Western Areas: Improved offer brings WSA board back to the table

About the author:

Mat Collings
Author name:
By Mat Collings
Job title:
Research Analyst
Date posted:
14 April 2022, 9:00 AM
Sectors Covered:
Mining

  • IGO has increased its all-cash offer for Western Areas (ASX:WSA) to A$3.87/share (from A$3.36) reflecting the positive impact of recent nickel price volatility on WSA’s near-term cash flow and asset values.
  • Western Areas (ASX:WSA) board unanimously recommends the updated offer price, subject to the absence of a superior offer and the independent expert finding the offer is in the best interests of WSA shareholders.
  • While the revised offer price is ~15% below our target price, we consider it likely to be successful. With the current share price trading in line with the updated offer price, the market appears to agree.
  • We move to a Hold recommendation (from Add) on this basis.
  • Acknowledging that our target price sits outside Morgans’ rating structure, we leave it unchanged at (login to view) awaiting WSA’s quarterly production, development and cash flow update at end-April, at which point we will revisit our underlying assumptions.

Event

IGO improves all-cash offer to A$3.87/share (from A$3.36) after independent expert found the original offer to not be in the best interests of WSA shareholders.

Analysis

Recent strength and volatility of the nickel price has forced IGO to lift its offer price in reflection, at least, of the short-term cash-flow strength WSA will be enjoying. 

While IGO has a history of walking away from deals, acquiring WSA appears strategically important if the company is to achieve its aspiration of becoming a “globally relevant supplier” of clean energy metals.

WSA’s nickel production from Odysseus is particularly valuable given it is not under an existing metal offtake. This means IGO can revisit its prior ambitions of downstream processing, now in conjunction with Andrew Forest’s Wyloo (with a partnership agreed in return for Wyloo’s support of the WSA acquisition).

We anticipate the acquisition scheme to complete successfully, with a stated target implementation date for the takeover in June 2022.

Forecast and valuation update

Our forecast and valuation for WSA remains unchanged from our prior update (5 April) at (login to view) using our recently updated nickel price outlook.

WSA will report its quarterly production, development, and cash flow updates before the end of April, which will be the next catalyst to refresh our valuation assumptions.

Investment view

While our target price sits ~15% above the revised offer price, we believe the independent expert will find the offer in the best interests of WSA shareholders.

Our target price is based upon our view of the nickel price outlook (where we sit towards the upper end of consensus) and the cost to completion of the Odysseus development project.

A more conservative view on the nickel price and development costs in a tight market in WA could comfortably bridge the gap between our target price and the offer price in the expert’s report. Given the time elapsed since IGO’s original offer, we consider it unlikely an alternative bidder will emerge.

As such, we consider the takeover likely to be successful and, on this basis, move to a Hold rating with the WSA share price trading near the offer price.

Price catalysts

The emergence of a competing bid (which we consider unlikely).

Risks

Significant operational underperformance at Forrestania or material changes in the development budget and outlook at Odysseus would allow IGO to terminate the scheme.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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