-Potential funding gap by mid 2022
-Upside to the stock in de-risking Odysseus
-Heightened seismic risk to production at Flying Fox
After many years of consistent delivery,
The former was affected by a seismic event that limited access to the ore and reduced grades, while for the latter grades were affected by a pegmatite intrusion. As Macquarie explains, around 40% of tonnage is mined at Spotted Quoll from development and intrusions can materially affect average grade when intersected.
The company expects the problems, particularly at Flying Fox, should ease in the second quarter and better production and grades should be encountered in the second half.
Macquarie downgrades to Neutral, disappointed by the materially weaker result. It is evident to the broker that both mines are likely to produce slightly below reserve grade and this is now factored into the broker's base case.
The outcome is a material reduction to the earnings outlook for the medium term and this opens up a potential funding gap by mid 2022, although Macquarie assumes any shortfall will be covered through debt agreements. A spot price scenario generates higher earnings over the next three years and this should remove the need for any additional funding, the broker adds.
Citi takes a more optimistic view, believing the sell-off in the stock is overdone and there is an opportunity now to buy a pure nickel stock, upgrading to Buy from Neutral. Price risks are to the upside in the broker's view.
This typically leads to lower grades, higher costs and less flexibility. The market needs to be aware of the higher risk this implies particularly, the broker points out, as
Odysseus
The future lies with Odysseus,
Morgan Stanley expects there will be upside for the stock in the de-risking of Odysseus, which is progressing to plan. The company has also indicated it will investigate lifting mill capacity at the prjoect.
The broker, risking Odysseus at 90%, calculates de-bottlenecking and reaching capacity of 1mtpa with no extra capital could add around 9c a share and concludes the valuation is cheap.
During the September quarter a maiden reserve for AM6 of 2.1mt at 2.2% nickel was published. An integrated production schedule for the three ore bodies, which include Odysseus North, South and AM6, is expected mid 2021.
Forrestania
The main issue at Forrestania is how much of the downgrade to Flying Fox and Spotted Quoll is structural, Credit Suisse asserts, meaning whether nickel can be recovered in the future.
If structural, this would involve a reserve impairment and have implications for future production and costs. The company has indicated higher grade material has been deferred and that the downgrade is not an impairment.
Either way, the issues reflect increasing challenges, particularly as Flying Fox approaches the end of its life. Credit Suisse notes this mine has a history of seismic activity, although this has been inconsequential in the past as multiple mining zones have provided flexibility to access all from alternatives.
Flexibility is now reduced and therefore future production has a more heightened exposure to seismic or other incidents.
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