Is IGO’s $1.1bn takeover of Western Areas the start of the WA nickel consolidation we’ve all been waiting for?
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The $3.36 a share cash splash will boost IGO’s nickel business from a short-life, single asset operation centred around its Nova nickel-copper mine into a multi-asset division with decades ahead of it.
IGO will take on $900 million in corporate debt and use $272 million from its cash reserves to fund the deal, which comes after months of negotiations which saw Western Areas barter up from a scrip offer to a mega payout.
The move would immediately turn IGO into a major regional player, boosting the company’s nickel production profile from 25,000-27,000t in FY22 on a proforma basis to 41-44,000t with the addition of Western Areas’ Forrestania nickel operations.
The bigger prize, arguably, is the Odysseus mine near Leinster in the northern Goldfields, which Western Areas plans to bring into production at the end of 2022.
Odysseus itself will produce upwards of 10,000t of nickel a year for more than a decade, but the broader Cosmos Nickel Complex, especially the giant low grade Mt Goode orebody currently the subject of a scoping study, could see battery metals focused IGO produce nickel for decades to come.
It presents the company with the option to refire a study into a nickel sulphate refinery, producing downstream chemicals for EV batteries to compete with WA’s dominant nickel business, BHP’s Nickel West.
With the WSA takeover set to clear by April, could the IGO bid be a trigger for more M&A to come?
The IGO takeover makes sense given the limited lifespan of the Nova mine in the Fraser Range, where the company has failed to make a major discovery anywhere else in the region since acquiring the mine from Sirius Resources in 2015.
While it has come at a massive 35.5% premium to Western Areas’ share price before news of the merger talks arose in August, there was a sense of urgency to IGO’s bid.
IGO sold its 30% stake in the Tropicana gold mine earlier this year to Regis Resources (ASX:RRL) in a strategic pivot to battery metals as it also paid big bucks for a 49% share in struggling Tianqi’s Kwinana lithium refinery and Greenbushes JV.
Had it risked the chance of running its Nova mine dry by 2027, growth-hungry IGO could have faced the prospect of becoming a single asset operator barring future M & A moves.
They may come as well. The IGO-WSA deal consolidates some of the complicated investment holdings of junior nickel companies across WA.
IGO has a stake in Kambalda’s Mincor (ASX:MCR) after selling the junior its Long Mine, while Western Areas owns a bit under 20% of Kimberley nickel producer Panoramic Resources (ASX:PAN) and a substantial shareholding in Kalgoorlie explorer Metal Hawk (ASX:MHK).
BHP is the main consumer of mined nickel in WA through its integrated Nickel West business and has offtake deals with Mincor, IGO and Western Areas, and could be looking to expand after turning the future facing metal from a non-core business to a major growth area.
Iron ore billionaire and green energy advocate Andrew Forrest also appears to be circling. His Wyloo Metals sits on the register of Poseidon Nickel (ASX:POS), Mincor and, curiously, has built a more than 6% stake in WSA in the midst of IGO’s takeover talks.
Wyloo is in the mood for it, having recently peacocked all over BHP’s bid for Canadian nickel explorer Noront Resources, lodging a C$1.10 offer this week at a 47% premium to BHP’s accepted C$0.75 bid.
Talking to the West Australian, Wyloo boss Luca Giacovazzi suggested the time could be ripe for a consolidation of WA’s fragmented nickel industry which could challenge BHP’s dominance.
IGO has the support of WSA’s board and its 14.7% largest shareholder Perpetual, but is yet to hear from Wyloo about its intentions over the scheme, which will require a vote of WSA’s shareholders to for approval.
“Wyloo is active around the nickel space and I think everyone would expect that we have had interactions with Wyloo,” IGO boss Peter Bradford told analysts on a conference call after announcing the deal.
“We don’t have any specific understanding vis a vis this transaction with Wyloo.”
The WSA deal will open the possibility for IGO to revisit a nickel sulphate refinery placed on the back burner several years ago because Nova did not have the mine life or scale to support it.
BHP’s recently opened Kwinana plant is currently the only producer of battery quality nickel sulphate in WA, currently receiving concentrate from a number of local nickel companies including IGO.
Bradford told analysts today it would take 18-24 months to assess the option, but that it was not the driving force behind the WSA deal.
Despite taking on a large amount of debt to fund the all cash offer, Bradford said he did not foresee IGO having to dilute shareholders if it made the decision to develop the refinery down the line.
“This is obviously something that we’ve looked at before and we’ve parked it at that time, because primarily we didn’t have the longer dated nickel units that we would need as feedstock to justify a financial investment decision,” he said.
“This transaction if we’re successful, allows us to revisit that work stream and that will be something that we would pursue post transaction.
“At this stage, we’ve not progressed any further work around what we may or may not do with nickel sulphate. From a funding perspective, given that would take some 18 to 24 months to complete the permitting etc. required for that nickel sulphate project.
“We believe that we’ll be in very great shape for any funding that we would need to invest into a nickel sulphate development in the future should such a study be successful and should we make such an a financial investment decision.”
For Western Areas shareholders, the deal comes is an opportunity to realised the value of its Odysseus mine years before they otherwise would have in the form of dividends and returns.
That has proven as astute acquisition, having been purchased from Glencore X-Strata at the bottom of the nickel market in 2015 for just $24.5 million.
“With the objective of maximising value for Western Areas shareholders, the Board allowed IGO to undertake due diligence to support the submission of a binding change of control proposal,” WSA chairman Ian McLiver said.
“The Scheme announced today provides Western Areas shareholders with an opportunity to realise A$3.36 per Western Areas share in immediate value that reflects the quality of Western Areas’ long life nickel assets and exploration portfolio.
“This accelerates realisation of this value now versus operating the assets over the longer term. The Scheme provides certainty for Western Areas shareholders today at a compelling premium in cash to the recent, undisturbed, trading prices for Western Areas shares.”