Nickel Industries Limited (NIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nickel Industries Limited September quarter activities webcast. [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 at this quarterly results call. Once again, pleased to report record production and -- which underpinned record EBITDA from operations of USD 120.7 million. We're now seeing the full impact of a fully ramped up Oracle Nickel as well as a significant decrease in operating costs. We're also pleased to have our first contribution from the HNC HPAL, and that delivered 1,410 tonnes of nickel in mixed hydroxide precipitate for just the 2 months that we hold that we held that 10% interest. That implies an annualized run rate of in excess of 70,000 tonnes from the HNC HPAL, so it's performing very well. Those numbers, the RKEF EBITDA of USD 97.6 million, was 117% higher than the June quarter despite a small decrease in the weighted average contract pricing. As I mentioned, there is a decrease in operations between 13% to 22%, primary driven by lower electricity prices, coal and nickel ore prices. And we saw a significant increase in the EBITDA per tonne sold. That was up 85.8% from 1,500 in the June quarter to 2,849 in the September quarter. ANI and ONI continue to drive our production and EBITDA, and they experienced margins in excess of $3,247 a tonne and $3,502 a tonne, respectively. Pleasingly, we also had record mine production, 3.7 million wet metric tonnes. That was a 33% increase on the 2.7 million tonnes in the June quarter. That flowed through into a record mine EBITDA of USD 23.1 million, a 93.6% increase on the June quarter of USD 12 million. And definitely starting to see the results of the recently opened haul road. If I could just ask you to turn to Slide 3, please. Here in the table, you can see a summary of all of the key numbers. As I said, record production 33,852. That puts us on an annualized run rate of well in excess of 120,000 tonnes of nickel, well above BHP, who sits at about 83,000 a year, and they've been operating in Western Australia since 1966. The next largest is Independence Group with 36,000 tonnes. So that 33,852 tonnes of nickel for the quarter, which includes the HNC production, is a new record for Nickel Industries production. I don't know if other people are having trouble, but the presenters they -- but it appears like the pages haven't moved. If you can please move it to Presentation Slide 3. Pleasingly, if you look at the bottom of the table on Page 3, we have USD 827 million of cash. And we'll touch on that a little bit later on and what that means for our ENC and HPAL aspirations. Turning to Page 4 of the presentation. You can see here the clear and consistent ramp-up quarter-on-quarter. September '22, we were at 20,275 tonnes, September of '23 we're now at 33,852. We did also acquire an additional 10% interest in the ONI, which we also completed during the quarter. Moving to Slide 5, please. As I said, a record quarter of production at the Hengjaya mine, 2.7 million tonnes of ore was mined. The significant EBITDA increase was driven predominantly by an increase in saprolite. Last quarter, we sold 227 tonnes of saprolite. This quarter that was 1 million. The opening of the haul road has allowed us to push all of our saprolite sales through the jetty and all of our limonite sales down the haul road. And moving to the next slide, Slide 6, which is the opening of the haul road. You can see last year, we did 3.5 million tonnes of ore. We sold for an EBITDA of $54 million. We're now looking at ramping that up and well on track to achieving 10 million tonnes per annum. So assuming a similar margin, you could expect a tripling of that EBITDA number. And we're starting to see that come through already in this quarter with USD 23.1 million, which is 50% -- in one quarter, it's 50% of the full year result for 2022. So we're really starting to see the dividends from the opening of that haul road. Moving to Page 7. We were pleased to announce post the quarterly period a positive final investment decision for the ENC HPAL. NIC will own 55% of that. It has a CapEx guarantee of USD 2.3 billion. It will be the first plant globally to produce the 3 key Class 1 nickel products, being MHP, nickel cathode and nickel sulfate. If you look over at the table on Page 7 there, you can see that in terms of capital intensity, it's still lower than most of our Indonesian peers, who don't have a CapEx guarantee, and it's significantly lower than all the Western peers. Not only it's coming to CapEx guarantee, it also has a time frame guarantee, a nameplate guarantee, a 15-year tax holiday. I'll let Chris touch a little later on the fund of ENC. We're now fully funded given the recent placement by UT of AUD 943 million at $1.10, which is a 30% premium to where we're trading today. And the recently announced $400 million loan facility from BNI, one of Indonesia's largest banks. Slide 8, you can see on the far left there, the average that NIC has paid across all of our projects for our nickel units, and that's USD 19,650 a tonne. On the right there, you can see a number of projects, battery and nickel, that have all demonstrated significant CapEx blowouts over a period of time. Some of these projects have been continually increasing CapEx since -- as early as 2008 and still as yet anything to be got -- I think just to highlight the strength of the CapEx guarantee and the time frame guarantee, and this slide clearly demonstrates that. And you can see the capital intensity there on the right. One of the recent Australian companies has come out with a nickel equipment CapEx intensity of almost $120,000 done. So that isn't -- theoretically that's not where we get. Slide 9, I'll hand over to Chris just to touch on the balance sheet and how we see the funding of the ENC HPAL project over the next 2 years.

Yes. Thanks, Justin. Since announcing our potential involvement in the ENC transaction in January, we face questions for most of 2023 on how we're going to fund our 55% interest. We've always been very comfortable with that interest, and it's one of the reasons why we paid our option to be able to take a positive FID later in the year once we were confident that we could comfortably fund the project. We thought it would be useful after feedback from investors, both debt and equity over the last few months to set out an illustrative overview for you over the next few years. In our announcement a few weeks ago, we set out the exact payment schedule on where our funding obligations are for the $1.265 billion. But over and above that, there are some other key items, being the April 2024 bonds of $245 million; the debt servicing of our existing bonds; as well as, as you can see there in the footnotes, assuming a bond refinancing, potential interest on new bonds; our NIC dividends. And critically with that number important to note that we've only assumed the current dividend level to continue going forward. That's not to say if margins continue to improve, like they have in this quarter, that's not to say that, that dividend -- those dividends won't increase. But for illustrative purposes, we've just left them at the current level. You can see our NIC dividend policy in our ASX release in July 2021 for further information. And critically, it is all dependent on future margins. The funding sources. Now, Justin has touched on post the UT transaction, we've got a significant cash balance. On a 100% basis, it's nearly $830 million. On an attributable basis, which takes into account our 80% interest in our project -- in our Indonesian projects, it's just over USD 800 million. We've assumed interest on the attributable cash, which is in line with what we're currently receiving. We've got BNI loan facilities of $400 million, which we secured -- announced and secured earlier this month. An assumption around the bond refinancing in April 2024 of the $245 million of our existing bonds, again, that's an illustrative example and it will purely depend on what the prevailing market conditions are at the time. If -- for example, if margins continue to improve and cash flow continues to improve, there's nothing to say that we couldn't just simply pay that out of cash. But we'll assess it at the time. And what that basically leaves us with is our acquired cash flow from existing operations over the next 8 quarters to fund the Excelsior Nickel Cobalt project. So you can see there, highlighted in the blue, it's USD 550 million. And then on the right-hand side, you can see what our existing operations are. That equates to USD 69 million a quarter. We've obviously just announced a USD 120 million quarter. And our existing operations, the 12 RKEF lines, which are now operating at steady state production. And you can see the margin where they were at just over $2,800 a tonne, which we don't believe on a historical basis that is not an aggressive number at all. You've got your Hengjaya mine, which just contributed $23.1 million for the September quarter. And as Justin noted, we've only just commenced trucking on the haul road. So there's potential for that number to increase going forward as well as we increase from the 3.5 million tonnes to 10 million tonnes per annum. And then, finally, our -- a final element of our existing operations is the HNC interest. For the September quarter, we announced 1,400 tonnes of attributable nickel, which critically was just for 2 months since acquisition. Importantly, there is no financial contribution of that production in our September quarter financials. And the reason for that is we are still working through that with our auditors and our major shareholders at the project level, being Huayou Cobalt and Tsingshan Group, which are both public companies. So I guess the message from this page is investors and -- investors, analysts need to take a view on whether -- when we just put out a quarter of $120 million for the quarter, we need $550 million for the next 8 quarters to be considered fully funded. Justin, back to you.

Thanks, Chris. If we could just move to Page 10. On the corporate front, I'm pleased to complete the placement to UT Tractors for AUD 943 million, as I mentioned, $1.10 a share, 30% premium to where we're currently trading. As part of that, UT had the right to appoint a member to the Board and they've appointed Mr. Muliady Sutio, who's been appointed as a Non-Executive Director. He brings a lot of diversified experience, and we welcome him to the Board. We completed during the quarter the -- 10% of the HNC HPAL acquisition. And as we touched on, that delivered 1,410 tonnes of nickel in MHP for the 2 months that we had that 10%. The payment for that 10%, predominantly shares, which is issued to Shanghai Decent, so we see that as a strong positive. And then we also moved to 10% interest of ONI for the same amount that we originally paid when we first invested into the project. So there was no markup even though the project is fully ramped up and delivering very strong margins. Again, a strong reflection of the good relationship that we have with Shanghai Decent or Tsingshan. Slide 11. We've touched on the $400 million loan facility with Bank Negara Indonesia. The facility is split into 2 tranches, $200 million secured, which is secured against the company's Angel Nickel project, and $150 million unsecured with a further $50 million revolving credit facility. As Chris just touched on, these funds along with the recent placement and with the very strong EBITDA that's been generated on a quarterly basis, it leaves the company well positioned to fund its share, its 55% share of the ENC HPAL project over the next 2 years. On the ESG front, I'm pleased to announce that recently awarded a BBB rating from MSCI, which is the highest ESG rating given to an Indonesian-based metals and mining company. We were also upgraded by S&P Global from 56 percentile to the 59th percentile on our ESG scores. We won TrenAsia, which is a local award from local industry leaders and consultants for ESG excellence in the nickel sector. We're once again shortlisted to be 1 of only 2 nickel mining operations in all of Indonesia to have a Green Proper rating, the other being Vale. And then, finally, on Slide 12. We are pleased to announce execution of the binding agreement for a 200-megawatt peak solar plus 20 megawatt-hour battery energy storage system project within the IMIP. That is Indonesia's largest solar project, to give you some idea. The installed capacity in Indonesia at the moment is about 269 megawatt peak. This project is 200 megawatt peak. So it means double that. We are not required to outlay any capital. We're simply entering into a 25-year off-take agreement at very competitive pricing. What is attractive is that, that pricing is fixed for the next 25 years with no inflation escalation. But more importantly, this solar project, it's intended that it will supply energy to the ENC HPAL. And we believe the ENC HPAL will be one of the lowest carbon intensive nickel producers globally, not only one of the lowest carbon intensive, but the only diversified Class 1 nickel producer. And off the back of that, we've started the process to engage with Tier 1 global EV and battery makers. And so far, we have a list of about 20 of the top names that are all showing strong interest and engaging with us. And so over the coming months, we hope to be able to provide more details on any potential uptake from one or a number of those groups and perhaps even a small minority investment if that's something that they're looking to entertain. With that, that ends the presentation and so happy to turn over to Q&A.

[Operator Instructions] Your first question comes from Niel Botha with Ninety One.

Maybe just a few questions from my side. Firstly, in the [ HNC ] project you're still trying to figure out how to treat that in your sort of account? Sort of is there indication of what the best way would be? And then maybe sort of indication of asset at [indiscernible]. Currently sort of what margins are you seeing at that asset? And sort of what level of earnings could that contribute just to sort of get a bit of sense.

I'll take the first bit. It's partly just the accounting. We're working out between equity accounting and investment in associates. Obviously, we're not consolidating the number as an interest. But that also flows into the disclosed. And I'll let Justin talk about margins. But it goes into disclosure on what we can and can't disclose. We had a call this morning, and similar questions are coming up from our earlier call. We -- still we're a 10% minority interest with 2 very large shareholders or very large public company shareholders, which don't have to disclose the numbers basically on HNC. So we're just trying to work through with them what we are able to disclose and when we can disclose it such that we're not prematurely disclosing what they don't want us to. We're not about to enter into a project -- into a partnership, a long-term partnership with 2 other public companies and suddenly step off on the wrong foot. So we're working through on that with them. So it is difficult to give more color. I don't know, everyone is trying to get more color around where the HPAL will be. I guess the -- one bit of additional information that's coming your way is the independent expert as part of our AGM, the upcoming AGM. And I expect the notice of that to go out probably within the next week. There'll be an independent expert's report attached to that. And then there'll be a little bit more color around HNC on that for investors and analysts. Justin, do you want to add anything there?

Yes, I think Chris has covered off on it. But typically, what we see is the newer RKEF lines delivering sort of margins from $3,000 to $5,000 a tonne, HPAL delivering margins sort of $7,000 to $10,000 a tonne. So typically superior margins from -- far superior margins from the HPAL. As Chris said, we're just still working through how we possibly report or present that. But I think, as Chris also alluded to, there will certainly be a lot more detail and clarity in the independent expert's report, which will be based off the feasibility study and some of the actual operating numbers that we're seeing in the country.

Okay. Perfect. That's very clear. And then maybe just one on the cost side. I mean, given sort of goals increased recently, sort of when do you expect that to flow through on the cost side and sort of impact cost? Is that sort of a quarter delay? Or sort of how long do you generally tend to see that?