WEST PERTH Aug 20, 2015 (Thomson StreetEvents) -- Edited Transcript of Western Areas Ltd earnings conference call or presentation Thursday, August 20, 2015 at 12:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dan Lougher Western Areas Limited - CEO & MD * David Southam Western Areas Limited - Executive Director ================================================================================ Conference Call Participants ================================================================================ * Chris Drew Royal Bank of Canada - Analyst * Paul McTaggart Credit Suisse - Analyst * Jo Battershill UBS Securities Australia Ltd. - Analyst * Brett McKay Deutsche Bank - Analyst * David Keogh Bell Potter Securities - Analyst * Stefan Hansen Morgan Stanley - Analyst * Harry Cator DMP Asset Management - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by and welcome to the full-year results conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you this conference is being recorded today, August 20, 2015. I would now like to hand the conference over to your speaker today, Managing Director, Mr. Dan Lougher; and Executive Director, Mr. David Southam. Thank you and please go ahead. -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [2] -------------------------------------------------------------------------------- Good morning. I hope you can hear me clearly. As mentioned, my name is Dan Lougher and I'm the MD and CEO of Western Areas Limited. I would like to welcome you today to discuss our full-year results and I've got probably you all know our Chairman, Ian Macliver; and David Southam, our Executive Director. Now I hope that you've all had a look at the announcement this morning and along with all the presentation materials that's now on the platform. Now I won't be running through this in any great detail, but will hand over to David at the end of my sort of overview to go through a bit more detail on the actual financials and then we'll open the floor to some questions. So firstly, very pleased to report a strong set of financial result. An increase in profitability, cash flow, and of course very importantly a high dividend back to shareholders; as well as a balance sheet that is now debt free and that's I think a very important position to be with some of the external factors that most resource companies are currently facing. But I guess what's very important is that we achieved these results with a very good strong safety position and very proud to be able to speak to everybody today that we've actually got a lost time injury rate of zero. What that means is that over a 12-month period the Company has not sustained a lost time injury and this is an absolute great and I say this with a lot of pride and I would like to thank everybody on the operational side. That covers the underground guys, the surface drillers, the guys in the mill, the guys that support in terms of logistics. And I think that the Board would like to acknowledge the operational team in this respect. So, we are currently profitable and in FY15 generated AUD35 million net profit after-tax and with a strong operating cash flow of AUD148.5 million and both of these representing an increase over the previous year despite, what you're all aware, a weaker nickel price environment. I guess we've always said that Western Areas, the quality of the assets and the way that we do our business, we would be able to see and remain profitable through some of these downward cycles. We've also seen the Company reach its strongest ever balance sheet position and now being debt free. And I guess that's actually quite a good message that from a junior explorer somewhat 15 years ago to now running two underground mines sort of highest grade certainly in Australia and probably the world, lowest cash cost position; I think it's a tremendous effort by everybody that's been evolved with Western Areas over the time. So, this has resulted in over AUD70 million net cash position at year-end. Now the Company with that sort of financial strength has allowed us to declare a AUD0.04 fully franked final dividend for the year. That now brings us to a total dividend payout of AUD0.07 per share for the year, which is comparing with AUD0.05 in FY14, and a payout ratio now of near 47% of net profit after-tax. Just as an aside here, Western Areas now has paid in excess of AUD100 million, I think it's around about AUD107 million, back in dividends since we started in March 2010. Now the balance sheet strength has also seen us taking active steps to position the Company for future growth. And I think part of the theme of our presentations in recent times has been along the lines that we now have a platform of growth and we can take the position that the market now opens to us that there's opportunities at the very lowest point in the cycle. But also with this come the projects that we have in our expansion in terms of Mill Enhancement Project, the New Morning Project, obviously the Cosmos Nickel Complex we've just recently acquired from Glencore, our organic profile up at Forrestania, and our sort of Greenfields exploration project at West Gawler. And all of these together will provide Western Areas with a very strong platform into we believe an upward swing in nickel prices in the next sort of 18 to 24 months. Now I'm not going to go into the nickel price and the effects of nickel pig iron et cetera. I think there are very good slides and we're very open to take questions on that later on. But just looking ahead into 2016, we are forecasting the year much in line with the year we've just had. We've got falling sustaining capital cost requirements at Flying Fox and Spotted Quoll because we've done quite a bit of work last year. Both mines have now over two years development ahead of reserves and that gives us the flexibility to manage our discretionary capital spend if and when the need arises and that's not saying that we will be doing it. It is just if things deteriorate much, much more than where we are today because as we know in terms of Australian dollars today, we are sitting around about AUD650 per pound of nickel, which is not the worst place for the Company we've been for a very long time. Exploration spend at Forrestania regionally will be maintained at AUD15 million and alongside an additional AUD7 million of investment in exploration and some engineering studies for the Cosmos Nickel Complex and as I've said previously, we will be investing in the order of AUD22 million for the Mill Enhancement project which will deliver just a little into our portfolio from July next year. So, that's all really I have to say on a sort of high level. I just want to say one last time to thank everybody within Western Areas and our shareholders for being with us and I think that the Company is now in probably the strongest position it's been in. I accept that the market conditions are somewhat volatile, but I just wanted to say that we will endeavor to make sure that Western comes out of this cycle we are seeing today from a very positive platform and look forward to reporting back to you again throughout the year. So, now I'd like to hand over to David, who will run through I guess a bit more detail about the actual financial results and then at the end of that, we'll open for questions. So, thank you very much. -------------------------------------------------------------------------------- David Southam, Western Areas Limited - Executive Director [3] -------------------------------------------------------------------------------- Thanks, Dan. I will run through some of the slides. I will try and keep it brief to around five minutes and welcome any questions that you have and I will repeat a little bit over what Dan said just to highlight a few things. So from a cash cost perspective, we ended up the year at AUD2.31 per pound in concentrate. It's always great when the exchange rate changes around to start reporting those in US dollars, I know US dollars was $1.94 per pound, certainly one of the best performances we have had in a number of years. The Company's been very successful at removing cost out on a sustainable basis and also improving with some productivity gains and some returns on CapEx investment that we made a few years ago that are now starting to pay dividends. In terms of capital expenditure and mine development and exploration, we came at the bottom end of our guidance range at AUD71.7 million. And in fact on the theme of guidance, every guidance metric we have hit or beaten for the year that we've put out to the market. Certainly at the end of the day, cash is king and it is something that we spend most of our time focusing on. And over the period compared to last year, we had a lower nickel price to deal with roughly AUD0.33 a pound. And when you consider we produce or sell around 55 million pounds to 60 million pounds per annum, you can equate out the impact that that has. But despite that, our operating cash flow increased 27% with an increase of AUD31.4 million to a total of AUD148.5 million. So, very strong and operating cash flow after CapEx was also up 21% on the prior year as we invested more into the business around mine development and put in a new paste fill plant at Flying Fox mine. Reported net profit after-tax of AUD35 million. That does take into account FinnAust, which is a publicly listed subsidiary that we own 50%, 60% odd of. If you exclude that out, the pure Western Areas business had an impact in the mid AUD36 million range. Certainly one of the largest impacts that we have is a trending nickel price that is falling for the year versus FY14 where there was a trending nickel price of increasing. What that does and how we report it comes through as quotational pricing adjustments, which means we sell product in one month that we ultimately settle based on a nickel price a couple of months later. And if it's falling, you do suffer the consequences of a falling nickel price. For the first half of the financial year, the QP was a modest AUD17 million which we previously reported and in the second half of the year, it was in the mid AUD10 million range. Certainly what had an impact on us was a falling July 2015 nickel price where the impact on QP alone to adjust prior period sales was AUD5 million for that and I'll go through QP a little bit more later. But as I said, cash is king. Net cash increased AUD60 million so that's after everything is absolutely accounted for and we paid more tax this year because we have been lifting our profits up this year. We still generated another AUD60 million on improvement from last year so we have net cash of AUD70 million, which enabled the Board to declare a final dividend of AUD0.04 that met our commitment to increase dividends in a very responsible manner noting that we have some investment in growth for the period going forward. So if I then turn you to slide 6, that gives a few highlights in terms of some of the key numbers that you might look at, but I've talked about most of those. If we go into slide 7, that's the income statement goes into a little bit more detail. Some of the changes, I've talked about revenue already. Depreciation and amortization was down on last year as we moved more tonnes, but we also added more tonnes into reserve, which means that you allocate the costs over more units which reduces the ultimate cost that gets recognized. We certainly had strong grade profile through the year, which meant that we moved less tonnes; but we also had prior year stockpiles that we were able to put through the mill. Certainly one of the things that we're most proud of, you can see the interest expense has come down significantly and in the next financial year, our interest expense will be effectively zero as we have gone debt free on July 2. If we then turn to slide 9. Slide 9 is where I have tried to demonstrate the impact of an increasing and a falling nickel price and what that has as an impact on revenue from a quotational pricing adjustment and I've taken this over a 24-month period. And what it demonstrates is over 24 months the QP impact is almost negligible at AUD1 million, but it can be very lumpy. And in FY14, you can see the graph there, that had a trending upward nickel price where we had positive movements in QP and then a trending downward in the next 12 months where we've had negative. If I'm to find a silver lining and that's what I love to do is find (technical difficulty), what it means is that we have set the nickel price base for FY16 quite low and it then depends on your outlook for nickel price over the next 12 months. If you were to believe consensus or even the midpoint of between spot and consensus if that was to eventuate, then we would have positive adjustments to revenue going forward. The cash flow statement on slide 10 tells a pretty good story. Most of the things I've talked about there. The main item is that we have now repaid, we repaid AUD95.2 million at the beginning of FY15 in convertible bonds and post year-end we have paid off AUD125 million out of cash and so we are debt free. What I will turn to now is slide 12 briefly on the balance sheet and then turn to guidance on slide 13. In terms of the balance sheet, I won't quite continue to labor the point that we're debt free, but what it enables us to do is position the Company for growth. We've been in the position before where the nickel price has been tough to deal with. Fortunately our business is very robust in that we're low cost and so we can be a little bit countercyclical and position ourselves for growth and that's what the entire focus and strategy of the business is. We've got the Cosmos Nickel Complex that we'll be investing in, the Mill Enhancement Project, increased exploration spend in South Australia and the Western Gawler there. So, the Company is in the best position it has ever been in its life. And so with that, we then move to 2016 or FY16 guidance. From a physicals perspective on mine and mill production, we're pretty much in line with FY15. We do go through around eight different scenarios to work out what the optimal number is to produce. We could produce more, but it doesn't necessarily generate the best margin outcome at today's nickel price. So, we've always retained that option to increase should the nickel price improve. Having said that, our mining plan does not change on nickel price. It is a mine plan based on the correct mining sequence. In terms of cash cost of production, last year we ended up at AUD2.31 a pound. One thing we have purposely done this year because we have had a history of upgrading or improving our guidance on cost is that we've taken an aggressive approach straight up and so we're guiding in the range of AUD2.30 to AUD2.50. In terms of capital expenditure, we've broken that out a bit more this year to indicate where we're spending some of our money in terms of future growth being the Mill Enhancement and Cosmos. One of the key numbers to note there is that sustaining capital is falling, it's down AUD12 million on FY15 and that trend will continue over the next five years. Sustaining capital will fall very similar to these rates as we have really spent the bulk of the money. Flying Fox current capital development is almost complete. It was a bottom-up mine so we've done all the work that we have made it to get to the bottom based on the current reserve, which is six to seven year mine life and so we now start to reap the benefits of that going forward. So in summary, increased profit on last year on a lower nickel price, increased dividend on last year on a lower nickel price, better cash flow on a lower nickel price, all guidance metrics hit, safe operations, and I also point out that we are still profitable at today's nickel price. And as an indication for that, for July we still generate and this is an unaudited number profit after-tax of between AUD2 million to AUD3 million. So, the business is in a very solid position. We certainly don't ignore the external environment that we're in, but we have been doing the hard yards now for two to three years to make sure that we are bullet proof and we certainly are looking forward to FY16. So on that note, I've gone over my five minutes. Operator, if you can pass on each question to us. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Chris Drew, Royal Bank of Canada. -------------------------------------------------------------------------------- Chris Drew, Royal Bank of Canada - Analyst [2] -------------------------------------------------------------------------------- First, just a quick update on timing of the completion of the Cosmos transaction there. And then secondly, just on Dan's comments around some flexibility with the sustaining CapEx and I think David touched on it slightly as well. But I guess if you were to leave that development later at two years and not spend any further money there, what sort of could the sustaining CapEx come down to under that sort of scenario? -------------------------------------------------------------------------------- David Southam, Western Areas Limited - Executive Director [3] -------------------------------------------------------------------------------- I'll deal with Cosmos, Chris. We are probably a few weeks away from completion. There's just the normal sort of transfer novation of contracts and we'd like to complete that in this current quarter and this gives us time to full planning. We have to put in our safety environmental protocols and from day one we'll be starting surface geophysics work, which we've been planning with the help of Newexco and so basically we hit the ground running and start the exploration activities and then slowly in the background work on the studies around [ODC]. So, that's all going to plan. -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [4] -------------------------------------------------------------------------------- Dan here, mate. For the sustaining CapEx, obviously one of things I guess we don't like to look at is any knee jerk reaction to the current climate. Saying that, I mean we've got looking forward on the guidance AUD45 million. Probably AUD25 million of that would be Spotted Quoll and obviously Spotted Quoll mine is a lot more less mature than Flying Fox so we wouldn't really want to slow that down. But at Fox, we've got quite a good position in terms of the reserve so one could argue that we could basically stop that completely, which would be probably in the order of AUD15 million odd. But are we likely to do that? Probably not, but I'm just saying that the way that the operations are structured is that we have availability of doing that. We have done half a year previously at Flying Fox, but it would have very little consequence on the next sort of period of physicals. But then obviously the pain would kick in at some point, which not only you can't recover from, but you don't want to be going down that path too long. So yes, we can switch off probably I would say around about AUD10 million; but would we want to do that right now, probably not. -------------------------------------------------------------------------------- Chris Drew, Royal Bank of Canada - Analyst [5] -------------------------------------------------------------------------------- That's great. Thanks very much. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Paul McTaggart, Credit Suisse. -------------------------------------------------------------------------------- Paul McTaggart, Credit Suisse - Analyst [7] -------------------------------------------------------------------------------- We've obviously caught up recently on (inaudible) et cetera so I don't have a lot of questions about what's in the slide show today, but I did want to touch on the nickel market because obviously prices are low at the minute. In your travels and your talks with other nickel players, do you get a sense particularly in China that prices have moved low enough now that we can start to see some of the indigenous Chinese production being cut back? I mean I noticed that we've seen some evidence that refined nickel units into China imports have started to lift. Just trying to get a sense of how deep you think this price drop might be before we start to see some real action that can ultimately lead to us all getting a bit more positive about the outlook for the near-term nickel price? -------------------------------------------------------------------------------- David Southam, Western Areas Limited - Executive Director [8] -------------------------------------------------------------------------------- It's David here. I'm almost tempted to quote Ivan Glasenberg from I think his conference call last night where he said he hasn't met anyone yet who has called China correctly. But us at Western Areas, we like to think that we've got some special windside knowledge so we'll try our best. Certainly if you look at the cost curve just as a pointer and you compare it say to copper, the current nickel price is on a C1 basis direct cost basis at least 50% of the world's nickel producers are losing money. So, that's something which is critical for our feedback in China and Dan is probably best to talk about this, but we have gone and spent time breaking bread and eating a few strange meals with the largest Chinese nickel pig iron producer. And you got to remember that these guys are all privately owned businesses, they are not state-owned entities so they are there to make money not to employ people and they are currently losing money. And you sort of answered that question in that NPR production is going to be somewhere in the order of 30% down in FY16 and what you've seen is record imports of refined nickel or ferronickel into China. So it's at quite an interesting point where you've got all the industry dynamics pointing to there should be a recovery in the nickel price, you've got the LME stockpile at last starting to show some depletion, you've got record imports into China, you're starting to see some supply drop off, and those who don't have the softer exchange rate to cushion the blow are under pressure. At least in Australia the nickel price is, depending on which day you wake up, somewhere between AUD6.50 and AUD7.00 per pound. It's much better than where we were in FY14 where in Australian dollar per pound it was in the low AUD5 range. Dan, did you want to add anything? -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [9] -------------------------------------------------------------------------------- Paul, Dan here. The fundamental is, as David said, that nickel pig iron guys are certainly not making money right now. But remember they are stainless steel producers so one would argue that they're making some money at the back end of that. But in terms of their nickel input, there's not much change out of that. The funny thing is they are having very good imports of nickel units in pretty much ferronickel, scrap, et cetera; but they haven't touched the LME yet. We've seen some canceled warrants on the LME, which is good news so the actual available nickel from the LME is probably less than what you're seeing on that sort of graph and as David said, that graph is becoming pleasantly negative. But I guess the demand side of things is still somewhat lazy and also I guess a fair comment would be that there are some delays in people taking production out of the system and I guess that goes back to the maturity of the nickel industry. For example Vale up in Canada, Glencore up in Sudbury, Nickel West for example. These are large smelter refining mining areas and it's hard to shut them down because the cost of closure is actually almost prohibitive. So, they keep on making these things work and producing nickel. And as we know, they're not making any money; but surprisingly enough, they are not losing enough money I guess to incentivize closure. So, that's part of the issue. But I think the other thing that I've noticed more recently is the volatility I guess coming through the equity markets in China and then we've got nickel now on the Shanghai Futures market, which Norilsk is feeding nickel into. So there has been a few little changes, which I guess is causing little bit of volatility and sentiment overall takes over. And as David said, the fundamentals are there to be starting to look at pinch points. -------------------------------------------------------------------------------- Paul McTaggart, Credit Suisse - Analyst [10] -------------------------------------------------------------------------------- Well, we'll wait for the uptick. -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [11] -------------------------------------------------------------------------------- Well, I'm waiting too so you're not alone. -------------------------------------------------------------------------------- Paul McTaggart, Credit Suisse - Analyst [12] -------------------------------------------------------------------------------- Thanks, guys. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Jo Battershill, UBS. -------------------------------------------------------------------------------- Jo Battershill, UBS Securities Australia Ltd. - Analyst [14] -------------------------------------------------------------------------------- Just a question given the sort of general weakness in overall metal markets, at a Board level I guess philosophically, how does the Board feel about diversifying away from nickel into other [metals]? -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [15] -------------------------------------------------------------------------------- How far are you away from our office here, Jo? -------------------------------------------------------------------------------- Jo Battershill, UBS Securities Australia Ltd. - Analyst [16] -------------------------------------------------------------------------------- About 14 levels. -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [17] -------------------------------------------------------------------------------- Look Jo, it's the everlasting question, isn't it? Do you want to go countercyclic in terms of another metal. Look I guess one of the good things that we have on our side is that we've shown through our track record of being profitable and generating good cash flows in tough times. So as a pure nickel player with good assets, I mean it's hard to find equivalent assets in other metals. Now look, there's always the golden metal gold; but if you believe some of the things that is in the market about gold and what the Yanks might do is not a good thing and copper, it's six year low. So there's always the question, there's always the debate, and I would never say never; but where we stand today, we are very happy that we are in terms of a pure nickel play. So we are not losing sleep, but we've earned the right to look. -------------------------------------------------------------------------------- David Southam, Western Areas Limited - Executive Director [18] -------------------------------------------------------------------------------- If I just add there, we do have some exposure through some exploration in South Australia where that's more focused on intrusive style ore bodies; which is copper, nickel, gold. -------------------------------------------------------------------------------- Jo Battershill, UBS Securities Australia Ltd. - Analyst [19] -------------------------------------------------------------------------------- Second question from me just on the Mill Enhancement, I may have missed this at the start. But I mean that AUD22 million, that development or that enhancement project, will that be dependent upon the nickel price? I mean will you go ahead with it in any price environment? -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [20] -------------------------------------------------------------------------------- I can tell you at spot nickel price today, it still returns all of its capital plus substantially more. So, it's a sensible project to do. We did put into the announcement, for want of a better word, some wriggle room that if things really really got bad and we've sort of committed to spend AUD7 million, AUD8 million up until October. If you're a betting person and you're up to October and you've spent that money and you only got another AUD15 million to go, it's probably more likely to continue going ahead and we have put it in there as full-year guidance. So, it's the right project to do. It's a project that returns us money and adds to the bottom line. So, it's a quite a bullet proof project. -------------------------------------------------------------------------------- Jo Battershill, UBS Securities Australia Ltd. - Analyst [21] -------------------------------------------------------------------------------- What sort of payback is it at current prices? -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [22] -------------------------------------------------------------------------------- I don't have a number in front of me in terms of capital and in terms of IRR, but what I can tell you is that it's well in excess from a cash return basis. -------------------------------------------------------------------------------- Jo Battershill, UBS Securities Australia Ltd. - Analyst [23] -------------------------------------------------------------------------------- Okay. Thanks, guys. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Brett McKay, Deutsche Bank. -------------------------------------------------------------------------------- Brett McKay, Deutsche Bank - Analyst [25] -------------------------------------------------------------------------------- Just couple of really minor ones from me. What's the outlook for your dividend payout ratio? -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [26] -------------------------------------------------------------------------------- In terms of dividend policy, our policy goes up and down with the nickel price. But from a modeling perspective, I would probably use somewhere around 35% of NPAT, but that number depending on the nickel price can be quite high like it is this year. If we were to go back to 2011-2012, we were making AUD130 million because we were living in a beautiful world of $11 nickel price so it's around the 30% level. But on a sustaining basis, I'll do somewhere around 35%. -------------------------------------------------------------------------------- Brett McKay, Deutsche Bank - Analyst [27] -------------------------------------------------------------------------------- And sort of playing into that a little bit, your D&A half-on-half was significantly lower, it looks about half of the D&A in the second half relative to the first half. Is there something that we should be thinking there in terms of low D&A profiles and potentially flowing through to better divis on the payout ratio basis? -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [28] -------------------------------------------------------------------------------- You're pushing hard on the divi there, but we're certainly focused. We are all shareholders and we're all focused on making sure we return the appropriate math in the form of dividends. But in terms of D&A, it was down on the prior year and down on the second half. We did invest a bit of money in stockpiles over the period and we have pushed a lot of those through in the half just gone. We don't put out guidance on D&A, but to give you a feel if you like; it's probably likely to be higher than what it is for FY16, but lower than what it is for FY14. -------------------------------------------------------------------------------- Brett McKay, Deutsche Bank - Analyst [29] -------------------------------------------------------------------------------- And do you think the dividend payout ratio on the basis of the NPAT is the right way of thinking about things or should we be all going to a more of a free cash flow type payout? -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [30] -------------------------------------------------------------------------------- That's probably a philosophical question about which number you use as a measure for the market. We've just used NPAT. But what we do as a Board is we look at how much free cash flow that we've generated, how much cash we require for investing activities going forward, and then look at what we actually generated in the year prior. And it's a mix of that so that's why it's very difficult to give you a hard and fast rule. But I think there's a lot of logic in a general sense of looking at your free cash flow generation. -------------------------------------------------------------------------------- Brett McKay, Deutsche Bank - Analyst [31] -------------------------------------------------------------------------------- Okay, alright. Thanks. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- (inaudible). -------------------------------------------------------------------------------- Unidentified Participant [33] -------------------------------------------------------------------------------- Dan made the point about smelter closures and it's an expensive exercise. Just in that regard on the WA part of the nickel market, I noticed that some of your peers have been pulling back production or guiding to much lower production in the second half due to prices and sort of uncertainty of what's going to happen in calendar 2016. In that regard, has there been any expressions of angst from some of your offtake partners particularly in light of serious selling away the balances there, the nickel offtake to Glencore? -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [34] -------------------------------------------------------------------------------- No, not at all. In fact it's the opposite. We actually haven't had any negative queries whatsoever. I think I would like to say that most of the commentary we've had in recent times has actually been positive and specifically from our friends down the road. So look, Glencore picking up the serious offtake is I guess a million dollar question. Will that go to Nickel West or will that go to China or Europe. So, today you could argue that that could find its way into a couple of areas. We don't have any concerns about the going concern about where we feed that offtake into a Kalgoorlie smelter. We have a very strong contractual arrangement and there's been absolutely no negative or even discussions of anything to do with shutdown or anything. So, we are pretty confident. The other thing I guess is that the quality of the concentrate is also a big player. It's not just concentrate generally, it's actually what people can do with your concentrate and ours is a very sort of blendable concentrate to work up so smelters can do a lot more with our concentrate for blending rather than having to put through lower quality concentrates into their smelter. So, there is another side of why the concentrate from Western Areas is more valuable. -------------------------------------------------------------------------------- Unidentified Participant [35] -------------------------------------------------------------------------------- I think probably the next question was around why I would expect it that you're being asked for more rather than less. -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [36] -------------------------------------------------------------------------------- You're right. Absolutely with a few people cutting production, it just means that you want more and so we are getting queries from many different parties. Although our offtakes have expired until December 2016, we are already getting expressions of interest. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- David Keogh, Bell Potter Securities. -------------------------------------------------------------------------------- David Keogh, Bell Potter Securities - Analyst [38] -------------------------------------------------------------------------------- Just a quick one on circling back to M&A a bit. You obviously sort of pointed out in the call you guys are in a very strong position and you also talked about countercyclical growth. Obviously just on the Cosmos deal, I don't suppose you have characterized for us your view or appetite on M&A in the current market. -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [39] -------------------------------------------------------------------------------- Dan here. Let me say firstly where we are at in our own sort of internal strategy with the projects. We've just been through and rattled off all the things that we have on our plate right now. We are very excited with the joint venture work that we have in the South Gawler Craton and we see that in a window of sort of five to seven years. So, that's got a while to go but we are very excited right now and you can hear it my voice. We obviously have a very strong organic portfolio at Forrestania yet granted dependent on nickel price and then we were looking to fill up that I call it jigsaw puzzle. The final bit to that puzzle was getting the Cosmos assets and we've been working with Glencore pretty much over about 18 months to get our hands on that. It's actually in nickel geology potential terms the next best thing since what we've got at Forrestania. So, we've got now what we believe a portfolio that in the next two years can deliver quite a significant ramp up in production potential for Western Areas in terms of its own project generation. So, we don't really need right today to go and to do any major sort of M&A. Yes, we have a strong balance sheet and we will leverage. As I said in previous presentations that we will look at the junior market and we will continue to look at potential joint ventures and maybe smaller acquisitions on just enhancing that portfolio. Diversification, look it's always a question. It's always a question everybody should have at least a debate about on a Board level, but we have got a track record of not doing anything out of the sort of left field. But I guess we are quietly confident right at this moment with what we got on our plate, but we will look at other things but we certainly won't be making large sort of transformational I guess M&A right this very moment. I guess the way that our Chairman likes to put is that we are progressive, but not cavalier. So, that could be the statement of the day. -------------------------------------------------------------------------------- David Keogh, Bell Potter Securities - Analyst [40] -------------------------------------------------------------------------------- That's great. Thanks so much, Dan. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Stefan Hansen, Morgan Stanley. -------------------------------------------------------------------------------- Stefan Hansen, Morgan Stanley - Analyst [42] -------------------------------------------------------------------------------- Actually you covered off on quite a lot of it with [Sam's] question. But just looking at I guess the concentrate market and payabilities from this result like when you account for the negative QPs, it looks like payabilities is sort of in the mid-70s, which is a pretty decent step up. I'm going to guess that's reflective of the recent sales contracts. But given we were talking earlier about some of the (inaudible) guys starting to pull back a little bit on development and potentially pull back on production, there could be more demand for high quality concentrates out there. What's the outlook do you think for payabilities then over the next couple of years when you've got contract renegotiations coming up? -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [43] -------------------------------------------------------------------------------- Stefan, probably best not to get into the calculation of your payability. But I suggest just give Joe Belladonna a call after that because I think it might be just slightly high so they might be nothing wrong in there. But certainly you can see from recent announcements such as serious sale to Glencore and to BHP, there's absolutely no disclosure on payabilities because it is very sensitive and when they produce con like our concentrate is quite high quality and so it's very sensitive in the market. We'll start those negotiations early maybe in terms of the concentrate that's due to go out to tender later next calendar year because we're certainly getting very strong expressions of interest today. Our job is absolutely to try and generate more payability, but we do know from the last round of negotiations that we think that we are at the top of the curve in terms of what prices we do achieve for the intermediate product. But certainly with more producers coming off, that makes people who want concentrate maybe a little bit more desperate to have somebody who's got a sustainable concentrate strain for a number of years. -------------------------------------------------------------------------------- Stefan Hansen, Morgan Stanley - Analyst [44] -------------------------------------------------------------------------------- Fair enough. Thanks very much. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Harry Cator, DMP Asset Management. -------------------------------------------------------------------------------- Harry Cator, DMP Asset Management - Analyst [46] -------------------------------------------------------------------------------- My question relates to the fact that the Chinese post the Indonesian oil ban set up shop in Indonesia and in fact one of the issues that may be causing some angst in the nickel market is the fact that these imports are actually coming from these Chinese operations out of Indonesia. Do you have any comment on that? -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [47] -------------------------------------------------------------------------------- The group that we actually know extremely well and have visited their Fujian plant twice already in China, they are the first movers up in Indonesia. The Company is called Tsingshan and they have actually moved their product back to their two plants in China. So, they are now bringing their material backwards. They were in that area for over three years to get that plant built and it's only producing top end of 30,000 tonnes per annum and they are currently sitting on an annualized rate of about [20%] and the quality is nowhere near the 12% nickel pig that they were doing in their own plants back in Fujian. So, there's obviously some commissioning ramp obviously and they are I guess the largest by a long shot and their projection for this whole current year is not a lot more than about [30%]. So, we have to keep close to these guys because the ramp up in Indonesia is going to be tougher. We are not seeing any new guys coming in. Yes, there's a couple of blast furnaces that are starting up, but these are very very small in terms of the production. So, we do see net production down on the heydays of nickel pig iron in China. But I pretty much know when I was up there about 10 weeks ago that the Indonesian high grid laterite stockpiles in China is now almost diminished. I mean we were down to about 3.5 million tonnes and Tsingshan being quite a large importer in that area had hardly any left, I think they had 700,000 tonnes for blending. So, that blend is going to disappear. Will they continue to use these lower grid Filipino ore? Yes, they will. But the consequence of that is the nickel pig iron through to the converters into stainless steel will only be running probably between 6% and 8% nickel whereas they need for the 400 series stainless that order of magnitude of 12%. So, they do have supply. They will get to put refined nickel in the back end to keep that QA up on the stainless steel quality. So, we are monitoring it quite closely. I'll be up in Jakarta end of September in a conference there and it's interesting what's happening there, but it's much slower in terms of the original ramp up and there appears to be that the caveat at the end of the day is going to be hard to get power because there's no grid power, which is what the nickel pig irons in China live off cheap power and I guess construction is not that hard because it's all being built by Chinese labor. But then obviously there's problems with just the skill set of the people in country. So we are seeing it coming through, yes incrementally, but certainly not in the volumes that people were talking about. -------------------------------------------------------------------------------- Harry Cator, DMP Asset Management - Analyst [48] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- There are no further questions at this time, I would now like to hand the conference back to today's presenter. Please continue. -------------------------------------------------------------------------------- Dan Lougher, Western Areas Limited - CEO & MD [50] -------------------------------------------------------------------------------- Thank you, everybody, for the interesting questions and for allowing us to present the Company's financial results. As you've all alluded to, it's a volatile market at the moment and I guess the role of our Board and our management is to ensure that Western Areas remains in its top position going through the rest of the cycle. But we do believe that there is an upside and we will make sure that we maintain as much as we can of our margins if anything does slip, but we are very confident that the Company is in a good strong position with a good platform of growth projects. And I just like to thank everybody and our shareholders for being on board and talk to you guys hopefully sooner than later. Cheers. Bye. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, you may all disconnect.
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