Why Western Areas (ASX:WSA) share price is falling off a cliff today

It hasn’t been a great day for Western Areas Ltd (ASX: WSA) shareholders as its shares have tumbled drastically lower.

The company released an announcement revising its FY21 guidance, sending shares in the nickel miner down 17.74% to $1.92. In comparison, the S&P/ASX 200 Materials Index (ASX: XMJ) is 0.2% weaker at 13,404 points.

Let’s take a closer look at what growth Western Areas is forecasting for the financial year.

Revised guidance

Western Areas revised its FY21 guidance following the review of the production outcomes, and mine rescheduling completed at Flying Fox.

The company updated its nickel tonnes in concentrate production with a forecast of 17,000 to 19,000 tonnes. This is a decrease on the original 19,000 to 21,000 tonnes that was predicted for FY21.

However, unit cash cost of production is estimated to be around $3.50 to $4.00 per pound of nickel. This represents an increase on the previous $3.25 to $3.75 per pound guidance.

Western Areas advised that both revised categories were due to the lower grade ore in FY21, following some isolated seismicity. As these issues have impacted guidance earnings, the remaining life of Flying Fox will be rescheduled. It’s expected that deferral of some higher-grade material will be realised until later in FY21 and into FY22.

The company noted that as a result of the lower total tonnage of ore mined, overall mining cost per tonne will increase. In addition, fixed costs maintaining the mine such as power, dewatering and ventilation are incurred over a smaller production base.

All other metrics including mine development, capital growth, its Odysseus project and exploration activities remained unchanged.

What did management say?

Western Areas managing director Dan Lougher commented on its operations at Flying Fox. He said:

Flying Fox has been an exceptional mine over its 15-year life to date, but unfortunately, as it enters its final years there is limited flexibility in the mine plan when unexpected issues occur.

While it is disappointing to lower our guidance expectations for FY21, we are continuing to work with our mining contractor to reduce operating costs and maximise cashflow generation over Flying Fox’s remaining life.

About the Western Areas share price

Western Areas has a market capitalisation of $528 million and a price-to-earnings (P/E) ratio of 16.7, which can be seen as expensive to investors. The latter metric does not consider debt and cash in the bank. For the period ending September 30, Western Areas recorded a cash balance of $120.3 million. Effectively, this tells investors that the true P/E ratio is actually a lot higher.

Understandably, the mining industry is cyclical and the Western Areas share price will move in momentary swings. However, falling more than 35% since the start of the year, the latest news is likely to dampen shareholder enthusiam.

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Motley Fool contributor Aaron Teboneras 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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