Nickel Industries Limited (NIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nickel Industries Limited 2022 FY 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 thank you, everyone, for your attendance on today's call for the Nickel Industries' full year 2022 results. I'm pleased to report an extremely strong year for Nickel Industries and the investment in our RKEF lines, you can see is being reflected in the results for 2022. Records across all fronts, our group EBITDA of USD 339 million, record gross profit, $294 million, record operating profit of USD 257 million (sic) [ USD 258.9 ], and record profit after tax of USD 209 million. Remember, this is a company that's only recently been listed a little over 4 years. And 4 years ago, we had 0 nickel metal production. Last year, our nickel metal production was 70,079 tonnes, a significant increase on the 45,000 tonnes for 2021. Our attributable nickel production or a portion of that 55,993 and record RKEF EBITDA of USD 299 million. Pleasingly, the Hengjaya Mine has really stepped up in 2022 and will continue to do so in 2023 and is now becoming a significant contributor to the cash flow of the business. We had record mine production of 6.79 million wet metric tonnes, record mine EBITDA of USD 53.9 million, and we upgraded the JORC resource to 300 million dry metric tonnes at 1.22% nickel or 3.7 million tonnes of contained nickel metal with still exploration upside remaining on top of that. Finally, for our mine, very pleased to report that we were awarded a Green PROPER rating in 1 of only 2 mines in Indonesia nickel mines that have received that prestigious award. And it's really acknowledgment of the responsible and sustainable mining that's being undertaken. We've just announced another final dividend of AUD 0.02 per share, so bringing our full year dividend to AUD 0.04 per share, in line with our 2021 dividend. And we've been able to maintain a good dividend whilst we continue to grow the company, and I'll talk a little bit later on about the company's growth moving forward. And what we see is exciting transition now into the battery metal space. On the financial side, there was a USD 212 million equity raised, was completed during 2022 and $225 million of senior secured notes, and that was used predominantly to fund the Oracle Nickel acquisition. And Oracle is performing very, very well performing at well over 130% of nameplate and making significantly stronger margins than our older RKEF lines, which is RNI as HNI is now producing nickel metal. We still have a very strong balance sheet, and then I'll talk about that on another slide. On the corporate front, as I mentioned, we completed the acquisition of 70% in the Oracle Nickel Project, which is now in the process of ramping up 3 of the 4 lines are now commissioned, and we expect that to hit full run rate at the end of second quarter of this year. We announced the acquisition of the Siduarsi Nickel-Cobalt project a large contract of work with very good limonite and saprolite resource potential. And we continue to drill that out and probably second half of this year, we'll come out with a JORC resource for that project. On the sustainability front, we released our maiden sustained sustainability report, which was very well received. And we also announced an MOU for 2 solar projects comprising or totaling U.S. 440-megawatt peak of solar capacity. Finally, there was a change of name to Nickel Industries to sort of more reflect the industrial nature of the company. And I should just finally mention we also welcome to the Board, Chris Shepherd, who is joining us as CFO, brings a wealth of experience, particularly in the battery metal space; and also Xiang Binghe who is the Chairman of Eternal Tsingshan, who run all of the Indonesian operations for Tsingshan. So we have 2 of the most senior people under the Chairman sitting on the Nickel Industries Board, and so I think that speaks to the strong relationship and what we can expect moving forward. Can we please move to Page 3 of the PDF presentation? Sorry, the next slide. In terms of the financial snapshot, you can see here RKEF sales revenue, a significant increase 88% to USD 1.2 billion; gross profit, 35.5% increase to USD 294 million; and you can see across all of the metrics, operating profit up to USD 259 million, up again another -- in excess of 30%. Profit after tax of USD 209 million, and I mentioned, pleasingly, the EBITDA from mine operations. You can see that significant increase, up 145% from USD 22 million last year to USD 53.9 million this year. We will continue to ramp the mine up, and so we expect to see not only the mine EBITDA continue to grow but also that RKEF EBITDA continue to grow. We've yet to see any contribution from Oracle Nickel, and we expect to start seeing that in the second quarter of this year. We did also make the switch to nickel matte during the year. Two of our lines, which is HNI we converted to the production of nickel matte. That's proven to be very successful, and we've seen very, very strong margins there, almost $7,000 a tonne. And so we -- as I said, it's been a very successful transition and the ability for us to switch between Class I and Class II. We're one of the only listed nickel producers that has that ability, to be able to move into the production of either Class I or Class II, where we see stronger margins may exist in either 1 of those markets. If we could please move to Slide 4. The balance sheet, still very, very robust. I mentioned we completed the issuance of USD 225 million senior secured notes, a 10% coupon 3-year term, 2 year non-call . As of 31 December, cash of $144 million, debt of $559 million, so net debt of $415 million, still very conservatively geared given the very strong cash flows that the company generated for 2022 but that will significantly grow in 2023. And we will maintain that very responsible balance sheet and funding moving forward. If we just move to the next slide, please. I mentioned the RKEF operations. You can see that Angel Nickel, 29,887 tonnes, and that's not for a full year of production. That's operating at 138% of nameplate capacity. And you can see the differential in margins there between Angel and our older Ranger Nickel lines. Ranger Nickel last quarter was operating at an EBITDA of about [ $2,600 ]. Angel Nickel was operating at an EBITDA of about [ $4,500 ]. I mentioned the move to nickel matte. Hengjaya Nickel was converted to the production of nickel matte. And its margins in December were $5,950. So combined, the nickel matte, combined with the newer generation RKEF lines being Angel and Oracle, we're seeing very, very strong margins despite what we experienced in 2022 was significant cost pressures, particularly from thermal and coking coal as well as a period of depressed NPI prices as China was still in lockdown and has now moved out. And so we're seeing an improvement and strengthening in NPI prices, but it speaks to the robustness of the business through all throughout the whole commodity cycle. But even when we had significant cost pressures, we had record low NPI prices, we're still able to produce very strong margins, and that's a benefit of sitting right at the very bottom end of the cost curve. Can we just move to the next slide, please. If you look at the chart at the bottom there, you can see the contribution over the year in the light blue there from Angel Nickel in March, June, September, December. You can see there in December '22 in the light green far right there, 747 tonnes contribution from Oracle Nickel. That will continue to grow, and that bar will look basically identical to the bar next to it, which is the light blue bar, which is the Angela Nickel production. So there's still a significant amount of production that hasn't been translated into EBITDA yet. That will come on in 2023. And as I said, the margins are stable at the moment. They're very strong from Angel. We expect similar margins from Oracle, and we're seeing very strong margins from our nickel matter from HNI. We also expect to have our IUI issued or our sales license for Oracle, and so we expect to start seeing sales in the second quarter of this year. So we'll see that contribution to our EBITDA coming very soon. If we can just move to the next slide, please. Another record year for the Hengjaya Mine. I mentioned 6.8 million tonnes of ore mined, 2.7 million tonnes of saprolite sold and 844,000 tonnes of limonite sold. Pleasingly, limonite, which was previously treated as overburden and the cost, it's now making a very strong margin in excess of $10 a tonne. And our saprolite business continues to make strong margins of close to $20 a tonne. We are in the process of completing the haul road between our mine and the IMIP. Once that haul road is completed, our target will then be to get towards 10 million wet metric tonnes per annum of ore sales, mix of limonite and saprolite. So using the $10 to $20 margin, you can start to see that the Hengjaya Mine really is becoming a material contributor to the EBITDA of our business. If we could just move to the next slide, please. I mentioned in the opening, the awarding of Green PROPER rating for the Hengjaya Mine. We're extremely proud of receipt of this award. We are 1 of only 2 nickel companies in Indonesia to receive this, the other being PT VALE INCO. The mine really has become a showpiece for sustainable and responsible mining. We've had numerous Western OEM and EV makers, including Tesla, come and visit the mine to see what a good nickel laterite mining operation can look like in Indonesia as numerous customers take more of an interest in upstream and the source of ore for the production of nickel metal for particularly the battery market. If we could just move to the next slide, please. I mentioned we released our -- or updated our JORC resource to 300 million dry metric tonnes at 1.22% or 3.7 million tonnes of contained nickel metal. You can see where we sit amongst the known global nickel resources, places us firmly amongst the top 10. There is still upside to that resource, and we will continue to drill that out this year and hopefully add more tonnes to that current number. We're also looking to grow that base from 3.7 million tonnes via acquisitions such as projects as the Siduarsi project. And our aim will be to sit on the world's largest known global nickel resources, and we're working very hard on identifying suitable acquisitions so that we can continue to grow that resource base as it becomes more and more important in the future to ensure that we have the long-term security of supply, but not only that, that we are involved in that supply and so that we can ensure that similar to the Hengjaya Mine, it's mined in a sustainable and responsible way. If we could just move to the next slide, please. Just quickly quarter-by-quarter highlights. Early in March, we completed a USD 212 million capital raising to fund the acquisition of Oracle, and we acquired initial 10%. Both Angel and Oracle had secured material tax concessions, 10 years of CRA tax plus a further 2 years of about 12%. In the June quarter, we changed our name to Nickel Industries, which I said at the opening, we felt more reflective of the nature of business. And Angela Nickel received its commercial sales license, which, as I mentioned, Oracle Nickel should receive also in the second quarter of this year. We then continued to increase our interest in Oracle Nickel. We announced the acquisition of the Siduarsi Nickel-Cobalt Project, and we released our maiden sustainability report. We look forward again to releasing our 2022 maiden sustainability report in the coming weeks and a lot more good work has been done over the course of the year. In the September quarter, we signed a term sheet for a 200-megawatt peak solar project. What we find attractive about the solar project is obviously not only the reduction in carbon intensity but also the fact that the power purchase agreement is for a 20- to 25-year life at a fixed price without any inflation escalation. And so we see that attractive from the perspective of our power cost will be potentially fixed for that 20-year period and remove some of the volatility that we saw, particularly last year in coal prices and power prices. During that quarter, we also increased our ownership in Oracle to 70%. We signed a strategic cooperation agreement with QMB New Energy, who has a [ H-Power ] plant that's commissioning within IMIP for the construction of a slow plant to supply significant volumes of limonite to that [ H-Power ] plant, and we upgraded the JORC resource, which I've just been over. Finally, in the December quarter, the last year, we switched from the production of NPI to nickel matte at Hengjaya Nickel. As I said, that's proven very successful given the very strong margins, almost $6,000 a tonne for December quarter. We're seeing margins that are in excess of that already for the first month of 2023. So we expect to see very strong continued margins from the nickel matte side of the business. I mentioned the new director appointments of Chris and Binghe, and we formally welcome them and they will bring -- they bring a wealth of experience and insight to the Board. The awarding of Green PROPER rating, [Audio Gap] which I will now discuss on the next slide, if you could just move through to the next slide, please. This really is a transformative transaction. There's a number of elements to it. But what it will see is nickel industry is transitioning, and we've commenced that already at the end of last year from clearly a Class II to NPI producer to a diversified producer of Class II and Class I nickel products but also a diversified suite of Class I nickel products. So that being nickel matte, MHP and then nickel cathode or nickel sulphate in the future. And so that will see us change our production mix somewhat from -- in -- over the coming years to about 2/3 of our production being that Class I battery nickel metal, and that's really a part of the nickel market that we see a lot of upside and a lot of growth. Just going through the various elements of the agreement. The first was to acquire a 10% interest in the Huayue Nickel Cobalt HPAL project. That project is built in a little over 18 months during the pandemic as the world's fastest build, lowest CapEx, fastest ramp-up and lowest operating costs along with one of the lowest carbon intensities, so less than 10 tonne of carbon to a tonne of nickel. It really is a showpiece of what a successful HPAL plant can look like. We're delighted to be able to acquire a 10% interest in that because we believe that what it will do is provide a see-through for NIC investors to come to site, perhaps see what a successfully operating HPAL looks like, the margins that are very strong. We've seen months of up to USD 10,000 a tonne, a very low capital intensity. And there really is now, I think the next wave of growth in Indonesia and nickel will come through these HPAL plants. This acquisition also gives us access importantly to 6,000 tonnes of MHP, which we can market. So that will allow us to be able to start and foster relationships with third-party EV and OEMs with a view to potentially bringing them into the much larger HPAL project, which was announced. That, again, will come with a CapEx guarantee. And I can't stress how important that CapEx guarantee is, particularly if you look across the nickel and lithium space in Australia. There's been significant CapEx blowouts that have been reported recently by many listed companies, some in the order of 2 to 3x magnitude. So that future HPAL project with that CapEx guarantee, nameplate guarantee ramp-up is about as risk-free as you'll see for an HPAL project. It's also the same team effectively that built the Huayue Nickel-Cobalt Project. And so we're obviously delighted to be able to secure that team to build the next generation of HPAL projects in partnership with [ Tsingshan ]. We also increased our stake in Oracle Nickel to 80%, USD 75 million in cash, and that aligns our interest across all of our [indiscernible] at 80%, that $75 million valuation for 10% that is the same valuation that we initially invested in [indiscernible] a year ago. And so I think it again reflects a very strong relationship that we have with Tsingshan and the value accretive deals that we're able to do with them. The final element of that agreement there's 2 option payments, 1 which is the option for the HPAL, which I've just been through, and that will produce nickel sulphate or nickel cathode. So we'll go further down the value chain and capture more of the margin that would be otherwise realized if we were just producing an MHP and an option to invest and construct in a low-grade to high-grade nickel matte converter of about 50,000 tonne capacity per annum, and we've obviously seen strong margins there. Really, the only bottleneck to producing more nickel matte is that converted capacity. Finally, we completed a USD 471 million capital raised. There was USD 185 million fully underwritten institutional placement. That was very well received. The bids into the book were very strong. And I think it was a strong endorsement of the company's strategy with project on, and we're also going through the final stages, awaiting for approval and then shareholder approval for a conditional placement of NIC shares to Shanghai Decent, which will bring their ownership in NIC up to around 28%. We see this as very good. I think it reflects the strength of the relationship. And coming back again, we've been able to successfully grow very rapidly in the Class II NPI space. As everyone's witnessed through HNI, RNI, ANI and ONI, through the very strong relationship that we have with Tsingshan, we'll now look to replicate that in the production of Class I nickel. As I said, that will again come with CapEx guarantees before undoubtedly come with Tsingshan's execution expertise and speed and ability to ramp up and tell we're very much looking forward to that. That concludes the presentation. So looking in summary, 2022, as you've seen from all of the production and financial metrics very, very strong year, a significant increase on 2021. We expect more of the same in 2023, as we've seen a recovery and strengthening in our margins. As we see Oracle Nickel ramping up and we're yet to see the contribution from that. We now look forward to, as I said, diversifying our nickel production as we strive to become the world's largest diversified list of nickel producer of Class I and Class II nickel. The move into the Class I nickel will go towards materially producing our carbon footprint. We will continue to look to grow our resource base. And as I said, we had 3.7 million tonnes of contained nickel metal is not a small number, but we have much larger ambitions to continue to grow that significantly. And of course, as we've done, we will continue to fund these things in a responsible manner and obviously look to retain our dividend with a view to growing it at the appropriate time if we see the strength of cash flows that we believe we will see in the future. So with that, that concludes the presentation. Thank you, everyone. I'm happy to turn over to Q&A.

[Operator Instructions] Your first question comes from Adam Baker from Macquarie.

Just on Hengjaya, I appreciate you got the haul road under construction, have it coming online second half of this year. Just wondering what is happening with the jetty operating at 3.5 million tonnes per annum when that haul road comes online. Is that jetty going to shut down? Or is there a potential upside to getting a 13.5 million tonnes per annum run rate to IMIP?

Yes. Thanks, Adam. We will continue to still operate the jetty. The US 10 -- sorry 10 million wet metric tonnes, is a target for the haul road only currently. One of the things that we will need to do is we will obviously need to just seek. And every year, we basically submit a plan to the government for what our intended production volumes will be, so we'll obviously look to significantly increase that. But to answer your question, we are looking at 10 million tonnes coming down the haul road purely and with the opportunity to supplement that with additional tonnes coming through the jetty. So at those sort of numbers, that makes us the largest ore supplier to the IMIP.

Yes. Great. And you've obviously got quite a bit of limonite built up on site there. Is that something that you can bring across straight away? Or is that something you've got to kind of drift feed across? And moving forward to the mid- to long-term, the breakdown between saprolite and limonite, is that around 40% saprolite to 60% limonite? How should we be thinking about that in the mid- to long-term?

Yes. The breakdown for the haul road for that 10 million tonnes that I mentioned, we'll be looking at about 6.5% -- sorry, 6.5 million limonite, 3.5 million saprolite, so about those numbers that you've mentioned there in terms of split.

Yes, sure. Awesome. And the FIRB approval, is there anything getting held up on that end? When can we expect to see that come through? And then I guess when you get that approval, you go straight to the shareholder vote for the initial placement. Is that right?

Correct, yes. We don't expect any hurdles. I mean we've done this before, and so that is imminent. And yes, once we have that emulated shareholder approval and the independent expert report is basically done.

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

Great set of results. A couple of questions. Firstly, just on the sales license from Oracle. I think you just mentioned that will be granted for the June quarter. Is that right? And if so, will we see those production from the -- mark the current quarter held over until then [indiscernible] as a result of that?

Yes, you are -- best case, we may see it end of March. But my feeling is it may not be issued until the second quarter. So there may be a pleasant surprise for this quarter, but I don't think it will be any material volume. So I would be probably be forecasting on seeing sales coming in the second quarter. So I certainly wouldn't be putting any down for this quarter. I said there may be a pleasant surprise. But given that we're dealing with government bureaucrats, I think take it to look at the second quarter.

Okay. Perfect. And secondly, the Green award for the Hengjaya Mine, so the mine is sort of a step removed upstream, I guess, you might say, from the OEMs where they come in as direct customers. But how important is that -- you mentioned they visited the site. How important is that in the whole kind of EV supply chain strategy? How much weight does that does that carry?

Yes. Look, I think it's probably the most critical element of what is the biggest concern. And I think the HPALs have now proven themselves, particularly with HNC, and that carbon intensity, that's one of the lowest globally. I should add that how they're able to achieve that is they have the world's largest sulfuric acid plant, which generates a significant amount of heat in the production of sulfuric acid. And therefore, that allows a lot of the power to be generated simply through that reaction. So the power requirements are very low. . They are using dry stack tailings, which is -- that's best in breed for tailings management. So I think the tailings element of a HPAL production has also been answered. And so now it's really what is the source of deal. Obviously, given the nature of the mining operations, large areas of land are disturbed, so it's important that these areas are rehabilitated properly and also mine properly so that you don't see runoff of laterite into rivers and local villages and things like that. So look, very, very important. And so as I said, we are very proud of the fact that our mine is a showpiece and we're getting a lot of recognition, not just Green PROPER. We've won a [indiscernible] awards for various initiatives and our operations, including best mine site rehabilitation from the forestry department.

And just finally, you mentioned maiden resource for Siduarsi. Sorry, I didn't quite catch the timing on that one, later this year?

Yes, middle of this year.

[Operator Instructions] Your next question comes from Matt Greene from Credit Suisse.

Just a follow-on from the Oracle sales license. Is this just a regulatory timing? Because if I recall, you mentioned the plant is operating well above 130% of capacity. So you don't have to see anything from an operational standpoint. This is just a regulatory process.

That's correct. So if you look -- and sorry, that's Angel that's operating at 138% of nameplate. If you look back at the Angel trajectory, very similar to Oracle. First line's commissioning in end of 2021, ramped up in the first quarter of 2022 and then was awarded its IUI in the second quarter of 2022. So this is basically following the same trajectory. So again, look, it's just a procedural matter. There's almost 100 RKEF lines in operation across the 2 parts that all received the license. Basically, all you need to receive it is to have completed all of the construction because it is linked to the importing of equipment that all of the equipment has now been imported into the country. The application has been made. So purely procedural, been done many times before. So we don't see any issues with that being issued, as I said, most likely second quarter.

That's great. Thanks for clarifyingn [ so I'm going to take you down on the Angel ] And then just, I guess, more longer term, you mentioned going NHP and you got the potential option to go to nickel sulphate. Do you have a sense of what the conversion cost is? You mentioned you want to capture more of that margin. But going all the way to that battery growth sulphate, do you have a sense as to what that will cost on a dollar per pound basis?

No. Look, we haven't gone that far down. And in fact, we're not looking to commence the project earliest end of this year most probably beginning of 2024. One of the reasons is that obviously a feasibility study will be undertaken. We will be the first to go further downstream and produce nickel cathode and nickel sulphate. And so at this point, I can't tell you what those anticipated numbers are. But certainly, if you look at the payabilities nickel cathode attracts basically 100% of the LME price. Nickel sulphate trades between sort of premium to deficit, and you may have seen that as Huayue has now approached the LME with its own marketable product, which we think is a positive for the LME because it will start to bring some more meaningful volumes and hopefully return it to a more meaningful market. So again, we don't have the actual numbers as yet. We will be undertaking the feasibility, but there is certainly a significant potential additional margin capture. Above producing MHP, which can range quite greatly in terms of payability. Anywhere from 70% up to 85% depending on the market, whereas we would expect certain [ capo ], we get 100% in sulphate premium or a small discount to LME depending on the market conditions.

Okay. And I guess, yes, I mean, how are you thinking about -- I mean, it sounds like it's just go to a sulphate or cathode. I guess in terms of going beyond that into the midstream in terms of precursor active materials, it's all [ BSF ] [indiscernible] investing a bit in the MHP plant in Indonesia. Is -- are you getting signals from the government as to are they wanting to go that extra stage to precursor? And obviously if you're going to be the first mover in potentially producing battery grade sulphates, I would suspect you'd be a key contender and get involved in that next stage. Is there any sort of commentary you could provide on kind of how you see things panning out?

Look, it's a very good question. We -- obviously looking for the first mover advantage in terms of sulphate and cathode and obviously, a number of large battery producers broken ground. Hyundai has broken ground on the first electric vehicle plant. We actually just returned from a few days in Shanghai with the Chairman of Tsingshan, who took us around. They now have their own battery plants in China, producing significant amounts of battery for EV market and also for home use inverters and those types of things for the solar systems. So it's certainly a strategy of Tsingshan. They're looking to diversify further downstream into the battery business. This is really the first sort of step for us, still quite a lot to do with the HPAL. But look, we will always look at opportunities if they're value accretive and if we can see the -- where we should take the company. But at this stage, the focus -- the next focus really will be on just executing that nickel sulphate and nickel cathode strategy and then diversifying our production pace into more of that Class II -- sorry, Class 1 nickel and cobalt space.

Your next question comes from [ Lawrence Kennedy ] from [ Buxton ].

Yes, Justin, just had one a little bit away from the general topic. But Huayue I think is a recent company we have bought into, if I am correct, they have an interest in the big massive lithium project in the Democratic Republic of Congo. I think the exposure there is in excess of 200 million shares. It may go to 250 million. I think the average is about $0.78 through a listed company in Melbourne. The project has just been revoked. Has anyone been discussing if there were going to be major losses with Huayue? It's a little bit ahead of time hasn't quite been resolved, but the DRC have revoked the project. So would there be losses perhaps handed down in the future that does occur?

Yes. Look, thanks, [ Lawrence ]. We were actually in Shanghai, as I mentioned, just 2 weeks ago and the Chairman of Huayue was there. I think, similar to the short [indiscernible] encountered in March of last year, these are companies that have significant operations talking in the tens of billions and very strong balance sheet and good support and actually support each other. So look, yes, that -- as we all know, projects can be revoked from time to time, particularly in jurisdictions such as the Democratic Republic of Congo. So look, I didn't expect any material impact to Huayue's business. And in fact, the margins on this particular HPAL plant, as I mentioned, in excess of $10,000 a tonne. But it is an interesting point that you raised that a lot of these Chinese companies, including Tsingshan, who has gone into a JV with Eramet in South America in lithium, are clearly building up not just supply of nickel and cobalt, but other battery metals. And so I think that indicates where they see the future heading in Indonesia, particularly in terms of development.

All right. Okay. I take it that if the project is revoked or has been revoked, there's large exposures, so there may be write-ups, but thanks for your explanation.

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

Thank you again, everyone. Look, I think, as I said, very, very strong 2022. We're looking forward to an even stronger 2023 as we continue to grow our nickel production, our EBITDA, our Class I nickel exposure, and we look forward to reporting a strong set of results for the first quarter of 2023 in the coming weeks. So thank you, everyone, again, for your time.

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