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Edited Transcript of WSA.AX earnings conference call or presentation 21-Aug-18 11:30pm GMT

Full Year 2018 Western Areas Ltd Earnings Call

WEST PERTH Sep 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Western Areas Ltd earnings conference call or presentation Tuesday, August 21, 2018 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Richard Lougher

Western Areas Limited - MD, CEO & Director

* David Clifford Southam

Western Areas Limited - Executive Director

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Conference Call Participants

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* Daniel Morgan

UBS Investment Bank, Research Division - Director and Analyst

* David Coates

Bell Potter Securities Limited, Research Division - Resources Analyst

* Hayden Bairstow

Macquarie Research - Analyst

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

* Paul Hissey

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Western Areas Full Year Results Conference Call, with Dan Lougher, Managing Director and CEO; and Mr. David Southam, Executive Director. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, 22nd of August, 2018. I would now like to hand the conference over to your first speaker today, Mr. Dan Lougher, Managing Director and CEO. Thank you, and please go ahead, sir.

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [2]

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Good morning, everybody, and thank you for joining us today to discuss the full year results. My name is Dan and with you -- with me today is Executive Director, David Southam and also on the line from Perth office is our CFO, Joe Belladonna. I'll start today with some commentary on the high-level points from our results before handing over to Dave for a few financial comments, and then we'll open up for some questions, which I'm sure you have.

We've had a strong financial '18, returning to operating profitably with a more favorable nickel price driving an excellent outcome. We've seen this not just in our revenue line, but with improvement to our EBITDA and EBITDA margin, cash generation and net profit. The healthy operational cash flow and strong balance sheet for the year have allowed us to progress our growth plans across the board. The DFS, Definitive Feasibility Study, is progressing well and this -- we anticipate being able to report on a larger operation and a longer mine life versus our prefeasibility study.

Post the release of the DFS, we will turn our attention to further optimization studies with additional mining inventory to be considered from the addition of adjacent ore bodies AM5 and AM6, mineral resources which contain around 65,000 nickel tonnes. The confidence in the Odysseus Project has seen us commence investment totaling $32 million in early work this year, fully funded from our existing balance sheet. This will bring Odysseus to a development ready status and reinforces our confidence in the project becoming our third operating mine.

Our other major growth initiative, the Mill Recovery Enhancement Project, we call it the MREP, has also been commissioned and is now producing high-grade nickel sulfide to spec. We are now focusing on production volume ramp-up and constructing separate bagging facilities to allow a separate high-grade product to be sold into its own offtake contract. We expect this offtake contract to receive improved terms of our current offtake agreements and will likely be sold into the electric vehicle battery supply chain.

Pleasingly, we have also been able to earmark increased funding for exploration in the coming financial year. We will return to Spotted Quoll for the first time since the resource was delineated back in 2007 to 2009 and undertake a resource extension program, alongside increased activity at both Cosmos and Western Gawler. And this will incorporate our new farm-in and joint venture partner with Iluka in the area.

Turning to the nickel market. We continue to regard the current market indicators as very positive for Western Areas. We have an excellent combination of robust demand sustained steel, which remained by far the largest consumer of nickel stocks, coupled with the looming demand for high-quality nickel concentrates for use in the electric vehicle battery supply chain. We see these twin demands showing up in the decreased nickel stocks across both LME and Shanghai Futures warehouse stocks. Our discussions with key players in the nickel market, including our partner Tsingshan, who is one of the largest producers of stainless steel in the world as well as in the volume of inquiries from potential new customers in the EV battery space.

So we're pretty of the view that going into the next financial year, things will improve. And now I hand over to David to talk through some comments on the financials.

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David Clifford Southam, Western Areas Limited - Executive Director [3]

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Okay. Thanks, Dan. First of all, I'll just cover off, we have some -- we use terms such as underlying and what that refers to in FY '17 so previous financial year. We had some one-offs in the form of the Bluejay sale and the recognition of Kidman equity. So we generally exclude those from the analysis as nonrecurring items.

As Dan said, our balance sheet has ended up in a healthy position with $150 million -- just under a $152 million cash at bank and at the 30th of June our Kidman equity holding was around $32 million. So we certainly have the ability to fund growth from our balance sheet and which Dan touched upon earlier. We've also, and consistent with the previous financial year, declared a dividend of $0.02 per share, which is fully franked. That represents 46% of impact dividend payout. We're always cognizant of disciplined capital management, and we think this is an appropriate balance of return and rewards for shareholders now versus our growth in the future.

What you'll see with our presentation, which was also released this morning, the main driver of improved profitability this year was a lift in the nickel price. And if you compare it versus FY '17, where it was AUD 6.11 per pound, in FY '18 it was AUD 7.53 per pound and that's before payability.

So despite some recent negative volatility, the spot nickel price is actually today higher than our realized price from FY '18. I think today, it's around AUD 8.30 per pound. And the other point tonight which Dan also covered was on the LME stockpiles. They're the lowest they've been in many years and currently sit at around 245,000 tonnes of nickel. If you were to put that in terms of weeks of supply, we're talking 6 to 7 weeks of supply in nickel.

Just turning to a few of the key takeaways in the presentation, which is on Slide 5. I won't be going through each of the slides because I'll probably end up repeating myself and I'd rather save the time for questions. You'll note that we had one lost time injury in FY '18, which is in the last quarter of the year, so we had an LTIFR of 0.91 and that was an ankle strain that occurred at the mill.

We produced 21,000 -- just over 21,000 contained nickel tonnes and concentrate, and you'll see that our EBITDA of $84 million is a 62% improvement versus FY '17, which was at $52 million. And more importantly, our margin continues to improve as well, was up 40% to a EBITDA margin of just under 34%.

The organic projects, we've already talked about. So I'll leave it there in terms of the results. I'll then turn the focus to our guidance for FY '19. And we have provided reasonably detailed guidance discussion on each of those metrics. You'll note that production is expected to be broadly in line with FY '18. That way, if you could take the midpoint of that guidance, it's slightly higher than FY '18.

Our unit cash cost guidance at this very early stage is AUD 2.80 to AUD 3.20 per pound. If you have a look at our Q3 and Q4 quarterly reports, the bottom end of that guidance range is in line with that.

I would like to make a few comments in respect of costs. So the upward trend in costs is coming from a range of factors, including some contractor and wage movements, which has been highlighted by many over the last 3 weeks, as conditions tighten out in our industry. And one of the factors has been that with an improved nickel price, some of our investors will recall that a couple of years ago, where the nickel price was certainly much lower than what it is today, we negotiated some contractor rate reductions based on nickel price. With the nickel price now being much healthier, those rate reductions have naturally spaced. And so, therefore, we have higher costs, but what I'll also point out though is that our margin is substantially better because of the nickel price improvement.

Our mine plan also contains slightly high proportion of development work this year as we open Stage 2 of Spotted Quoll and the ore fronts of Flying Fox. On the capital front, our sustaining CapEx is in line with FY '18 and we've got definitely more focus on growth with the Odysseus early works and more expenditure on the drill bit and also feasibility studies.

So to sum up, we've had a really pleasing year financially. We're in the midst of what we see as a transformative period for the company. We're investing in growth backed by strong balance sheet, and what we acknowledge some cost pressures on the operations front, we also note that our margins are also improving. And given what we've seen in the nickel market, we expect, whilst the price will be volatile, we're pretty encouraged by what FY '19 holds for the company.

So with that, Rochelle, we're ready to open up for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Michael Slifirski with Credit Suisse.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [2]

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I've got several. First of all, with respect to cost pressure, couple of questions there. Where do you think you are in the journey of cost normalization? And I'm trying to understand what sort of assumptions you've made on a forward-looking basis with respect to further cost changes, how long your renegotiated costs actually apply for? And then secondly, with respect to costs, what are the implications for the Odysseus DFS in terms of high labor costs compared to what maybe would have assumed in your DFS and construction costs?

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [3]

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Okay. There's a lot of cost questions there. So let's deal with the contractor costs. So as we talked about a number of years ago, we negotiated discounts based on nickel price bands. And whilst you'd never like to see your unit costs go up, the reason they're going up is that the nickel price is in a much better position, which means the company is in a much better position overall. So all we've effectively done is revert back to where we are. However, as a general industry in Western Australia comment, costs are going up specifically in labor and consumables and with some suppliers. A classic example is, there's a lack of pilots in WA, and so therefore, if you got to fly in and fly out of operation, you're starting to see increased costs in flying people in and out. Now that's only a small impact for Western Areas; I'm just trying to give you some examples. But there are rise and fall coming in. And so we've factored in what we've seen as the latest trend and forecast for rise and fall. As for Odysseus, I'm definitely not going to comment on any forward-looking statement for Odysseus. We have a DFS, which will come out at the end of September. However, we have made comments that the industry in terms of contractor costs are definitely higher than what they were 1.5 years ago. So you can draw your own conclusion from that. However, as we've talked about, we now have a -- we're anticipating a longer mine life and a larger project than what we had before. And if you bring in AM5 and AM6 into the calculations, and you'll see from our long section that we are developing into AM5 and AM6, that it augers well for a very long life operation.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [4]

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Okay. Secondly, with respect to MREP, what are your expectations, seeing you're now producing a product that's on spec, that's truth. Can I guess that's the hard part? In terms of ramp-up, what -- when are you expecting to be at name plate? Will it be a full year's contribution this year?

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [5]

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No. I think we've made it very clear that the first half of this year will be dedicated to that ramp-up. Look, we -- everything we can do -- hydromet plants notoriously have got some mechanical sort of maintenance that you need to get sorted. We will be -- we're pushing hard, the specs are actually extremely good, but we'll be looking forward to probably the back half of this financial year within the order of 300 to 400 tonnes. So hopefully if the run rate will get to the annual run rate, but obviously, only having a part of the year coming into the physical, so obviously, it'll be not as much as what we've said previously. But look, we're very confident that MREP is doing as we planned it to do in terms of the technology and -- but the effects of the bacteria, so now it's just we probably were a little bit ambitious in terms of the ramp-up. And we are now going through the steps to rectify some real -- some basic stuff. So we are very confident that we will get there.

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David Clifford Southam, Western Areas Limited - Executive Director [6]

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Michael, just to clarify, there is a -- under the guidance in the announcement, you probably haven't had enough time to have a look yet in the nickel and concentrate section. We talked about 300 to 400 nickel tonnes from MREP for the financial year, but nearing name plate capacity towards back half of FY '19.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [7]

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Okay, I'll find it. And then finally, with respect to exploration, what are your sort of ambitions this year with respect to Flying Fox, limited mine life there? Your bullet point about the low grade disseminated resource. Are you seeing that resource as an upside to production because of MREP capacity or are you seeing that as a standby if exploration doesn't deliver?

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [8]

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Well, look, it's a good question. We -- at the operation front, we do a lot of work on resource extensions and as I said earlier on, Spotted Quoll was now the first drill-out that we've had since we basically started the open pit in 2009. Flying Fox is a lot more mature. We started production in 2006. We've done lot of the drilling. Some of the production we'll be seeing over the next 3 years will come from a dev that -- some of the development that we were putting in this year. The lower grade material is -- it really comes back to cut-off grades. If you've got a better nickel price environment, obviously with onus on capital you can move into lower grade areas, and we have, remember, a significant amount of low grade at Lounge Lizard, for examples, over 5 million tonnes. So what we're looking for is the MREP, the precipitation area of the MREP can actually do 3,800 nickel tonnes and not the 1,400, which is basically the front part of that plant. So we do have capacity and we are now across the Forrestania tenement group. We are looking now at all projects. So that would be New Morning, as we've spoken about lower grade at Flying Fox, lower grade materials at Spotted Quoll to be feedstock into the MREP project. Now we don't have numbers. We have to be careful about what kind of tonnage we're talking about, but it is now -- we'll move into that focus for not just Flying Fox, but across the board. We've got Diggers, for example, which if you can remember back in the day, it has got significant tonnage. So if nickel stays and continues to grow as we expect, then it is likely that we will have more material flowing into MREP, which is modular, as you know, but it can do 3,800 nickel tonnes back end today. But it's not -- we don't need to put a lot of capital. So we should be seeing some work moving in the company sort of second quarter this year into that area. So exploration, we are looking for still sulfides. Cosmos is a great belt, and we're very pleased with what's happening on progress up there as well. So not just the Odysseus project but also the exploration that we are doing up there. And look, we really do need to put more dollars towards the drill bit and past years we've cut back. So it is important that we grow our sort of potential resource base and the only way you can do that is through exploration. So it's all going to come out of a strong balance sheet that we've got.

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [9]

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And Michael, I just want to put one thing in context when we talk about low-grade nickel, that's quite often the head grade -- the average head grade of nickel mines around the world. So we just have to be a little bit careful when we talk about low-grade.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [10]

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Yes, absolutely. I guess, we just look at it in terms of capacity to process and grades being lower than what you're doing, so trying to think of what it means for production going forward.

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [11]

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Sure.

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Operator [12]

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Your next question is from Hayden Bairstow of Macquarie.

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Hayden Bairstow, Macquarie Research - Analyst [13]

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Couple from me. Just on obviously cost guidance, I mean, you sort of ran through that in a lot of detail. It is, though, a higher level than what we've seen in the past sort of 5 or 6 years. I mean, is there -- is part of that is actually getting deeper and going into sort of more narrow areas in Flying Fox? And also just on production, I mean, historically we've always sort of set a target and generally beaten it a little bit. I mean, this year it was sort of in line or '18 it was. I mean is it now at that stage as well as these mines get a bit deeper and harder that being able to beat guidance is becoming a bit more challenging? We should just assume that hitting the range is sort of the main goal here?

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David Clifford Southam, Western Areas Limited - Executive Director [14]

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I'll answer that, Hayden. So we're not going to say that we're going to beat guidance; otherwise, we then need to amend our guidance that we've just put out. So, look, where we will be focusing our assets is not necessarily to produce more nickel. Our assets will be focused on the cost line. And yes, they are higher than where they have been in the past. Now the last 2 years, we've had some of those discounts that we referred to had all sort of programs and run a whole host of programs to keep our cost very consistent over 5 years. What we're seeing now is the reversal of those. There are -- look, there's no one single reason that we can give you; there is a number of different reasons. Whether it's having to move waste rather than in-pit dumping at Spotted Quoll and moving waste to the waste oil pads or with Flying Fox as well now that we've got PACE Field moving more waste up through the decline than what we have. So there is a whole host of reasons, but certainly our focus is very much on the cost line. Absolute costs haven't really changed significantly, but certainly our grade is now trending to reserve. And if your grade trends to reserve versus where we've outperformed reserve in the past, your unit rate as a divisor has to go up.

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Hayden Bairstow, Macquarie Research - Analyst [15]

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Great. And just on the offtake agreements, I mean, I think the small batch payroll's off this year, I guess. Has that sort of discussion started about what happens with that?

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [16]

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Yes. Look, the main contracts mature end of next year, both with Tsingshan and BHP. The Lounge Lizard one here, that's a 2,000 tonne contract, that finishes middle of next year. So look, we have to be very careful about how we deal with in-confidence conversations. I mean, I think we've made it very clear in the comments that we are attracting a lot of conversation around Odysseus' offtake, which if you're talking about 2022, '23, obviously, the conversation around where we are in the current offtakes with Nickel West and with Tsingshan. Look, they are in contract, but yes, we are being asked when they mature, what people would like to do with them. Is it beneficial for the company to do a deal right or to talk about the future deal around those? Probably not, because we think conditions are going to improve. So the early [knee] week in October, very good conference week engage basically the smelter appetite across the globe basically. So that will be in October, that's really where conversations start. But we are not in any rush to look and have conversations around the existing contracts. Odysseus is interesting because that in theory would feed by that sort of 03 -- 02/23 period, the rising demand of the EV market. So obviously, the people currently in the room with those conversations are probably precursor people. And I think I've made it very clear almost every time I talk, but that's the only way we can gauge the excitement out there: how many people knock on your door. And I think you'll hear the same from all sulfide producers at the moment.

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David Clifford Southam, Western Areas Limited - Executive Director [17]

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Basically, Hayden, there's not a week that goes by that we are not talking about offtake even though it's 18 months before expiry.

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Operator [18]

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Your next question is from Daniel Morgan of UBS.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [19]

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I was just wondering if we could touch on MREP, again. It looks like you're targeting getting to name plate by the end of this fiscal year so midway through next calendar year. Can we just get a reminder of exactly what your ambitions are there on volume? And is there any -- what would you say about costs, given the conversation we've been having about costs lately as well?

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [20]

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Okay. Look -- so the conversation around the volume is the front part of the MREP plant, which is basically tank leaching is designed to take material that ordinarily would run into the tailings down. And that number that we've talked about on a per annum basis is 1,400 nickel tonnes. And that's the -- as David mentioned earlier on, the numbers that's in the guidance notes refers to that part of that product. Now the plant actually at the back-end has got a, what we call, the precipitation part, which can actually do more. Now from a metallurgical standpoint, the driver there is size of the containers that you can actually access them without putting people at risk, et cetera. So it's designed bigger, and therefore, can do more product. Now as I mentioned in the last conversation, that number is in the order of about 3,800 nickel tonnes. So the product coming through from the in-leach tank line, which is basically a crude nickel sulfate solution, which we then add sodium sulfide to precipitate out the high-grade 50% nickel sulfide. We really can't push that vault any greater than what that is because it's tanking -- so tanking, tankage size. So without changing the tanks or the number of tanks, that's pretty much the number. The back-end of the 3,800 number, if you take out the 1,400 that's dedicated to the front-end, we have the capacity to do more, and that's where lies the benefit of being able to do scat leaching that we've got 0.25 million tonnes sitting next to the Cosmic Boy mills, so that's the project we're looking at. And of course, any low grade, and the one that we're pushing right now is New Morning, which will just be a simple open pit crush to get deep leach pad and then pump the sulfate solution up to that precipitation area. So look, without going into any more detail, the back-end then, if we then want to say what we want to bring in another project, let's say, circa 2,000 nickel tonnes a year, we have to increase the precipitation tankage area. And on a capital per dollar tonne of nickel, it's not that expensive than what you'd think. Now I can't give you the number, but that would be something that we have optionality over if we want to ramp up more lower grade heap leach [sty] project at Forrestania. And we are looking across the whole tonne of package, and we have already got -- we have got Diggers South, we've got New Morning, we've got low grade of Flying Fox. So we are -- and scats projects, so we already have 4, 5 organic projects already lined up for that, Daniel.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [21]

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Okay. Can I just maybe ask a little bit of clarification on that as well. So as we go into, I guess, FY '20, I presume, you're going to be at name plate of circa 1,400 tonnes as you outlined.

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [22]

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Yes.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [23]

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The cost guidance that you provided today, does that include all the costs of getting the additional nickel out? Is there a scaling advantage in the following county when you're fully at name plate? I'm just trying to work out.

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David Clifford Southam, Western Areas Limited - Executive Director [24]

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So let me put that into context. The cost of MREP will be very similar to what our cash cost guidance is. And we're only putting 300 to 400 nickel tonnes as the output in FY '19. Now we're not doing FY '20 guidance today, but it would be safe to assume that if we're getting greater efficiency out of MREP, then the costs of MREP will be better.

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Operator [25]

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(Operator Instructions) Your next question is from Paul Hissey of RBC.

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [26]

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Just a simple 1 from me, you talk about a higher proportion of development of the fiscal '19. Is that just a bit of a temporary catch-up or is that a permanent trend as you sort of building out additional mine areas?

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David Clifford Southam, Western Areas Limited - Executive Director [27]

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It's quite we -- if you break up our sustaining CapEx, which is -- mine probably development and a bit of plant equipment, we're spending more at Spotted Quoll -- sorry, at Flying Fox this year, roughly around $11 billion at Flying Fox. And that is opening up new areas for the following financial year. So some contribution in FY '19 is opening up for FY '20. And so, whilst I'm not giving guidance for FY '20, the sustaining capital and the development costs will be less for Flying Fox in FY '20.

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [28]

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As Spotted Quoll as David mentioned earlier on, Paul, we're going into that Stage 2 area. So we are currently pushing or driving to give us more flexibility. It's just part of the plan. Longer term, yes, things would come on to steady state. But at the moment, we're just putting in more or driving down at Spotted Quoll Stage 2. So, but that's part of the plan. So it's not as if we are jumping around in terms of the mine schedule. So it's just that this year we are opening up more stoping fronts through development.

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David Clifford Southam, Western Areas Limited - Executive Director [29]

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And sorry, just one other point to add, it's probably an element of catch-up there as well as you'll recall when the nickel price was fairly low. We pulled back on a lot of development expenditure. So we are -- I suppose we're taking advantage of a better financial position to set ourselves up so then we have got more flexibility than what we've had over the last year.

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Operator [30]

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The next question is from David Coates of Bell Potter.

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David Coates, Bell Potter Securities Limited, Research Division - Resources Analyst [31]

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My question's actually already been answered, but I'll just follow up with another one on the divi. Just how are you guys thinking about that thing you described as an appropriate balance and the question of the $0.02 divi this year, with your capital requirements heading up next year, how are you kind of thinking about that appropriate balance of FY '19?

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David Clifford Southam, Western Areas Limited - Executive Director [32]

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Sure. Just so $0.02 dividend is roughly about $5.6 million in terms of cost. In terms of our capital spend for growth going forward, you'll recall that we are doing the $32 million early capital works for Odysseus. So that's really the bulk of the program for Odysseus for FY '19 and going a little bit into FY '20. If the DFS that comes out says right, we are going to kick off that project, it's not going to result in an increasing capital expenditure because we are already on a program. So the bulk of Odysseus spend is really required until late 2020, '21. So I think we've got time to manage our balance sheet quite well and with receivables in our equity stakes in companies, we've got close to $200 million available there.

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Operator [33]

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(Operator Instructions)

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [34]

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I think we're probably happy to wrap it up there, operator.

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Operator [35]

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Yes, sir. There are no further questions in the line. Please continue.

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Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [36]

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Okay. Well, look, everybody, thanks very much for listening in and asking some really good questions. As we always say, we're happy to take calls later on at the day or tomorrow. David and I are traveling up through to Melbourne on Friday, and we're back in office next week. So -- or give Joe a call. But thank you very much for listening in.

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Operator [37]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, and you may all disconnect.