Why brokers are optimistic about the Western Areas (ASX:WSA) share price after it dropped 17%

The Western Areas Ltd (ASX: WSA) share price took an almost 20% nose dive last Friday, following its review of its Flying Fox mine. 

What happened to the Western Areas share price?

Western Areas downgraded its FY21 guidance on all fronts. Its nickel production was lowered to 17,000–19,000 tonnes from the original 19,000–21,000 tonnes forecast. Its unit cash cost of production also increased to be around $3.50 to $4.00 per pound of nickel, up from the previous $3.25 to $3.75 per pound guidance. The negative surprise resulted in significant trading volumes for Western Areas and a 17.74% slump on the day of the announcement. 

Big broker updates 

This week, a series of big broker updates have emerged after the news was digested over the weekend. Despite most brokers downgrading the Western Areas share price target, the commentary was surprisingly positive. 

Citi upgraded the Western Areas share price target from neutral to buy. It did however, lower its price target from $2.65 to $2.35. It notes that the company’s quarterly production report missed expectations and saw a lowering in guidance for FY21, but the share price slump has improved the value proposition of the company. 

Credit Suisse lowered its Western Areas share price target from $2.50 to $2.35 and retains an outperform rating. It highlights the weak September quarter update on lower production and lower grades. It also fears that the “downturn may not be temporary and risks remain operationally”. However, much like Citi, it believes the company’s valuation has become more attractive due to the share price decline. 

Macquarie downgraded the company from outperform to neutral and lowered its price target from $2.80 to $2.00. The only differentiating commentary from Macquarie was its concern that the company could face funding issues. 

Likewise, Morgan Stanley lowered its price target from $2.75 to $2.55 and retains an overweight rating due to the disappointing quarterly production report. However, the broker takes an optimistic view that the issues are temporary. 

Foolish takeaway

Overall, big brokers have largely lowered their share price targets for Western Areas but also maintain a positive view that the share price discount has made the company more attractive. The key risk raised by the brokers is whether or not these production challenges are temporary or possess longer term implications moving forward. Fortunately, the nickel spot price has been strong in recent months and recently hit a 1-year high. 

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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