Nickel Industries Limited (NIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nickel Industries Limited 2023 Half Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Justin Werner, Managing Director. Mr. Werner, the floor is yours, sir.

Thank you. And thank you, everyone, for your attendance this morning at the Nickel Industries half yearly results call. It's really been a half of 2 quarters. The first March quarter of this year was a record quarter for us, and we achieved for the first time RKEF EBITDA in excess of USD 100 million. And remembering that, that didn't really have any contribution or very little contribution from our Oracle Nickel operations, which are now fully ramped up. March was certainly -- so the June quarter was certainly a different quarter. It was a bit softer, still managed to deliver USD 43.9 million in EBITDA. Happy to report that we are seeing some green shoots, certainly strengthening NPI pricing and further reductions in our RKEF OpEx cost base, which I'll touch on a little bit later on. To move into the numbers for first half of 2023. Sales of USD 932 million, so almost USD 1 billion in sales. Gross profit, $126 million, down to profit after tax USD 49.1 million and quite strong EBITDA of USD 141.8 million. And we also declared an interim dividend of AUD 0.02 per share. Production-wise, a record half, 59,957 tonnes of nickel production, placing us well above 100,000 tonnes of nickel metal production on an annualized basis. NIC share of that production is 45,000 tonnes. RKEF sales revenue, I've touched on, USD 932 million and RKEF EBITDA of USD 147.2 million. I think one of the major milestones was the commissioning of the Oracle Nickel power plant just recently. And we've already seen, from the point of commissioning, a significant improvement in the margins from our Oracle Nickel operation. And so we expect that to deliver to a strong September quarter. In terms of mine production, greater than 5.2 million wet metric tonnes were mined. EBITDA was on track with last year at about USD 26.1 million. We did complete also the HM to IMIP haul road, which is a significant milestone. That will now allow us to rapidly ramp up that mine production from the current rate -- sorry, the mine sales from where we sit today of about 3.5 million tonnes per year to around 10 million tonnes per year. That's significant ramp-up. First trucks that will be traveling down that haul road are basically beginning at September. On the corporate front, we executed electric vehicle battery supply chain strategic framework agreement, USD 400 million unsecured note issuance and a concurrent refinancing tender offer of our existing bonds and that new bond or those new notes are trading very well. We acquired a 10% interest in the HNC HPAL project and an additional 10% interest in the Oracle Nickel project. Then I'll talk later in the presentation about the significance of the acquisition in the HNC HPAL project and what that means for our future HPAL aspirations, which has really been encompassed in the HNC HPAL, which was also announced which has significant production capacity, 72,000 tonnes of nickel. But not only that, again, CapEx guarantee, time frame guarantee, nameplate guarantee will produce more than just MHP. It will produce 3 product streams, MHP, nickel sulfate and nickel cathode. Again, I will talk to that later on. And then finally, I'm very pleased to announce the conditional share placement and collaboration agreement with United Tractors. That's for AUD 943 million. It's been done at a significant premium to where the share price is trading today. And we view UT as probably the best blue-chip Indonesian investor that we could attract. And what it will do is it means that basically, when we make the final investment decision to move ahead with the ENC HPAL, NIC could be fully funded for its 55% interest. If we could just move to the next page, please. Safety for the 6 months to 30th of June, 5.46 million work hours without a single lost time injury across our RKEF operations. We're very proud of that. In total, our -- we're yet to see a fatality or significant injury at our RKEF operations. The same thing at the mine. During the first half of 2023, no LTI is reported and over 7.3 million work hours were registered since the last reported LTI, which was 3 years ago. So across both of our operations. That's a significant number. Cumulatively, that's 12 million work hours without a lost time injury. If we could just go to the next slide, please. Just in terms of the P&L summary. I mentioned sales, USD 932.3 million, significant increase on our sales number in the first half of 2022. Apologies, I'm not sure if there's a delay, but the next slide, please. I mentioned that there was a softening in our profit compared to the first half of last year that predominantly driven by OpEx costs and lower realized contracted pricing. As I said, though, we are, however, starting to see certainly improvements in the price and also a reduction in the OpEx cost. So we do look forward to finishing off the year with a strong second half. We could see EBITDA from RKEF operations wasn't a great difference there as well as EBITDA from mine operations. So those are tracking along quite nicely. Both of them, we should see significant expansion now with Oracle Nickel fully ramped up and will deliver its first full quarter this quarter. And the Hengjaya Mine with the haul road now in place, we should be able to see a significant ramp up there as well in terms of the production output. If we could just go to the next slide, please. We've still maintained a very conservative balance sheet. Assets close to U.S. -- current assets, USD 1 billion; total assets of USD $3 billion; net debt of around USD 292.6 million. I mentioned earlier, we successfully issued USD 400 million in unsecured notes, refinanced our USD 225 million senior secured notes, which was a key milestone for us that removed all of the security over our ANI operations. And we were able to tender for April '24 senior unsecured bonds for an amount of USD 80 million. In terms of our remaining debt, we have $400 million senior unsecured notes, 11.25% coupon on October 2028 maturity. So there's a long runway there. And then we have the USD 244.9 million, 6.5% semiannual coupon April 2024 maturity. But our balance sheet will be significantly bolstered further by the AUD 943 million placement to United Tractors. That will go to shareholder vote on Friday, 8 September. Based on proxy voting to date, we expect that to be approved and to receive unanimous support as have all of our previous shareholder votes for placements and for the project expansion and acquisitions such as Oracle. If we could just go to the next slide, please. In terms of production, you can see up 124% from this point in time last year. So a significant increase, 59,957 tonnes versus 26,733 tonnes for the same corresponding period last year. You can see the difference at the bottom of the page there in that realized price. The first half of this year, we averaged about 15,476. At this point in time last year, that was around 19,719. In terms of the Oracle Nickel production, you can see the contribution there of 15,347 tonnes. You can see Angel Nickel was 24,000 for the same period. So we expect Oracle Nickel in the next half year period to basically match that of Angel Nickel. But I think more importantly, match the margins that we've been able to generate from Angel Nickel. If we just go to the next slide, please. Here, you can see that steady ramp-up in production quarter upon quarter, and you can start to see the contribution from the various operations. Should we go ahead with the ENC project, you will continue again to see another step increase in those nickel tonnes produced. And I think probably more importantly, it will diversify our production base from where it has been historically, which is predominantly Class II NPI for the stainless market to Class 1 nickel products, so a suite of products, nickel matte, MHP, nickel cathode and nickel sulfate. And those Class 1 HPAL products come with a significantly lower carbon intensity and generally much stronger margins when compared to RKEF and NPI production. If we can just move to the next slide, please. You can see here, as I said, what's driven the reduction in margins and EBITDA. You can see the NPI price there in the gray. Pleasingly, the NPI price is up from its lows in July. We hit around -- it was about $12,800. It's now up to, you can see it today, at around $14,400. So that's $1,600 ton improvement above the lows that we achieved in July. I mentioned that our June quarter RKEF EBITDA was USD 43.9 million. Happy to say that our July RKEF EBITDA margin for just 1 month was over $30 million. Almost as much as what we produced last quarter, and that was just for a single month in July. And that's because we are seeing strengthening NPI prices and a reduction in our OpEx cost because we now are starting to see flow-through of reduced coal prices. So we're getting that double whammy of pricing, NPI pricing going up and our OpEx costs going down. Just go to the next slide, please. The Hengjaya Mine, as I mentioned, a record half year production, 5.2 million wet metric tonnes were sold -- sorry, were mined, 1.3 million -- 1.4 million tonnes were sold. With the haul road now coming online, we said we expect that half year number to now ramp up to somewhere around 5 million or 10 million on an annualized basis. So with 1.4 million of sales of saprolite and 328,000 tonnes of limonite sold, delivering USD 26.1 million U.S. EBITDA. Obviously, once that almost triples or does triple, we'd expect to see the similar uplift in mine EBITDA assuming that pricing and costs stay the same. If we could just move to Slide 10, please, on the next slide. The HM to IMIP haul road, as I mentioned, is now complete. First trucks are coming -- will be coming down the road in September. And I've just spoken about what that means for the EBITDA contribution or by our Hengjaya Mine. So on an annualized basis, it will now become a significant contributor to the cash flow of Nickel Industries. If we could just to the next slide, please. At the Siduarsi project, during the half, we drilled 2,074 holes or over 31,000 meters of drilling. We've now received almost 30,000 assays and have commenced the process of delivering a preliminary JORC resource for the Siduarsi project. That will then be used to assist in a feasibility study. And in conjunction with that, we've been working on various other technical studies and environmental studies. And so we look forward to updating the market with the JORK resource number and also updates on the status of the feasibility study. Next slide, please. So just to recap, a very busy first half. The acquisition of 10% of HNC HPAL for USD 270 million is a significant milestone for us. HNC HPAL has the world record for the fastest build, less than 2 years, fastest ramp-up in a matter of months, lowest carbon intensity. Currently sits around 8 tonnes of carbon per tonne of nickel, which compared to RKEF operations of around 60 tonnes, obviously, a significant reduction. Huayou has a road map to actually get HNC to be carbon neutral by 2030. What this 10% acquisition has done is it has allowed our investors to get a see-through into what a world's best-class HPAL operation looks like and to basically see that ENC will be a replica of HNC with those things and with those some improvements and some tweaks. And the major one being that we'll have the ability to produce more than just MHP. We'll be able to go further downstream into nickel sulfate and nickel cathode production. We did also, as part -- obviously, there was 2 option payments that were made, the $25 million option payment for the ENC HPAL Project and $15 million for the construction of a nickel matte converter. That is still ongoing, and we're still working towards looking to execute that nickel matte converter. That will get us a bit more control over our nickel matt production. Costs for the processing of low-grade to nickel to high grade have been increasing. So again, we see bringing that in-house and actually maintaining control of that has been very, very important. And we saw, particularly at the beginning of this year, very strong margins from nickel matte when compared to NPI. It would've been in the order of $5,000 a tonne versus $1,000 a tonne. So this would just give us further added flexibility to increase our nickel matte output in the future, if we think the market conditions support producing a greater amount of nickel matte than NPI. In terms of equity raisings, we completed a USD 270 million placement of Shanghai Decent at $1.02 per share as well as USD 16.4 million in placements to directors and a USD 185 million fully underwritten institutional placement, which was completed at the beginning of this year at the same price of $1.02. Once again, that institutional placement was very well supported and oversubscribed several times. As part of that equity capital raise, there is also an attached share purchase plan, which completed in March of 2023, and that resulted in raising an additional AUD 34.6 million. Moving on to Slide 13, please. We released, during the half, our 2022 sustainability report. This is our second sustainability report. And since that point in time, the company has gone on to receive numerous accolades and really has become the showpiece mining asset in Indonesia for sustainable and responsible mining. There's a lot of work still to be done, and we're focused very hard on that. But just to list off some of the accolades that we've received. We've won 7 trophies at the Environmental and Social Innovation Awards. We won silver award at the Asia Sustainability Report rating. Probably the biggest award was a Green Proper rating for our mine from the Indonesian Ministry of Environment and Forestry. We were one of only 2 mines, the other being Vale in Indonesia to receive a Green Proper rating. These ratings actually go beyond just mining. They go into agribusiness, they go into industrials. So across the many thousands of companies that are assessed, less than 5% have been able to achieve the Green Proper rating. So we're very proud of that, and clearly it's a reflection of the very good work that has been done. And we are striving towards achieving a gold rating, which, when achieved, would make us the first nickel operation in Indonesia to achieve that gold rating. And we're also nominated as a finalist in 3 categories of the Asia Sustainability Reporting Awards. We've seen -- and all of these awards have been given by independent third parties, who have come in and audited our performance. So we're in the top half of ESG performance in the global mining and metals industry, again, according to S&P Global. So we've managed to significantly improve our rankings in a lot of these indexes that are conducted by companies, such as S&P Global. So these are large, well-known, well-respected companies that are undertaking these audits and reporting back or even issuing these awards. I mentioned that successfully issued USD 400 million of unsecured notes. As I said, trading very well at the moment. And the important part of that transaction was the removal of the security over ANI and just extending our debt maturity profile. If we just go to the next slide, please. The condition of share placement to United Tractors for U.S. -- sorry, for AUS 943 million. That's at issued price of $1.10 which is a 27.2% premium to the last traded price before it was announced of $0.87, and is a significantly higher premium than that now based on where the companies is currently trading. That will represent 19.99% of the company's issued capital. UT's ultimate beneficial owner is Jardine Matheson, they are significant Fortune 500 global conglomerate with significant reach and operations across Southeast Asia. And UT itself has a very strong balance sheet, USD 3 billion in cash, over USD 8 billion in revenue last year. So as I said, we are delighted we see them as probably the best blue chip investment partner we could attract in Indonesia. And it goes further than just the placement into NIC. Also a collaboration, the conditional collaboration agreement for UT to acquire a 20% equity interest in the ENC HPAL Project for USD 500 million. The completion of the feasibility study is well advanced. And we expect an FID to be made this quarter. Pleasingly, when we originally announced the project, it was 60,000 tonnes, then it went to 67,000 then it went to 72,000. And more pleasingly, the CapEx guarantee has actually gone from USD 2.5 billion to USD 2.3 billion. With the nameplate guarantee and most importantly, a time frame guarantee. So this is a project that, if we reach a positive FID, has a CapEx guarantee and a time frame guarantee that will be delivered within 2 years. This isn't a project that will be done by the end of the decade or in the next decade. I think we've all seen the track record of Tsingshan to execute I think there's great confidence in that CapEx guarantee, that project being built on time being ramped up and delivering to its nameplate capacity. Again, can't overstate how important the CapEx guarantee is and a time frame guarantee, particularly given the current global economic conditions we find ourselves in, where there's significant inflation issues with labor supply and supply chain and logistics challenges. If we can just move to the next slide, please. Just a bit more on the ENC transaction. Nickel, with the collaboration agreement executed with UT, this would see Nickel Industries holding about 55% of the project. Shanghai Decent or Tsingshan, 25%; and then United Tractors holding 20%. So overall, in summary, strong start to the year. As I mentioned, very strong start in the first quarter, softer in the June quarter. But again, we are seeing much better conditions in terms of NPI pricing and also in terms of a reduction of costs. At Oracle Nickel, we had margins last quarter of around $500 and ANI of close to $3,000. So we expect to start to see our ANI margins start to match those of our Angel Nickel. And once that happens, which will be delivered this quarter, as I said, we're looking forward to a significantly stronger quarter this quarter than in our June quarter. And we look forward to a strong finish to the year with all of our RKEF operations ramped, up the contribution from HNC and the Hengjaya Mine ramping up and as well as an FID decision on the ENC HPAL Project. So with that, I'll hand over to Q&A.

[Operator Instructions] Our first question will come from Cameron Taylor, Bank of America.

Just a couple of questions around the ENC project, please. Noting that FID could be achieved in September the September quarter with NIC having 55% interest, can you talk about the decision-making process now involved Nickel Industries is? And are you comfortable with the time line? Have you seen enough of the HNC operation given you've just acquired 10%? And do you have any concerns around potential for oversupply given the number of proposed HPAL plants that are being constructed in Indonesia at the moment?

Yes, look, a number of elements to that. So look, I'll start with the first half, and then I'll hand over to Chris just to speak on the -- how we're looking at this from a funding perspective. Look, we have great confidence in the project and the ability for Tsingshan and Huayou to execute it. The track record is already there with HNC, and that was built during the COVID pandemic, so in more challenging conditions than we're facing today and delivered in less than 2 years. Look, we have a CapEx time frame guarantee as well. But in terms of execution, no, look, we're very confident. The feasibility study itself, we've engaged a Tier 1 global group that has a lot of experience in HPAL and including HPALs in Indonesia. They've done a red flag, peer review, and there's no fatal flaws, no red flags. And so as said, we're very comfortable with the feasibility study. And having the access to HNC and the ability to see actual real operating data, see real margins has given us a great deal of confidence as well in the ENC project with that. In terms of oversupply. I think what we're seeing here is exactly what we saw in NPI. It will be a race. And those who are at the front of the race will struggle to catch up if it will even be in the race. I was at the conference yesterday, the Indonesian government is basically at the point of probably banning any further RKEF lines for the production of NPI. We are one of the largest producers of NPI outside of Tsingshan. We have an 80% interest across 12 RKEF lines. We've been able to build that up very quickly and very rapidly. As I said, our newer lines, ANI and ONI are still making very, very strong margins, are still around $3,000 a tonne. We think the same thing will play out in the HPAL space. A lot of people are making announcements about HPAL, but what actually gets built and funded, I think, will be significantly less than what's been announced, and that will be for a number of different reasons. So again, we are looking to sort of stay ahead of the curve as we have been with NPI as we were with nickel matte, and as we look to do the same for HPAL. Again, we'll be the first to produce not just MHP but nickel cathode and nickel sulfate. So I think that's the key element here, too. We have product diversity. So we're not just locked into a single market. We will have flexibility to play the full spectrum of the Class 1 nickel products there, which hopefully should allow us to optimize our margins. With that, I'll hand over to Chris just to touch on from a funding perspective, how we've been viewing executing and funding the project.

Yes. Thanks, Justin, and thanks, Cam, for the question. Look, as part of our decision-making process for the FID, how we plan to fund this project is obviously critical. And we are in discussions with Shanghai Decent regarding the proposed time line for our required payments. I can confirm, as I've previously said, our expected investments into the ENC project if we move forward will be over the next 2 years. So the cash is not required upfront in the first 6 months. I've been in pains to let both equity and debt investors know that it's an investment over a 2-year time frame. When you look at the $2.3 billion acquisition or project value, that's 100%. 55% with the inclusion of UT will be USD 1.2 billion, just over USD 1.2 billion. We're about to get -- as Justin said, we've got our votes very favorable proxies to date. We've got our shareholder vote on the 8th of September, which will bring another USD 630 million cash in the door, into the treasury. We've got cash on hand now of several hundred million dollars. The plan is -- has been very open with debt and equity investors, is the plan is a conservative 50-50 debt equity split expected at the project level. So when you work through those numbers, our existing cash, the cash from UT, the time frame to actually being required to invest over the next few years, you can see that our existing operating cash flow is not expected to be required for this ENC investment. So we have significant operating cash flow that we will be able to use for our ongoing business ex ENC. So you can think that servicing obligations, you can think potentially increase returns to shareholders. And most importantly, with all of that, there is no further equity issuance expected to be required.

Okay. And I know obviously, you like the CapEx guarantee and the time line guarantee. But I mean just based on capital intensity, around $32,000 a tonne, we've seen others built less than $25,000 a tonne. Is there a reason why this is -- has a higher capital intensity? Is it because of those additional products that will be potentially produced from ENC.

I think I'll let Justin talk about some of the other projects, but you must remember, yes, there is other -- there's a nickel sulfate plant, there's a nickel cathode, electrolytic nickel converters or nickel cathode plant, there are additional costs just there. And then look, we do, as a listed company, we very much value the CapEx guarantee, the time frame guarantee and the commissioning guarantee. So there's no surprises for any of our investors. Now obviously, you don't get that for free. So there is additional cost in that over and above the sulfate plant at the cathode plant. And that -- I think when you look at what's happening around the world and some of our peer projects with these CapEx blowouts, we don't have any of that. But I'll hand over to Justin just to talk about some of the other projects and whether or not they've got -- they're actually fully baked in all the CapEx and the costs.

Yes. Thanks, Chris. Now look, that Chris has touched on there, a lot of these projects that have been announced, they haven't been announced with a CapEx guarantee. And that's obviously there's some value in that. And we don't mind paying for that value because that gives us peace of mind. Secondly, as Chris just touched, on a lot of these numbers that have been thrown out there, they are full development numbers. They don't include, for example, a full tailings facility that would allow tailings to be managed for the next 20 to 25 years. A lot of the auxiliary costs, which are large cost items have not been factored in to those HPAL announcements. And there will be obviously additional incremental CapEx over and above what's been built historically because we will be the first plant to go past MHP for the downstream into nickel cathode and into nickel sulfate. But I think, again, as I said, there'll be a lot of announcements made, I think, in terms of actual projects delivered and executed. I'm not that confident that a lot of them that have made these announcements to actually go ahead.

Okay. That's really helpful. Just one quick one before I pass it on. So you mentioned the IMIP haul road has -- is expecting to increase to 10 million tonnes program by the end of the year. Is there any downside risk to this figure? Like for example, does Tsingshan have to take all of that 10 million tonnes? Or is there any sort of downside risk to them nominating to take less?

No. Look, it's been probably well publicized, but there is a bit of an ore squeeze at the moment in Indonesia. That's predominantly because there has been a reduction -- well, there has been a clampdown on a lot of illegal mining activity. So a lot of those operations have been stopped. And so you are starting to see a supply squeeze. Look, I think -- we -- if you look at our RKEF operations and our HPAL operations, 10 million tonnes is not even enough to feed those. So even our own operations, we're not fully self-sufficient. So I don't see -- and we would obviously prioritize our role above anyone else's into our operations. So I don't see any risk there of the not taking the ore.

Next question we have will come from Adam Baker with Macquarie.

Just one on the ENC project. It sounds like you're getting a lot more optimistic on FID projects upcoming in this quarter and then construction December quarter, potentially. Just wondering, the 24-month commissioning, will come right to commissioning, do you think there's any upside to this figure given the track record that Tsingshan has? And why are you building these projects, is there any potential upside to getting this into production earlier than Q4 2025?

I think look, '24 is a conservative and achievable number. We certainly won't be going out there promoting that it will come online earlier. And so we're sticking with 24 months. But we've all seen a track record. Safe to just say it's going to be 24 months.

And maybe just one on the cost of production at Hengjaya. Just wondering with the saprolite cost of around $30 a tonne and the limonite costs of about $30 a tonne. Now that the whole growth in place, what can we expect these costs to reduce to? Or maybe another way of asking the question is, what component of the cost historically is coming from port and barging costs?

Yes. I think we're expecting probably somewhere around $2 to $4 a tonne improvement in our costs across our mining operations.

And finally, maybe just on nickel prices at Hengjaya. Like we're seeing the improvement in NPI prices this quarter. So just wondering if you could remind us on the kind of saprolite and limonite prices you're seeing at the moment? And are those prices still quite correlated to what the LME nickel price is doing? Or is there a different mechanism behind those prices?

There is at the moment, the pricing has increased slightly. So I mean our average saprolite price last quarter was about $40, and our limonite price was about $20. I think we will see a couple of dollars a tonne increase, and that's been driven mostly by what I alluded to earlier is that there is a bit of a supply squeeze, which has really just been from the shutting down of illegal operations and a bit of clamping down on the quota that the government is allowing to be dug up and mined. So I think over the coming months, and I think it will be a temporary thing. But I do think we will see a bit of an increase in both saprolite and limonite costs over the next couple of months.

[Operator Instructions] Next, we have Alex Papaioanou with Citi.

Maybe a couple of questions for Chris. Firstly, on HNC, how do you expect to report that share will be equity accounted? And where and when should we assume this effective from?

Yes, equity accounted. And we -- on acquisition or we only completed the acquisition this month or last month. So obviously, we'll start to report that in our 31 December numbers.

Okay. So effective from acquisition date?

Yes. So we should get close to a full 6 months of contribution.

Cool. And I might have missed this, busy reporting day, but is there a reconciliation of profit to operating cash flow? I'm just trying to reconcile that? Or is there any key differences that I should be aware of?

No, we haven't reconciled that, but I'm happy for you to, if you've got any questions, follow-up with me after this call.

[Operator Instructions] Well, at this time, we're showing no further questions. I would like to hand the conference call back over to Mr. Werner for any closing remarks. Sir?

Thank you, everyone, again, for your attendance. Just to reiterate, we look forward to a strong second half, particularly with our Oracle Nickel operations ramping up. And as I mentioned, a strong start in July. For now, our RKEF operations, particularly with an improving NPI price and a declining cost base. And obviously, looking forward to completion of the placement with UT and FID on ENC and further updates on the mine ramp-up and Siduarsi project. So once again, thank you, everyone, for your attendance.