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Western Areas cashed up and ready to pounce, refuses to be beaten by nickel price smash

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Western Areas cashed up and ready to pounce, refuses to be beaten by nickel price smash

Western Areas Ltd.decided to undertake a hefty A$70million capital raising at a time most miners would struggle to raiseeven a measly million. But the Australian nickel producer has proven investor confidenceis strong despite the nickel price sitting at a decade low.

Not many mining companies could convince institutional investorsto part with A$60 million of their hard earned cash given the current state of themarket, but Western Areas has closed its fully underwritten placement substantiallyoversubscribed.

"I believe this outcome signals investor support for WesternAreas' operations, responsible growth strategy and our ability to navigate the currentcyclically low nickel prices with our low cost operations," Managing DirectorDaniel Lougher said in a March 31 statement.

Existing and new investors, domestically and internationally,subscribed for shares at a price of A$2 apiece, a premium to the underwritten floorprice of A$1.95 per share and a discount of 7.4% to the closing share price on March30.

Besides covering the A$25 million cost of the of the nickel complex from , the remaining cashfrom the placement will be used to strengthen Western Areas' balance sheet and allowthe company to grow its pipeline of projects.

CFO Joseph Belladonna told reporters March 31 following an industryevent that the cash raised will allow the company to snap up good assets quicklywithout having to worry about trying to secure the necessary funding.

"If we knew where the nickel price was going, and we'd alllike to know that, you'd maybe wait and see how it played out, but if we do startto see assets that are of the quality that we're looking for, we don't want to haveto be begging the ANZ for the money to go and talk to those people," he said.

"When people come to the market with assets that are good,that have got good value, you need to be ready to rock and roll. So maintainingthe right level of liquidity plus capacity is really important."

Belladonna did, however, dispel rumors that a transaction iscurrently in the works.

"I can put my hand on my heart and say as we stand heretoday there's nothing that we're aware of that we've raised money specifically forin that regard, but replenishing the capital that we've spent over the last fewmonths, especially with the Cosmos acquisition and the Cosmos acquisition paymentsthat were coming due, was really the main driver to go to the market now,"he said.

Western Areas is on the hunt for "tier one-and-a-half"assets, but according to Belladonna these are hard to come by.

"Anybody that works in the industry knows there are a lotof operations that are on the market … but we're still not seeing the high qualityassets come on the market as such," he said.

"We're seeing what we call the tier two assets. What we'rereally looking for is the tier one-and-a-halves, which we think will come in timeas the commodity prices start to bite more and more producers and they start toget rid of the operations that don't maybe compliment some of their more cash flowgenerative operations."

While Western Areas has ruled out diversifying into bulk commoditiessuch as iron ore or coal, the ASX-listed miner has not discounted acquiring assetsin the base or precious metals space.

"You're never going to see us in iron ore, coal or any ofthose bulk sort of metals, but copper, base metals, those sort of things, PGMs,gold is not off the table," Belladonna said. "We're definitely not weddedpurely to nickel."

Commenting on the recent acquisition of the Cosmos project, theexecutive dubbed it a "no-brainer" for Western Areas.

"It fits beautifully with Forrestania for style of asset, commodity typeand we can use all of that as a synergistic sort of play," he said. "Ifyou were going to invest in nickel in WA, I don't think there's two better placesthat you would probably put forward than the Leinster-Wiluna belt and the Forrestaniabelt and we think we've got the dominant position of the good pieces of those orebodies."

The 88-square-kilometer Cosmos project lies within the AgnewWiluna nickel belt, which hosts more than 9 million tonnes of nickel. Historic productionfrom Cosmos is about 127,000 tonnes of nickel at an average grade of 5%.

The acquisition doubled Western Areas' resource inventory toover 1 million tonnes of nickel.

Meanwhile, the company is also open to potentially expandingits footprint overseas.

"Overseas there's nothing that is particularly off the tablein that regard," Belladonna said. "Jurisdiction is the key there, whetherthere's areas in Africa that we probably would consider, there's definitely areasin Africa that we wouldn't. South Sudan, you're probably not going to see us there,but maybe Botswana or some of those other places that are a bit more mining friendlyor politically stable, you might see us in those places."

Nickel price 'smashed'

Although the nickel price continues to decline, Western Areasis one of few producers still making money at the current price.

"The nickel market has been absolutely smashed," Belladonnasaid during his March 31 presentation at a West Australian Mining Club luncheonin Perth. "Let's not dilly dally or pussy foot around it."

The spot price is currently trading at around US$3.81 per pound,a far cry from the over US$12 per pound it reached in 2011.

Belladonna said the nickel market has never before been belowthe 50th percentile of cash costs.

"That's pretty dire for the industry," he said. "Itmeans that there will be no investment in new nickel capacity going on and we allknow that mines have got finite lives."

"If we keep operating at this level it assumes that nickelis never going to be used again really in the longer term and I don't buy into thatmyself. So over time as capacity either gets idled or runs out we should be seeingsome recovery in the nickel price."

Belladonna attributes Western Areas' ability to still make moneyin the current downturn to the company's shrewd cost cutting and capital managementstrategies.

"We're one of the few mining operations in the nickel spacethat has operating cash flow out of the mine gate, which is really important thatwe maintain that margin, but cost reduction has been a real focus for the groupover the last three years," he said. "We haven't sort of ever rested onour laurels or rested on hoping for the right price. We've always maintained a prettyvigilant focus on that."

Western Areas cut its cash costs by 19 cents per pound in the2015 financial year and has reduced it even further in the first half of the currentfinancial year.

The company also announced in October 2015 that it was A$32.6 million in plannedCapEx to fiscal 2017 from the current financial year.

While Belladonna would not say exactly what Western Areas' breakevenprice is or how close the company is to that level, he did confirm the company isstill generating positive cash flow.

"We can definitely put our hand on our heart and say whena tonne of concentrate gets booked, we do make a cash margin off the back of that,"he said.

According to the executive, every 50-cent-per-pound improvementto the nickel price adds around A$15 million to Western Areas' EBITDA.

"That's a pretty significant change just on 50 cents a pound,"he told reporters. "It moved 50 cents a pound two weeks ago in one tradingsession. So it doesn't take a lot of recovery for Western Areas to get benefit fromthat, which is where we take a lot of comfort from at the moment."

Western Areas is now undertaking a share purchase plan to raiseup to A$10 million, but is "not really banking on" the cash.

"The thing with share purchase plans with the retail holderbase is if they're in the money you get stampeded, if they're out of the money youget zero," he said.

"So we're not really relying on that one. It would be niceto have, but it's a way of rewarding both retail holders as well as institutionsin the placement process."

The share purchase plan gives existing shareholders the rightto subscribe for up to A$15,000 worth of additional shares at the same price asthe placement.