Cost bites at Western Areas

ASSET IMPAIRMENT

Need To Know

• Large $880m-980m pre-tax asset impairment for 2022 acquired $1.3bn Western Areas assets.
• Higher costs, capital requirements, and production delays across two nickel (Ni) mines.
• Lasting damage is unlikely. IGO is more about lithium than nickel, with ~70% of FY24 EBITDA exposed to lithium.

Investment Implications

Large asset impairments at two of the recently acquired nickel (Ni) mines from the Western Areas (WSA) assets will raise questions about management credibility and depth of due diligence around the 2022 acquisition. A write-down had been flagged by IGO, but the size of today’s write-down is much larger than what the market was expecting.

Cosmos and Forrestina (WA) mines have seen their accounting values impaired given higher capital and operating costs, challenges to the mine production schedule and delays in development at Cosmos.  CAPEX guidance for completing Cosmos has been withdrawn, with IGO expected to update the market at June quarterly on 31 July.

Whilst the impairment is large, ~70% of the 2022 acquisition price of WSA, the main game for IGO from both a production and equity value perspective is lithium (Li). ~70% of FY24 EBITDA is Li based, which Li represents a similar proportion of the long valuation of the company. So, to an extent, we should not overplay this write-down.

The market's initial price response is to send the share price down -7%. This equates to $910m of lost market capitalisation, relative to a post-tax impact of ~$800m (assuming a 15% tax rate). The market is marking down the value of Management and the Board. 

In our view, the impairment is more a reflection of overpaying (at a time of high mining sector cost inflation) than a view of the assets. Noting that Cosmos is still in the commissioning phase.

Investment View

IGO has a strong portfolio of assets and growth projects under development. A creditability mark now hangs over the Board following the WSA acquisition. Combined with the ongoing search for a new CEO, the market is likely to take some time to re-establish comfort levels in IGO.

With the share price down mid-single digits, investors looking long term maybe be tempered to buy-the weakness, particularly given the main story for IGO is now lithium. We retain the Hold rating, and will look for re-access once we have better clarity on new cost/capital assumptions.