Nickel Industries Limited (NIC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Nickel Mines Limited 2021 FY Results. [Operator Instructions] I would now like to hand the conference over to Mr. Justin Werner, Managing Director. Sir, please go ahead.

Thank you, and welcome, everyone. Moderator, if you could please move the slide deck to Slide #2, the highlights slide. Another very strong year for Nickel Mines as we continue to set new records. And we're set up for an exciting growth profile over the next 12 months. Gross profit for '21 was USD 217 million, continue to see strong conversion of EBITDA to free cash flow, and I'll talk about that a little bit later on. We produced over 40,000 tonnes of nickel, more than 30% above nameplate capacity. And as a result, there was record RKEF EBITDA of USD 225 million. Pleasingly, the Hengjaya Mine recorded production of 2.5 million wet metric tonnes, and it also delivered EBITDA of USD 22 million on a stand-alone basis. And it will continue to increase as a material cash contributor to the Nickel Mines business. Corporately, during the year, we completed the acquisition of an 80% interest in Angel Nickel, and we also signed a definitive agreement to acquire another 70% interest in Oracle Nickel. And what that will do is that will set us up to more than triple our production profile and our EBITDAs and within sort of a 12-month period. Regular repatriation of funds continued throughout the period. We paid a $0.02 interim and $0.02 final dividend, taking the total to $0.04. That was a 33% increase on the $0.03 that was paid last year. So I think we've successfully managed to balance very strong growth opportunities with returning money to shareholders' pockets. We also completed our maiden bond issuance and followed that up with a tap and a total of USD 325 million. But we still maintain a very strong balance sheet and still very lowly geared. During the year, we were also admitted to the ASX 200. We signed an MOU to diversify into the production of nickel matte, which will make us unique in terms of diversification and having access to both -- or exposure to both class 1 and class 2 nickel and LME and NPI nickel price markets. We saw obviously continued COVID issues globally. I'm very pleased to report that there was -- actually, we had no issues or shutdowns or any production-related issues from COVID. And we were able to pleasingly deliver Angel Nickel the first half 6 months ahead of schedule despite a lot of the supply chain challenges that a lot of companies have experienced. Moderator, if you could please move to Slide 3, the financial snapshot. You can see there in all instances, a significant increase in -- compared to FY 2020, RKEF sales revenue up almost 25%, gross profit up 31% to $217 million. It was a very pleasing year given that we were able to deliver higher EBITDA margins despite cost pressures, which came from rising nickel oil prices, rising coal prices and rising electricity prices. Against that backdrop, we were actually able to increase our EBITDA per tonne margins, and it speaks to the robustness of the business and the fact that we sit at the very bottom end of the cost curve. If we could move to Slide 4. As I said, we have continued to maintain a very robust balance sheet, total assets of $1.8 billion, net debt of only USD 187.1 million. And so that low gearing leaves us in a good place to potentially take on further value accretive opportunities as they may arise. I mentioned the successful maiden bond issuance. That was USD 175 million, a 6.5% coupon. And then we followed that up with a successful USD 150 million tap issue. So we're now establishing ourselves and our credentials in the bond market. And through the continued good results, we will hopefully sort of start to see some ratings upgrades. If we could move to Slide 5, please. In terms of production, again, very consistent and we were down slightly on 2020, although we saw a significant increase in EBITDA. The only real driver behind that slight decrease in tonnes is just grade. We decreased NPI grades from 14.7% in 2020 to 13.5% in 2021. The reason we do that is, by reducing that grade, we actually can improve the payability, which has gone on to obviously higher EBITDA per tonne margins. And we saw in second half of 2021, we saw EBITDA per tonne margins average 6,109, and we're continuing to see, even into the start of beginning of 2022, those EBITDA per tonne margins are increasing over and well above the 6,000. And if you look at that compared to 2020, we were sitting at EBITDA margins of 4,500. So we've increased that to over 6,000 in the second half and as I said, the -- off to a very strong start in 2022. If we could move to the next slide, please, #6. I think the headline here says it all, operating consistency a hallmark of our business, and you can see it there in the graph, just continued, steady, strong production well above nameplate capacity. And that just highlights the industrial nature of our business, and we see no reason why this won't continue. If we move to Slide 7. You should see here, as I mentioned, the EBITDA per tonne margin despite the cost pressures that I've mentioned, we've actually seen a significant expansion in the second half of last year. And as I mentioned, 2022 we're off to a very, very strong start. And in fact, we had LME nickel prices touching on sort of USD 25,000 overnight. If we move to Slide 8, the Hengjaya Mine, again, seen a significant improvement from the Hengjaya Mine, and that's been a result of the expansion initiatives that we undertook in 2020. We saw record production of almost 2.5 million tonnes. And the Hengjaya Mine actually offers a natural hedge against the ore costs. And ore costs are about sort of 35% of our cost base. We consume sort of almost 4 million tonnes of ore a year. That 2.5 million, as I said, provides a natural hedge. And if you look at our December quarter, that was a record. That was 847,000 wet metric tonnes for just the quarter. So the current run rate is well in excess of 3 million tonnes per annum and well above the ramp-up target, which was 2 million tonnes. Pleasingly, in November 2021, we also supplied our first barges of limonite to the HNC HPAL project, which is in -- within IMIP, and that -- those limonite sales will continue this year, and we look to -- we will look to wrap that up. That will allow us to further improve the cash flow profile of the Hengjaya Mine. Typically, limonite is being treated as waste and overburden. And so we are now being able to monetize that limonite, which sits above the saprolite, and it has -- it will provide very, very healthy margins. If we could just move to Slide 9. You can see here that the high cash conversion that I spoke about earlier, 99% for the December quarter. And the reason for that is we're a beneficiary of our existing operations have a 7-year tax holiday and then a further 2 years at about 12%. Our new lines, which are just commissioning, Angel had a 10-year tax holiday with a further 2 years at 12%. So I don't think you'd find anywhere else a commodity business that has these types of tax concessions, this type of cash flow generation, and we have minimal sustaining CapEx. So keep hitting on the note that we are an industrial company. We're really not a mining company. And you can see that in the strong EBITDA to free cash flow conversion. If we could just move to Slide 10, please. I mentioned growth. We're more than -- we're set to more than triple our current production profile over the next 12 months. So it's an exciting 12-month period for us. Angel Nickel, which is already fully paid, as per all of our previous deals, came with a capital cost guarantee. As with HNI and RNI, it was delivered well ahead of the delivery schedule. And we were pleased to report just a couple of weeks ago, commissioning of the first line, and we will commission the remaining 3 lines over the next sort of 2 to 3 months. We then, as I mentioned, signed a definitive agreement for Oracle Nickel. Again, it's a 70% interest for USD 525 million, comes with a CapEx guarantee. It's actually already well advanced, so we're expecting commissioning in February of next year. Just move to the next slide, please. What does it do for our production profile? It will firmly position us once ANI is fully ramped up and Oracle Nickel comes online around this time next year, puts us up in amongst the top 10 global nickel producers, which is a tremendous achievement given that we've been listed only a little over 3 years. And you can see it puts us above the BHPs, the Anglos, the Eramets and on the heels of the Glencore, Vale and Norilsk. That number there of 86,000, that's actually nameplate capacity. It will probably look more like 100,000 if you take the current production performance. If we move to Slide 12, this just really shows in a chart what that production profile will look like. The blue there is the overperformance. And so as I said, we'll be significantly above 100,000. And this growth path is clearly defined. In the case of Angel Nickel, it's fully paid for. In the case of Oracle Nickel, there's a clear payment schedule, and we have a strong balance sheet and are well funded to meet those payment commitments for Oracle Nickel. Both ANI and ONI will deliver a 20% increase on our current nameplate capacity for our 4 lines. We'll also deliver a 20% saving on the power costs. And so we expect to see a more than tripling of our current EBITDA profile. What does that look like, if we move to Slide 13, the table at the bottom there and you can pick your EBITDA per tonne margin. We've used sort of a range of 5,000 to 6,000. As I said, we actually averaged over 6,000 for the second half of last year. We're well above 6,000 at the beginning of this year. But if we use a conservative number of 6,000, you can see indicative EBITDA of close to USD 800 million on a consolidated basis. With the overproduction and the increased EBITDA per tonne margins, we think that could be up somewhere around USD 1 billion. So it's a significant step-up from where we currently sit today. If we could just move to Slide 14, just to summarize, we think nickel mines is very unique. Nowhere else can you get this kind of exposure to the nickel market through nickel pig iron, but also, as I said, diversification, which we're undertaking into nickel matte, which will give us access to LME-based pricing. We have, as I said, a defined growth path, and nowhere else in the market do you see that defined growth path that comes with CapEx guarantees and with production guarantees. And as I said, we're on track to become a top 10 global nickel producer, and we believe there will be plenty more growth opportunities post where we see ourselves in a year's time. The reason we can do that is because of the high cash conversion, the low sustaining CapEx and the diversified production that we have. So looking forward to another very strong year this year. And as our growth profile continues to build, as I mentioned, approaching EBITDA sort of profile of close to USD 1 billion. With that, I'll -- that ends the presentation, and I'll hand over to questions.

[Operator Instructions] Your first question comes from Jon Scholtz with Macquarie.

Just a question on the capacity rates versus the run rate. So obviously seeing that at the existing operations already. Should we kind of be modeling the same for Angel and Oracle, the increased NPI grades and set throughputs that will give us a higher attributable production there than capacity?

Look, I think that is probably a fair assumption. The nameplate capacity is derived from an NPI grade of 10%. As I said, our NPI grades were about 13.5% for 2021. Hence, that's the sort of 35% overperformance above nameplate that we're seeing. So I think it's probably fair to model a 13% -- 12%, 13% NPI grade for this year.

Excellent. And then for the nickel matte conversion, I mean, it seems like you're going to start doing 2 of those lines in this period. What sort of grade wise can we expect from that matte? And what's the sort of payability assumption versus LME there?

So the grades that will come out of our RKEF lines will be around sort of 25% nickel. They will then go through a converter, which will take them up to sort of in excess of 75% nickel. In terms of the payability, it is commercial in confidence, but it's a pricing formula that's quite unique. It's not a percentage of the LME, which is typically what you would see. If you look at, say, Vale, their payability is a percentage of the LME. In this instance, the pricing formula actually delivers a superior payability in a high nickel price environment. And we're talking potential payability in excess of sort of 90%. And so obviously, as we do the conversion, which you've correctly pointed out, we will start to undertake, over the next sort of 2 to 3 months, those numbers will come out and people will be able to see that payability. It will vary depending on what the LME nickel price is, but as I've stated, it's certainly going to be significantly stronger than what nickel matte has historically captured in terms of percentage of the LME nickel price.

Excellent. And if I can just ask one more, with Oracle and Angel, is there any tax holiday incentives in those as well?

There is. So Angel, we've we recently announced a 10-year tax holiday with a further 2 years at 50% of the corporate tax rate in Indonesia, which is sort of around 25% that's coming down to sort of 20%. And Oracle Nickel, we'll be given the same tax concessions. So Angel Nickel's being confirmed. Oracle, as we get closer to commissioning and meeting our commitments in terms of expenditure, will then be granted by the government a similar size 10-year holiday with a further 2 years at 50% of the corporate tax rate.

Your next question comes from David Coates with Bell Potter Securities.

Just you touched on -- just on HPAL, you touched on the commissioning there. We saw the news recently that Huayou Cobalt had shipped its first nickel production. Can you give us any update on what that means for you guys apart from just the presumably the increased limonite sales to them?

Yes. It -- I was actually on site about 3 weeks ago and had a look at the HPAL plant, extremely impressive. They started construction in March of 2020 when COVID first kicked off. They delivered it in November of last year and commissioned the first train. They're currently commissioning the remaining 3 trains. They're expecting to hit nameplate capacity and be fully ramped up in the second half of this year, which I think is also a tremendous result. For us, as you've touched on, obviously, means that they will need a significant supply of limonite, and we are the closest source of high-grade limonite for that HPAL operation. Our recent MOU that was signed with Tsingshan, that has collaboration on future HPAL projects, and so we certainly -- that is on the radar, not in the immediate future but certainly in the second half of next year. As the first HPAL plant successfully ramps up, we will start to look closer at what an HPAL opportunity may look like. And certainly, given the strong relationship with Tsingshan, the fact that we've actually captured it in an MOU, there's certainly an intention there from both parties to collaborate on the basis of the successful ramp-up and achievement of nameplate capacity from the current HNC HPAL. I will also note there's a second HPAL, QMB, which is also coming online at the moment. And both of them appear to be having no major issues thus far.

Excellent. That's great. Just I'd just ask you for maybe a quick comment on the NPI market. We've seen the NPI price continue to ratchet up over the last -- since the beginning of the year again. How is that flowing through to, I guess, sort of capabilities? But also what's -- what are the key drivers behind that at the moment?

So key drivers are whilst we're seeing increased input prices for ore and coal, that is flowing through into increased NPI prices. And so Chinese NPI producers, their current cost is sitting around $19,000 a tonne, which is where we're sort of seeing today's NPI price. Obviously, sitting at the bottom of the cost curve where we do and around sort of $12,000 a tonne, that's why we're seeing the significant margins that we're currently capturing and enjoying and that margin expansion. In terms of NPI versus LME, it was actually trading at a premium back in October of last year. It has bifurcated a little bit in the first half of this year, but still NPI price is still very strong and sort of sitting close to that 90% payability. So still very attractive and robust stainless steel demand, and growth is forecast to continue for this year. We had a nickel deficit last year of around the sort of 150,000 tonnes, and that's forecast to remain in deficit for certainly the first half of this year. So NPI pricing looks very robust and looks set to continue for at least the first half of obvious year.

Your next question comes from Kate McCutcheon with Citi.

Justin, good timing reporting on Nickel's at a 10-year high today. I was just wondering if you've spoken to shareholders ahead of the vote for STI to take the full placement offer and have any color on whether you think that's going to be a done deal per se subject to FIRB approval.

Yes. Look, we -- our major shareholders have indicated their support for the Shanghai Decent deal. I think it does a number of things. Obviously, the 106 million conditional placement to them, that is sort of almost 20% of the consideration price that we're paying for Oracle, which is $525 million. So I think it demonstrates their commitment and alignment of interest with Nickel Mines and just brings us closer together. So the overall feedback is that this is a positive development, a, for the reason that instead of taking cash off the table, they're actually -- the consideration will be further shares in Nickel Mines, which aligns our interest. And, b, they've been a tremendous shareholder so far and have delivered everything ahead of schedule on time and continue to do so. And so we don't see that changing.

Yes. Okay. And then secondly, on the matte. Can I just confirm that Tsingshan will incur those conversion or upgrade costs to get to that higher grade?

We will pay us more tolling fee, and they have built the converters. But as I said, it's a small fee. We expect that the OpEx costs for the production of nickel matte will basically be in line with the production of nickel pig iron as will the sort of actual metal volumes as well. So what we, hopefully, we'll be able to catch up is possibly a greater payability given that it's linked to the LME. So at today's point in time, nickel matte, the production would deliver a superior margin. That's not always going to be the case. But I think it's -- as it comes back to the earlier point, it's unique to see a business that has that diversification in nickel, where we have exposure not only to class 2 NPI pricing, but we'll also have exposure to the class 1 LME nickel price environment.

Yes. So can I just reconfirm, so you're saying very little change from your current NPI costs, but that's essentially all ex conversion to upgrade with the exception of a tolling agreement?

Correct. Correct.

Your next question comes from Patrick Collier with Credit Suisse.

I'm just firstly wondering if you're able to provide any additional details on Angel just given it's been a month or so since the commissioning there just in terms of performance relative to nameplate on that one line.

Yes. So the commissioning of the remaining 3 lines is going well. And in the coming weeks, we'll be sort of providing updates as those lines come on. The actual production, so far, we are waiting for new power capacity to come online, which will happen in the next sort of 1 to 2 months. So I don't expect to see sort of significant output from Angel really until sort of the beginning of April, end of March this year. But we'll provide certainly further updates in the quarterly and as those remaining lines commission.

Okay. That's good. And then just on the nickel matte, I appreciate you've touched on it already, but just whether there's any additional detail you can give on how the other lines are going and how many of those 8 lines have been converted. And then just also whether you know whether Tsingshan is looking to go beyond those 8 lines and that potential converter kind of the capacity there to go beyond the initial 8 lines of nickel matte.

Yes. So of the 10 lines that are planned to be converted for currently operating very well. The remaining 6 are in the process of undergoing the conversion. In terms of Tsingshan going past the 10 lines, given that the conversion is not particularly capital intensive, I'd expect that we may see more lines than the 10 that's currently planned for conversion with that flexibility to produce nickel matte. But again, it's no plans have been made post the 10 that are currently being done. But as I said, given the low capital intensity and the relative ease of which it can be done, there may be further loans are converted past the 10 in the near term. And I guess that will be a function of what -- how the LME and nickel pig iron pricing plays out over the course of this year.

Okay. And so just on the number of lines, is it 10 that were planned and how many currently operating...

Yes, 10 planned and 4 that are currently operating.

[Operator Instructions] Your next question comes from David Brennan with Petra Capital.

Congratulations on a great result. Just a few accounting, picking a few little accounting issues here. I had a look at the noncontrolling interest, the big jump of that on your balance sheet, I didn't know what it was, and then I saw Note 16. So you obviously incorporated 20% of the 700 million for Angel into that. That's fine. Does that mean in 2023, you'll be incorporating 30% of the 750 million in, so we can expect a USD 225-odd million increase onto the noncontrolling interest on the balance sheet? That's the first question.

Yes, I'll hand over to Chris for that one.

Yes, I'll take that one. Yes, it is Angel, David. And so what you can see on the balance sheet now. Can you ask the second question again or the second part of that question?

Well, it was just to start mean in 2023, when you take on Oracle Nickel, we can expect 30% of 750 million, USD 225 million to be added on -- another addition onto the minority or noncontrolling interest line on the balance sheet.

For Oracle, yes.

For Oracle, yes. Okay. And just second one, ultimate accounting question, just in terms of inventory. The big increase in inventory between 2020 and 2021, and that's due to NPI production raw materials, so about 50-odd million increase and even though nickel pig iron production was more or less flat. Is that due to increased tonnages of coal? And why is that?

It's increased nickel or increased tonnages of coal. That's correct. And I think it's just prudent inventory management by Tsingshan and Nickel Mines at the IMIP.

There are no further questions at this time. I now hand back to Mr. Werner for closing remarks.

Thank you, everyone. And as I said, just to reiterate, an exciting year looking forward for Nickel Mines. Production profile set to more than triple. Cash flow set to more than triple. If you look at the EBITDA per tonne margin 2020 versus 2021, we've seen a significant increase. And I think things are boding well to see further increases in 2022. And so it's an exciting year for Nickel Mines looking forward. So thank you again, everyone, for your time.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.