In the American vernacular, a person is "nickel and dimed" when repeatedly penalised for a raft of minor indiscretions.
The team at Western Areas, one of Australia’s few pure-play nickel miners, might sympathise with the feeling after investors rushed to place bets that shares in the company were set to fall.
Over the past three months, short positions in the company have surged from 1.5 per cent of the register to beyond 11.3 per cent, making Western Areas the second most shorted stock on the ASX.
That dubious honour has arrived, perversely, amid a strong rally in the nickel price, which is up about 50 per cent since the dark days of March.
None of the other ASX nickel stocks – IGO Limited, Nickel Mines, Panoramic, Poseidon or Mincor – have been targeted in the same way, suggesting the short sellers are not driven by commodity price perceptions but rather factors that are unique to Western Areas.
The spectre of a dilutive equity raising appears to be bringing the shorts to Western Areas’ door.
The company’s predicament is a textbook example of a burning platform: its Forrestania mining hub in Western Australia is expected to reach the end of its life by about June 2024, and the company is racing to get its next mine, Odysseus, into production before then to ensure there is no gap in nickel production,
There should be no gap if construction of Odysseus runs to schedule; the project is forecast to produce its first nickel concentrate by December 2022, and run at close to full speed in fiscal 2024.
The big question driving short sellers is whether Western Areas has enough cash to make the leap to Odysseus, without needing external funding help.
Odysseus will require $252 million of capital spending in the three years to June 2023.
Western Areas had $120 million of cash in the bank at October 30.
UBS expects the miner to post profits of $13 million in fiscal 2021, followed by $32 million and $59 million in the subsequent two years.
If UBS is right, Western Areas will struggle to fund construction of Odysseus from cash and earnings. Any cost or schedule blow out on delivery of Odysseus would only exacerbate the cashflow challenge.
The trajectory of nickel prices over the next three years will also be critical. At $US7.73 a pound last week, the price was higher than the $US6.80 a pound assumption that underpinned UBS’s earnings forecast for fiscal 2021.
But the price will need to rise further to meet UBS’s assumption that nickel prices will average $US7.81 a pound in fiscal 2023.
Western Areas downgraded nickel production forecasts for its Forrestania mines in October – a disclosure that triggered a further surge in short positions and provided a reminder that old mines become less reliable in old age.
“The mines at Forrestania are clearly becoming more difficult to sustain consistent performance as they near the end of their lives,” UBS analyst Dan Morgan said in a note on October 30.
“A reserve downgrade, we think, is still a risk that may reduce the life.”
Adding to competition for cash within the company, Western Areas spent $28.6 million buying 19.9 per cent of mothballed nickel miner Panoramic Resources in May, and is keen to help restart Panoramic’s Savannah nickel project some time in coming years.
While it looks increasingly likely that Western Areas will require an injection of external funds, analysts and investors reckon the company should have plenty of options over where to source those funds.
Nickel is once again fashionable on expectations that demand from battery manufacturers will soar once electric vehicle adoption accelerates, and, with no debt, Western Areas looms as an attractive client for lenders.
“We believe that project financing will be available to bridge any gap,” Mr Morgan said on October 30.
Western Areas declined to comment when asked by The Australian Financial Review whether it would give priority to debt in the event it needed a funds injection.
Todd Warren from Tribeca Investment Partners’ Global Natural Resources Fund reckons Western Areas will be embraced by the market regardless of whether it chooses debt or equity to solve its cashflow squeeze.
To illustrate his point, Mr Warren pointed to Mincor’s success this year in raising $60 million from investors and securing a further $55 million debt facility. That was achieved despite the fact Mincor will not be producing nickel for more than a year.
Nickel Mines, a company exposed more to nickel processing than nickel mining, has also this month secured strong support for its $364 million equity raising.
“The macro tailwinds are pretty strong, nickel is one of the biggest beneficiaries of the electric vehicle trend, so that alone is enough to put a decent foundation underneath any nickel producer now,” Mr Warren said.
“Yes, these guys have some mine life issues, but there are very few pure-play nickel miners on a global scale that you can get exposure to.
“The fact BHP has done an about-face and are now looking to grow their nickel exposure tells you everything you need to know.″
WSA Price at posting:
$2.58 Sentiment: None Disclosure: Held
