Nickel Industries Limited (NIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nickel Industries Limited 2022 Half Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Justin Werner, Managing Director. Please go ahead.

Thank you, and welcome, everyone, to the first half results call for Nickel Industries. If I could just ask the webcast operator to move the presentation to Page 2. Sorry, the next slide. Thank you. So it was a record half operationally and financially. So pleased to report profit USD 161 million, operating profit USD 140 million, profit after tax of USD 118.4 million. Really a continuation from last year, continued strong conversion of EBITDA to free cash flow, and that's really because we pay no tax currently, and we have very little sustaining CapEx. In terms of the tax breaks that we've received during the half, both Angel Nickel and Oracle Nickel received tax holidays, 10 years in duration with a further 2 years post the 10 years at 50% of the Indonesian tax rate, which will be about [ 11% to 12% ]. Also pleased to declare another AUD 0.02 per share interim dividend, which is maintaining the dividend from last year. It was a record half in terms of production, 26,733 as we just caught Angel Nickel commissioning in the second quarter of this year. Nickel industries attributable production was 21,386 tonnes. RKEF sales revenue, USD 511 million, EBITDA at USD 158.6 million, and we'll look at how that compares with last year, but certainly a significant increase and also a very strong EBITDA margin of USD 6,122 a tonne, so significantly higher than last year. The Hengjaya Mine is really starting to become a material contributor to the Nickel Industries' cash flow. Mine production of more than 2.3 million wet metric tonnes. EBITDA of USD 27.6 million for the half. We have recommenced in April selling our limonite ore to the recently commissioned HPAL plants next door. And we're also seeing the benefits of the cash flow contribution from the sales of that limonite ore. That will allow us also to monetize a portion of the ore body that was traditionally just treated as waste or overburden. We're also working on a haul road to connect the HM mine with the IMIP. Once that haul road is completed, we expect that around sort of the second quarter a year, we will start to see significant ramp up again in the Hengjaya Mine and the associated significant contribution in terms of cash flow. On a corporate basis, we completed the USD 212 million capital raise, successfully commissioned and ramped up ANI, again, ahead of schedule. We've acquired an initial 30% interest in Oracle Nickel, which is under construction and scheduled for commissioning in October of this year. We finalized the definitive agreement for acquisition of the Siduarsi Nickel-Cobalt project and drilling is currently ongoing there. We were pleased to release our maiden sustainability report, and we signed 2 MoUs for 2 solar projects, and we've recently converted 1 of those into a binding term sheet. The total of that solar capacity is about 440-megawatt peak. And that's part of our decarbonization plan. And we changed the name to Nickel Industries, which is more reflective of the nature of the business. If we could just move to the next slide, please. So just to summarize the first half, as I said, strong consistent RKEF production from both HNI and RNI and we started to just initially see some results from ANI. And you can see significant improvement from first half of 2021 to first half of 2022. Revenue up 78%, profit up 73%, operating profit up 58%. And that's really a result of an increased margins. And those margins, I should point out, have been achieved despite cost inflation, elevated coal prices. And so we -- it really is a very, very strong result. As I said, we've had material profit contribution from the Hengjaya Mine and happy to maintain the AUD 0.02 dividend. If we just move to the next slide, please. In terms of the balance sheet, still very conservatively structured with significant flexibility for the future and for future growth opportunities as they arise. Total debt stands at about USD 550 million considering -- which comprises USD 325 million of senior unsecured notes with an April 2024 maturity. We just recently announced a USD 225 million debt package of senior secured notes with an August 2025 maturity. So there's a lot of runway in terms of when those -- when that debt has to be paid down. And as I mentioned, we're still very conservatively geared, which leaves us the opportunity to capitalize on future growth opportunities as they arise. If we could just [ speak ] to the next slide, please. In terms of the RKEF operations, again, a record half year result. We're able to ink total nickel production or nickel tonnes by 32.3%. And that was -- we've started to see Angel Nickel, which came online across -- in April, starting to contribute to our nickel tonnes. Pleasingly, as I said, if you look at the bottom line, RKEF EBITDA margin per tonne has increased to $6,122 in the first half of this year versus $5,022 same time last year. So a 21% increase in the face of rising inflation, rising costs. So we think that's a tremendous result. If we could just move to the next slide, please. In terms of the RKEF operating performance, you can see there in the light blue contribution from Angel Nickel particularly in the second quarter of this year. Pleased to report that Angel Nickel is now fully ramped up and is operating in excess of nameplate capacity. So we expect to achieve the 130% capacity that we've been achieving from both HNI and RNI. If you could just move to the next slide, please. I mentioned the record EBITDA per tonne margins, and that's been also assisted by an increase in the nickel tonnes that we've sold. We did see a significant increase in realized contract prices. But as I said, happy to report that we're also able to capture an increased margin on top of those increased realized prices. Just move to the next slide, please. You can see the NPI pricing here over the course of the year. That has allowed us to, obviously, achieve the record of EBITDA per tonne margins that we've been able to report. It has come down recently, and that's really off the back of what's taken place in Ukraine as well as some slowdown in stainless consumption in China, which is mostly being driven by their [ 0-COVID ] policy. We expect that, that policy won't continue for too much longer, with upcoming reelection. And so whilst we are in a period where NPI prices have declined, our margin remains quite robust. If we could just move to the next slide, please. I mentioned the Hengjaya Mine. It's been a record half year, production of over 2.3 million wet metric tonnes, which consisted of 1.6 million wet metric tonnes of saprolite and 784,000 wet metric tonnes of limonite. EBITDA of USD 27.6 million. That's a 140% increase from the same time last year, given the strengthening LME nickel price and the linkage of ore to the LME, we are seeing higher realized oil prices currently. We're also reaping the benefits of the sale of our limonite ore and the margins that we're making from the sale of that limonite ore. As I mentioned earlier in the call, haul road is under construction and the plan is to once that haul road is operating to ramp up the Hengjaya Mine to well in excess of somewhere between sort of 8 million to 10 million tonnes per annum. So it will be a material contributor in terms of cash flow to the business. If we could just move to the next slide, please. On a corporate basis, we completed an equity capital raising. There was 2 components to that. Institutional placement, we raised USD 106 million and that was very well supported. And then we completed a placement to Shanghai Decent for the same amount, USD 106 million, which followed FIRB approval and has moved then to 21%. And we're, obviously, very happy to see Shanghai Decent take a considerable amount of the consideration as nickel mine shares. We think it's a strong endorsement of the company and their belief in Nickel Industries. We announced the successful commissioning and ramp-up of ANI well ahead of schedule. And we saw a small part of the contribution of Angel Nickel in our half year results, about 7,466 tonnes. As I mentioned, that's now operating in excess of nameplate capacity at around 130%. So we expect to see that operating at well in excess of sort of 40,000 tonnes per annum on an annual basis. We also just recently commissioned the power plant and so we expect to see an improvement in the cost structure for ANI moving forward. The ownership interest in Oracle Nickel, which is under construction and due for commissioning in October of this year. Funds from the placement to institutional shareholders and also to Shanghai Decent were put towards acquiring an initial 30% interest in Oracle Nickel. With the debt package that we've just recently completed, that will allow us to fund the move to a 70% ownership. And as I said, we expect first NPI production in October of this year. So that's also been expedited. Once we have all 12 lines in operation, that will take our nickel production to in excess of 130,000 tonnes per annum on a 100% basis, and that firmly cements us in amongst the top 10 global nickel producers. And so we've been able to achieve that over a very short period of time. Nickel matte strategy. We completed the modifications that will allow us to be able to produce nickel matte. The CapEx was very low for that sort of -- a little over USD 1 million for both lines. We're currently monitoring the market, and if we see an opportunity where we think that nickel matte may realize a better margin or we could get timing wise in terms of demand nickel matte switching just 2 of our lines out of 12 makes sense, then we will make that decision. And that will provide diversification for the company. It will give us exposure to not just the NPI or Class 2 NPI market, it will give us direct exposure to Class 1 nickel and to the current LME pricing. I mentioned the acquisition of the Siduarsi Nickel-Cobalt project. It's a contracted work. There's only 3 other nickel contracted works in Indonesia, previously explored by Freeport and others who were there because of the attractive cobalt values. We're currently drilling that with a view to discovering what we think could be a world-class limonite deposit. It sits on the other side of Papua New Guinea in the Indonesian side. And on the other side, you have [indiscernible], which is the world's lowest cost HPAL project. And so we think that Siduarsi is certainly demonstrating that it's -- the ore body would be consistent with what currently exists at [indiscernible]. And then finally, following shareholder approval, we changed the company's name to Nickel Industries from Nickel Mines. As I said, we think it's more reflective of business and our operations going forward as we continue to go downstream and diversify in the nickel industry. With that -- that's the final slide, I'll then turn over to any questions. Thank you.

[Operator Instructions] Our first question today comes from Adam Baker at Macquarie.

Quite a big jump in receivables and inventory on the balance sheet during the last 6 months. Just wondering if you could make a comment, are these expected to unwind during the second half?

Adam, it's Chris here. Look, the receivables have increased. One of the big drivers of that is obviously Angel coming online over the double the size of the production. You clearly are going to have that receivables increase. I want to note to everyone that all of our receivables within the payment terms and the contracted payment terms they have been throughout the course of the year, and they continue to be -- so will it unwind? No, you'd actually expect the receivables to stay relatively high given that Angel is now online. This is comparing so we've got 8 lines operating versus 4 lines last year. So I think [indiscernible] to be cognizant of that.

Sure. On the inventory, are you expecting those to remain a little bit higher with Angel online as well? Is that much the same story? Or are you...

No, no, no. Inventory will obviously be when you move from 4 lines to 8 lines, inventory will obviously increase and that's going to continue. And it's a hallmark of our business. As everyone knows, we're maintaining inventory at the -- in centralized stockpile also at all of the RKEF lines and will continue to do so.

Sure. Great. And USD 100 million in contributions by the noncontrolling interest in the cash flows, is that some sort of prepayment from Shanghai Decent prior to the capital range? So I'm just struggling to understand what that is.

Sorry, you just cut out, Adam.

The USD 100 million contributions by noncontrolling interest in the cash flow. Just wondering if that's some sort of prepayment from Shanghai Decent prior to the capital raise. Or what is that number?

That's part of the Oracle construction payments in the Oracle Construction as Oracle is coming online. Shanghai Decent is funding into that and we've made our payments for that.

Sorry, Chris. Richard Edwards here, if I can just step in. That contribution's rather for the Angel Nickel construction so when...

Sorry, did I say Oracle?

Yes.

Sorry. Angel. Sorry.

That's right. Yes. So once we went to 80% at 30 September, all expenditures for the Angel project are going through our accounts, but Decent had to contribute or [indiscernible] funding the construction. So those monies are put in by Decent and then spent by our Indonesian operating under the Pte Angel Nickel Industry to come through the group accounts.

Sorry, Adam, I thought I said -- I thought I said Angel, not Oracle.

That's okay. And just wondering if you can make a comment on media speculation that Tsingshan's looking at selling some assets in Indonesia.

Yes. I think I'll throw that one back to [ Just ].

Yes. Thanks, Chris. Yes. No, they are looking to sell down some of their stainless capacity, about 1 million tonnes of their 4 million tonnes to Baowu, which is a state-owned company. Baowu is looking to increase its stainless steel capacity and also it's [indiscernible] Indonesia currently has a joint venture with Vale developing 8 RKEF lines to the north of IMIP. And partly the reason for the Tsingshan sell down, it should be noted, I mean, this is a small part of the industrial park sort of 8 RKEF lines and 1 million of 4 million tonnes of stainless capacity. That's currently 75 operating RKEF lines in which Tsingshan holds a majority across most. The reason for it is they are looking to diversify their business. they are looking to get more involved in the battery metal space. They're listing -- they do have a battery metals business in China, which are listing on the Hong Kong Exchange. They've recently announced a deal with Eramet to develop a lithium project in South America. And we believe they have quite ambitious plans for HPAL and MHP and production within Indonesia. So we see it purely, as I said, is diversification, and we see Baowu coming in to the industrial park as positive. And there's a number of partners throughout the industrial park. So this isn't unusual for Tsingshan to be selling equity interest in its operations as they've done to Nickel Mines as they've done to a number of other partners.

Your next question comes from Patrick Collier at Credit Suisse. We will proceed to the next question, which is Mitch Ryan at Jefferies.

Firstly, with regards to nickel matte and the conversion of those lines, obviously, can you just clarify my understanding is that the infrastructure is all in place. It's literally a matter of you almost clicking a button and changing between the 2. Is that understanding correct? And then secondly, how long does it take to see a nickel matte coming out of those lines?

That understanding is correct. The CapEx has been spent, the modifications have been made. So it is just a matter of making that decision. In terms of the timing, once the decision is made. It takes about 2 weeks to move to a saleable nickel matte product in the interim. We produce an off-spec product, which is still saleable, but not on spec. So there's no disruption to production. But it's about 2 weeks from sort of making the decision to producing saleable on-spec nickel matte.

And my second question relates to Indonesian government has been quoted in the press recently that they're looking to, I guess, looking to release a tax policy to incentivize domestic production of, I guess, more of a battery materials chain and higher spec nickel products. Do you have any commentary that you can provide on that or any views on where that may be going?

Yes. Look, that's correct. I believe that the government will implement it. What's driving that decision and it makes a lot of sense is that obviously, we've seen tremendous growth in nickel pig iron ore and even stainless in Indonesia. Indonesia is now the world's second largest stainless steel producer, thanks to Tsingshan. With that, the ore that feeds, all of these RKEF lines is saprolite, it's a higher-grade ore. To access that saprolite requires removal of lower-grade limonite ore. In the process of removing that limonite ore, it's actually sterilized. And we've now seen with the successful commissioning and ramp-up of [indiscernible] or HNC HPAL project which we were just visiting on the weekend. World's fastest construction time, fastest ramp-up, largest HPAL plant operating globally, currently making very good profits. The Indonesian government is keen to obviously see more development in that nickel space that is applicable to the EV-battery market. And also really the key driver behind that decision is that, as I said, there's hundreds of millions of tonnes of limonite that's currently being sterilized, which could be processed through HPAL plants. And so the government is just simply looking to incentivize people to look at HPAL opportunities rather than NPI opportunities. The other comment I would make is there's obviously a lot of NPI production that now comes out of Indonesia. The government recognizes and doesn't want there to be an oversupply of NPI. So I think it's comfortable with what's been built and the next focus, as I said, is really going to be on nickel for that Class 1 EV-battery space.