Nickel Industries Limited (NIC) Earnings Call Transcript & Summary

Thank you, everyone, for your attendance today at such short notice. And apologies that we don't have the online version. So we'll ask you to refer to the presentation that was in the announcement. The deal did come together quite quickly. And so then there wasn't enough time to line things up. But we're very excited to announce the strategic partnership with United Tractors. There's 2 elements to the transaction. The first is a conditional placement of AUD 943 million at a placement price of AUD 1.10, which represents a 27.2% premium to our last traded price as of 8 June. This would take UT's holding and it's through its subsidiary PT Danusa Tambang Nusantara or DTN’. This will take it to 19.99% shareholding within Nickel Industries. If you look at the chart there on the right, you can see the pro forma ownership structure. This does include the issue of shares to Tsingshan for the HNC acquisition. But you can see that Decent Tsingshan would hold 22.5%, United Tractors 19.99%, and remaining shareholders 57.5%. The second element to this announcement is a collaboration agreement for the ENC HPAL Project. DTN intends to participate in the acquisition of a 20% equity interest in Stage 1 of the ENC Project. I should note that the anticipation in Stage 1 will be at a valuation of USD 2.5 billion. You would recall recently that the value was negotiated down to USD 2.3 billion. The difference in that valuation amount, NIC will retain that difference. And so that will give cash to NIC. As part of this announcement, we are also pleased to announce a further increase from 67,000 tons of capacity to 72,000 tons of capacity with no increase to the CapEx, which further reduces the capital intensity and enhances the project economics. This is very reflective of the strong relationship that we have with our largest shareholder and partner, Shanghai Decent. When the deal was originally announced, it was USD 2.5 billion of CapEx with 60,000 tons of capacity. That CapEx amount was then reduced to USD 2.3 billion with the capacity increasing to 67,000 tons. As I said, I'm very pleased to announce a further increase to 72,000 tons. This represents a 20% total increase in output since we first made the announcement, but very pleasingly at 9.8% reduction in CapEx from when we first made the announcement. This certainly backs the trend that you will see across the battery metals complex, where there seems to be a consistent draft announcements regarding CapEx blowout. We also do believe that a further CapEx reduction may be possible should we elect to go ahead with ENC Phase 2. And the partnership with United Tractors will allow us potentially to unlock Stage 2, which would be a doubling of the capacity that is envisaged in Stage 1. If you look at the right page, you can see what the ownership in the ENC Project would potentially look like. Nickel industries will hold 55%, Shanghai Decent 25%, and United Tractors 20%. This is a reduction from our originally stated 60% to 80% ownership. We always would intend that we would make room for a strategic partner. And we're very comfortable with that number at around 55%, given that if we do move into even Stage 2 ENC, that ultimately, it actually reduces our funding burden required for the ENC Stage 1. Moving to Slide 5, a bit of a summary on who United Tractors is. UT is the major shareholder in Astra International and Astra holds 59.5% of shares in UT. Astra International's ultimate parent is Jardine Matheson. They are a diversified Fortune Global 500 company, have a diversified long-term portfolio with a very strong focus on Southeast Asia and China. So they have its footprint in Indonesia, Singapore, Hong Kong, Vietnam and China. This diversified portfolio includes automotive, engineering and heavy equipment, mining, construction, energy, financial services, hotels and property. By the numbers, their FY '22 revenue was USD 37.7 billion. They have assets of USD 89.1 billion. And across this diversified portfolio, they employ some 425,000 employees. UT is Indonesia's largest industrial conglomerate. Astra, who is the largest shareholder, is the 6th largest listed company in Indonesia. UT has a very diversified portfolio, which spans mining, contracting, construction and energy. By the numbers for UT, FY '22 revenue of USD 8.3 billion. USD 1.4 billion of net profit. They currently sit on USD 2.3 billion in cash, and they employ over 32,000 employees. If I could ask you to move to Slide 6, just to give a bit of an overview and summary on Astra International. I mentioned earlier that the ultimate parent is Jardine Matheson, who hold a 38.3% shareholding in Astra. They are the largest listed conglomerate in Indonesia. Their diversified portfolio includes heavy equipment, mining, construction, energy and automotive. On the heavy equipment mining side, they're the partner of choice for Komatsu, Sumitomo, and Kansai. On the automotive side, they have very strong partnerships with Toyota, BMW, Daihatsu, and Honda. They're very dialed in to the automotive space, particularly in Indonesia. By the numbers, USD 20.3 billion of revenue for FY '22, and USD 1.9 billion of net profit, USD 26.5 billion of total assets, and in excess of 200,000 employees. Moving on to Page 7 now that I've given an overview of the transaction and the background to the shareholders. As I said earlier, we see this as a transformative strategic partnership with a highly credible and significant regional investor. They have a deep knowledge and history in Indonesia, particularly in the Indonesian mining, construction and automotive landscape. The injection of capital allows us to effectively fund the ENC Project for Stage 1, and we envisage that no further equity issuances will be expected by Nickel Industries to fund the ENC Project. There may have been some overhang on the stock as to how this ENC Project is going to be funded, and we believe this investment answers that and should allow us to move forward, subject to a positive FID rapidly to commence the ENC Project. This investment also brings us the potential to look at and explore and expand the ENC Project. So rather than just the Phase 1 of sort of 70,000 tons, that potentially could be doubled. And UT has indicated their very strong desire to also participate in that second stage, and that forms part of the collaboration agreement that we have with them. What the diversification into the ENC HPAL means, and we did it initially with an acquisition of the 10% of the HPAL, is it gives us a fully diversified nickel product offering across NPI, nickel matte, MHP, nickel sulfate, and nickel cathode. It changes our product mix from Class 2 to Class 1 where potentially, if we did both stages of ENC, we would be looking at our product mix of Class 1 nickel being very close to 90%. That Class 1 does have higher margins and a lower carbon intensity. It also allows us to diversify our customer base and continue to work to attract a strategic player from the EV or battery space. On Slide 8, you can see here the transaction details. For the conditional placement, I mentioned at the beginning of the call, 857 million NIC shares to be issued to UT's subsidiary DTN for AUD 943 million, which represents 19.99% of the pro forma ordinary shares outstanding upon completion. The placement price of AUD 1.10, which represents a 27.2% premium to the last traded share price. UT will have the right to appoint a Director to the Nickel Industries Board. The key documentation behind that is just a conditional share subscription agreement. The timetable for the execution of the issue of shares with shareholder approval will be shortly expected early in Q3 of 2023, as is completion. There are some key conditions precedent to the completion of this placement, and that is the positive approval for the placement to Shanghai Decent for the acquisition of the 10% equity interest in the HNC HPAL Project, and that would require Nickel Industries shareholder approval for the conditional placement, and that needs to be achieved before the 29th of September 2023. The second element of the collaboration agreement, which to mention. UT intends to participate across ENC Phase 1 and 2 at a 20% level. We've executed the collaboration agreement. If we make an FID investment, we will nominate DTN to acquire a 20% interest from NIC in the ENC Project. If we do not make a positive FID decision by 29th of September, then that collaboration agreement will terminate. Just in regards to moving towards that FID, we are about to appoint, in the coming days, a global Tier 1 engineering process firm with big HPAL experience as well as very strong Indonesian experience in HPAL. They will provide us with a third-party audit and full review of the ENC feasibility study. And that will assist the NIC Board in raising or not raising an FID. Again, that FID intention is to make that before 29th of September 2023. There are also conditions precedent to this transaction: completion of the HNC placement; completion of the placement to UT; obviously a positive FID to invest in the ENC Project, and completion of the feasibility study and additional due diligence along with shareholder approval from NIC's shareholders. Moving to Slide 9, the transaction time line. The shareholder meeting to approve the HNC placement is set for, say, 5th of July. As I've mentioned earlier, we will be looking to seek shareholder approval for the conditional placement early in Q3, along with obviously a lot of those shares, assuming that we receive shareholder approval. To, again, summarize the transaction. United Tractors, as I mentioned, direct subsidiary of Astra, whose ultimate parent is Jardine Matheson, a Fortune 500 global enterprise. Astra is the largest listed conglomerate in Indonesia. They're a partner of choice for many large international operators, and I went through those names earlier, Komatsu, BMW, Toyota, et cetera. United Tractors is one of the largest heavy equipment distributors in Indonesia and Danusa Tambang Nusantara has expertise in the Indonesian mineral mining sector, particularly in the energy and also the gold mining space. Jardine, through its investments, has a very long-term approach to capital allocation. They've been a major shareholder in UT and Astra for excess of 20 years. And we see that same relationship and long-term approach as a very good fit with NIC and our philosophy and also that of our largest shareholder, Shanghai Decent. Being obviously the largest listed conglomerate and sixth largest listed company in Indonesia with in excess of 200,000 employees, they have a very deep local knowledge, very strong network throughout Indonesia, and very strong operational expertise, particularly in mining services. One of their subsidiaries, PAMA, is one of the largest local mining contractors in Indonesia. They have significant financial strength. As I mentioned, UT has USD 2.3 billion of cash sitting on its balance sheet and Jardine Matheson assets as I mentioned, USD 89.1 billion. And so this investment obviously significantly strengthens our balance sheet and allows us to pursue our desire or aspiration to diversify further into the Class 1 nickel space. Finally, on Slide 11, you can see in the chart on the right, where NIC sits today at 83,000, to jump-ups to the left there. So if we go ahead with ENC Stage 1, and if we were to execute on ENC Stage 2, where that would place us amongst the global nickel producers. You can see there stage movement to 196,000 tons of nickel per annum makes us clearly the fifth largest diversified nickel producer in the world. We're already today a top 10 global nickel producer. And we've been able to achieve this and we could potentially achieve the 196,000 in under 10 years from IPO. And that's really due to the strong relationship that we have with Tsingshan and the CapEx guarantees that we benefit. We are the first HPAL or ENC is the first HPAL to be announced in Indonesia. We're not just a CapEx guarantee, but a nameplate guarantee, a time frame guarantee, and also a diversified product mix of not just MHP, but also nickel cathode and nickel sulfate. And this allows us to unlock our aspirations to really transform the business into that Class 1 nickel space. We've had a very strong presence in the Class 2 NPI space. We have the largest holding outside of Tsingshan of NPI in Indonesia. And we will look to replicate that growth in the Class 1 nickel space. As we were in NPI, we look to be an early move up. And we believe that teaming up with UT, Astra will enable us to achieve this goal. With that, thank you, everyone, and I'll now hand over to questions.

[Operator Instructions] Today's first question comes from Cameron Taylor from Bank of America.

So my first question, why are you issuing equity at AUD 1.10 per share? Is this what you value the company at? And given the recent independent expert report findings, how do you view their controlling interest value for Nickel Industries at AUD 1.54? I've got a couple more.

Yes. Chris, do you want to speak to that one?

Yes, sure. No problem. I think, Cameron, looking at solely controlling interest, these guys do not have control. They're a 19.99% shareholder. We still have a larger shareholding than them as well. So I don't think it is fair to say that they should be looking at the controlling perspective. On top of that, as part of our shareholder vote for the 5th of July, the independent experts also don't need to opine on this transaction, that we'll be providing an update on what this transaction means for shareholders in the context of the existing AGM. And I think, on top of that, they probably, I expect, would outline just like they did in the HNC transaction, independent expert report. I expect that they will outline all of the other strategic benefits that are contained in that Justin just run through, they will probably allude to those as well. So I don't think it's a straight like-for-like comparison. Is it what we value the company at this share price? No, we think -- when you look at the growth profile that this transaction is unlocking, and specifically, the opportunity to move from just Stage 1 ENC Stage 2 as well, we think there's a lot of benefits and a lot of value for the company in that.

Also, are you concerned about the reduction in free float at all, given that Shanghai Decent and UT will be large shareholders following the approval of the conditional placements.

I'm not concerned at all. We're not acquiring other people's shares. It is still going to stay the same. The existing number of shares that are available for trading today will be available should this transaction close?

Okay. Just on the Stage 2 CapEx and timing, are you assuming similar CapEx to Stage 1. Would you assume to get the similar sort of CapEx guarantees? Or are there any other integration synergies that can reduce that CapEx for Stage 2 compared to Stage 1.

Justin, do you want to run through that?

Yes. Look, we are confident that there will be synergies as we pace that one. And so we are very optimistic that Stage 2 needs to be renegotiated at a meaningful reduction in the CapEx should we go ahead to Stage 2.

I'll just ask one more, if I can. Last one. You mentioned in the release that you're pursuing growth opportunities. You will be pursuing growth opportunities in the Indonesian nickel space. Have you got any specific examples of what these projects are given that United Tractors will be in partnership with them?

The growth opportunities, the immediate growth opportunities outside of ENC are really resources, and we remain committed and focused on increasing our resource base. And so UT does bring a very good mine in the Stargate mine. And for NIC, our focus is to continue to grow that resource base as resources continue to increase in value given the significant amount of processing capacity that's now online when we measure.

[Operator Instructions] Your next question comes from Tim Zhao from Lazard Asset Management.

Just a quick couple of questions for me. Can you just confirm the process still for ENC Stage 1. So I calculated, the remaining CapEx from you guys is about USD 440 million. Is that correct?

I'll take that, Justin. Look, the simple way that everyone should look at this is, the stage 1, it's USD 2.3 billion for 100%, where if this transaction goes through, we will be taking 55% of that. So that's USD 1.265 billion. The number slightly reduces because, as Justin alluded to, if it goes through UT, it is coming in at a higher valuation than we negotiated for ourselves with our partners. So they're coming in at USD 2.5 billion. That additional USD 200 million and 20% of USD 200 million is obviously USD 40 million, that additional USD 40 million accrues directly to Nickel Industries, so it reduces the amount that we have to pay. So we're just over USD 1.2 billion. And then look, as I've said before, we will be looking to fund this with a mixture of debt and equity. That has not changed. This transaction doesn't change that. So we have a total funding requirement of USD 1.2 billion over the course of the next, say, 2 to 3 years of the construction build. We've got our existing operating cash flows and we've now got another -- we will have another AUD 900 million.

Right. So I guess calculating USD 1.2 million minus the USD 628 million that you're getting from the UT, right?

You can look at it that way, but we've obviously got -- as I said, we're looking at -- and I've said this to all investors and the investor community, we are in discussions with debt financiers at the project level as well. So that remaining amount, it may not be that entire amount of equity just go straight in like that.

Right. And also on Stage 2, I think, Justin mentioned about there's no further equity issuance of Stage 1 and 2 positive transaction. Does that mean, assume USD 2.3 billion for Stage 2, or probably slightly lower, at 55% interest. So there's another USD 1 billion funding requirement that will come in from the debt holdings. Is that the way I should think about it?

No, no, no. Absolutely, we do not foresee another equity issuance at this stage. As I've been very clear with all our debt and equity investors, the funding for these HPALs, you don't put all of the money in on day 1. It's required over the timing of the construction. So we have a lot of time to continue to build our cash flows through our existing operations and through our modeling. We do not expect to have to do another equity raise.

Last question, if I may. Does this transaction prevent you guys to deal with a third party for the next 3 months, for better terms -- does this transaction prevent you guys to deal with another party for the next 3 or 4 months?

Absolutely not. One thing that Justin mentioned is that we do retain the right to -- the percentages that we've outlined there, the 55%, 25% and 20%, we do have the ability to introduce other strategics in terms of targeting the likes of a global battery maker or global EV maker to supplement what UT brings to the table as well.

Your next question comes from Kate McCutcheon from Citi.

Justin and Chris, congrats on getting this way at a premium, well likely to. Just some comments on the decision to not give your either institutional and retail shareholders an opportunity.

Justin, do you want to do that? Or do you want me to take that?

If you want to take it, Chris...

Okay. Kate, I think when you look at the size of the premium, 27%, that's obviously to the last close. It's not as if that we've issued at a dip either. When you compare it to the 30-day VWAP, 60-day VWAP, it's very similar to our premiums. If our institutional and retail shareholders want to buy the 27% premium, I would imagine that they would have been in the market doing so already.

Okay. Makes sense. And then are there any escrow clauses on the share issuance or any link to the equity with the ENC stake that we should be aware of?

Sorry, can you just repeat that question?

The 20% stake that United Tractors will take, are there any kind of escrow periods on those shares? Or is there anything that ties the shares to the 20% stake in ENC per se?

No. We will be, for the downstream investment, as we said -- or as Justin said, we're still moving to definitive documentation on that. It may be contained in the definitive documentation, but at this stage, we have got no escrow clauses in there.

Okay. And then lastly, I think you did kind of touch on this with Tim's question. The CapEx for Stage 1 of ENC, how do you see that profile flowing? Will it be pretty evenly staggered or is it to be a construction time frame? You mentioned you went out for the 55% on day 1.

Yes, that's right. The money is not going to be on day 1. I think as you've seen with our previous investments and the Oracle is a good example. As the project gets constructed, funding will be required along that same period. Will it be exactly matched? No. Will it be faster in some points and slower in some points? Yes. That is all still to be determined should we actually, one, get a positive shareholder vote on the 5th of July to actually progress through to having the ability to do an HPAL project with Tsingshan; and two, still subject to the finalizations just instead of the feasibility study and on the back of that a potential final investment decision by the Board of NIC.

[Operator Instructions] As there are no further questions at this time, I'll now hand back to Mr. Werner for any closing remarks.

Look, I'd just like to thank everyone that was on the call. I appreciate it's a Friday before a long weekend. Chris and myself will be in Sydney in Australia Tuesday and Wednesday of next week. As always, happy to take any further questions or meet up with anyone as required. So thank you again for your time.

Thanks, everyone.

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