Nickel Industries Limited (NIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nickel Industries Limited December Activities Results Call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Justin Werner, Managing Director. Please go ahead.

Thank you very much. And before I welcome everyone, could I please ask the slide operator to move to Page 2 of the presentation. Welcome, everyone to the Nickel Industries' December quarter results. We're very pleased once again to report record group EBITDA from operations of USD 135.4 million, which underpins an announced increased full year dividend and share buyback. Despite the backdrop of very weak nickel prices, particularly over the second half of 2023, our unaudited second half EBITDA is USD 256 million versus our first half, which was USD 169 million. And so I think we're just really showing with the ramp-up of our operations, maintaining our position at the bottom end of the cost curve and a ramp-up in the Hengjaya Mine, we're really starting to see the results of those coming through. For 2023, over 16.7 million LTI-free man hours across all of NIC's operations. That's a tremendous result and I'll talk about that a little bit later on. Again, record RKEF nickel metal production of 34,450 tonnes, which is well in excess of -- or close to 140,000 tonnes on an annualized basis. NIC attributable for the quarter was 27,560 tonnes of nickel pig iron in matte plus an additional 1,823 tonnes of nickel from our 10% interest in HNC. Pleasingly, the HNC production of 1,823 tonnes was 29% above the 1,410 tonnes received in September -- produced, sorry. And I think that's indicative of the sort of performance or outperformance that we can expect from ENC, which I'll touch on a little bit later on. Those 2 numbers give us 29,383 as NIC attributable nickel metal for the quarter and full year '23 nickel metal production [ 327,000 ] tonnes on a 100% basis. Remembering that we haven't been fully ramped-up for the entire year. So again, we're looking forward to a strong 2024. RKEF EBITDA, USD 85.1 million, down slightly on the September quarter, mostly due to lower realized contract pricing. And we did pleasingly though see modest cost reductions across most of our operations and that was driven by lower ore, coal and electricity prices. Pleasingly, record Hengjaya Mine EBITDA of USD 42 million, 82% increase on the September quarter, which was USD 23.1 million and that we expect to see continued strong EBITDA from the Hengjaya Mine. Off the back of these very strong results for the second half of 2023, we're pleased to announce a full year dividend of $0.025 per share, which is a 25% increase on the prior FY '22 dividend and the announcement of a new capital management framework we've enunciated a dividend policy of 30% to 60% of free cash flow and also announced an on-market share buyback of up to USD 100 million over the next 12 months. And here, we're obviously looking to target higher shareholder returns and the increase in the dividend reflects the very robust EBITDAs that we've been able to deliver in a very challenging environment. And the fact that our ENC project is also fully funded. If we could just go to the next slide, please. Environment and safety and NIC is really taking a leadership role here in Indonesia as far as the environment and safety. I touched on earlier, over 16.7 million LTI man hours were worked or LTI-free man hours for 2023. As an LTIFR, that's about 0.1 and the TRIFR of 0.98. The industry benchmark, I believe, in Australia for 2021 to 2022 for LTIFR was about 8.4. So, a significant amount of man hours worked as I said again, without an LTI injury. Environmental, we were once again awarded a Green PROPER rating by the Ministry of Environment and Forestry for the second consecutive year, one of only 2 nickel mines in all of Indonesia to again receive a Green PROPER rating. We are striving to be the first to achieve Gold over the coming years. And just to put that into some perspective, only 196 companies of the 3,694 audited, achieved a Green PROPER rating. So again, a tremendous achievement and placing us as an industry leader. Towards the back end of last year, we had a visit from a North American EV maker, very impressive what they saw. We were audited by European EV maker. Again, that audit went very well, over 90%-plus compliance with all of their requirements. On the renewable energy front and as part of our decarbonization, we executed an operational lease agreement for Indonesia's largest solar project, which is 200-megawatt peak plus 20-megawatt hour of battery storage. And it's anticipated that, that power will supply the ENC HPAL. And we are targeting for that ENC HPAL to have the lowest carbon footprint globally. We were invited to present at the COP28 Climate Summit in Dubai, 1 of only 2 Indonesian mining companies that was asked to present. And that was really on the work that we've done around our ESG work in Indonesia. And at that conference, we announced our future emission targets, so a 50% reduction in carbon intensity by 2035 and net zero by 2050. Again, fitting in with our reduction in carbon intensity, we also successfully trialed the first electric vehicle trucks in Indonesia and we're now working towards increasing that EV truck fleet over the coming months. If we could just move to the next slide, please. This slide clearly demonstrates you can see in the bar chart there, December '22 last year where we sat in terms of production, 23,433 tonnes and then probably just reported now for December '23, 34,450 tonnes. So, a significant increase and that ramp-up has gone very, very well. But I think if you look at the bubbles above that, in the green, you can see EBITDA from operations and in the white, you can see the average LME nickel price. If we look at December '22, EBITDA from operations, USD 106.1 million. If you come over to December 2023, USD 135.4 million EBITDA from operations, so a 28% increase. Looking at the LME nickel price below that, it was 25,460 in December '22 and 17,288 in December '23. So, a 47% reduction in the LME nickel price. So again, tremendous result, I think, as again, showing the ramp-up of our operations and again, the fact that we sit at the very lowest end of the cost curve. So, 28% increase in EBITDA from operations against the backdrop of a significant decline in LME nickel pricing. If we could just go to the next slide, please. The Hengjaya Mine, as I said, tremendous result, USD 42 million in EBITDA versus USD 23.1 million for the September quarter, up 81.1% and record quarterly production of 4.5 million tonnes. If we could just go to the next slide, please. On the corporate front, I'm pleased to announce the final investment decision for NIC is 55% in the ENC HPAL project. It's expected to produce 72,000 tonnes per annum. And it will produce and it will be the first HPAL globally that will have the ability to produce 3 of the key Class 1 nickel products, those being mixed hydroxide precipitate, nickel sulphate and nickel cathode. That is progressing very well. We have made acquisition payments totaling USD 316.3 million for our 13.75% equity interest. There is and contained in the quarterly report the full acquisition schedule. But again, that payment for the 55% is over the next 2 years. And we look forward to providing further updates on the ENC progress over the course of this year. We established or executed a financing facility with PT Bank Negara Indonesia or BNI, a leading Indonesian bank. This is the first time an Indonesian bank has actually financed a HPAL project in Indonesia. And again, that's reflective of our ESG credentials and our strong operating performance and our corporate governance. It's a $350 million 5-year senior term loan at a very attractive rate compared to our bonds with a further USD 50 million revolving now for the facility. That loan has been syndicated out. It was a very successful syndication. There is a large number of banks, not just Asian banks, but Western banks that have come into that syndication and again, very reflective of NIC's operations. We announced during the quarter our first nickel matte sales contract with Glencore. So, they need no introduction. Everyone knows who they are. This represents our first direct sale to Western companies. And this is underpinning our diversification into the Class 1 nickel space, which we see stronger margins, lower carbon intensity and a diversified customer base. We are currently working on sales of MHP from our 10% interest in HNC and we had that product currently being tested by a number of potential buyers, Asian and European and as well the strategic partnering process for ENC and potential off-takers that will be kicking off over the coming weeks. Finally, some Board changes at the end of the year. Retirement of our Non-Executive Directors, Mr. Huang Weifeng. He's been instrumental in the relationship between NIC and Tsingshan. He's been replaced by Haijun Wang who we also have a very close working relationship with him and we welcome him onto the Board and looking forward to continuing that very close and as I said, strong relationship and also the retirement of Mark Lochtenberg, who's been a long time NIC shareholder in fact from its foundations. We also saw retirement of our Chairman, Rob Neale. I'm delighted to say that Norm Seckold has stepped back into the Executive Chairman role and as the Founder of the company with a long history, we warmly welcome him back into that Chairman's role. So in summary, another record quarter, which again is just demonstrated our ability to generate very strong margins in a weak nickel price environment because of that OpEx and where we sit at the very bottom end of the cost curve. On the safety front, as I said, tremendous achievement, 16.7 million hours LTI-free. When you think about how many hours that actually is, it's a tremendous result and the continued leadership in ESG. Just a final comment on the market generally. We are obviously seeing a supply response globally to the current nickel price environment that we are faced with, with mine closures with a reduction in Chinese NPI production and even in Indonesia, we're seeing numerous HPAL projects either being deferred or completely canceled. We think that we are extremely well positioned for the rebound in nickel prices when it comes, given our current strong operating footprint, but also our fully funded move into ENC and a more diversified Class 1 product mix. With that, I'll hand over to questions.

[Operator Instructions] Our first question will come from Alex Papaioanou of Citi.

Justin, are you seeing any supply response in Indonesian RKEF, given where margins sitting? And is nickel ore shortages still a thing?

Thanks, Alex. We have seen some supply response. There has been a curtailment of other higher cost NPI producers and also stainless steel production out of Indonesia. There has also -- and the government has strongly enunciated that there will be no further nickel pig iron capacity approved. And so we have seen a curtailment with no further NPI to be built. In terms of ore supply, we haven't seen any shortages. And look, as our Hengjaya Mine continues to ramp-up and we are looking at -- we've now achieved the 10 million tonne per annum mark, we are looking to further increase that over the course of this year, we expect to be in the sort of coming years at a point where our mine supply will probably meet our whole RKEF and HPAL declines.

And in terms of the attributable EBITDA from HNC, you noted that it won't go into your financials. So, how are you planning to account for that share in the P&L and the cash flow?

Sorry, I'll take that. Alex, I know this is a big thing for everyone and we are finalizing our treatment with the auditors over the course of this month. Obviously, as a 10% investment, we won't be equity accounting it, but we will be carrying that at fair value. So, it won't give you a direct read through quarter-by-quarter basis on the actual operating performance of HNC, which I know will be disappointing to the entire broker and the investor community, but that is -- that's the approach that we're most likely to take.

Just one more if I can. When do you think you'll start for buyback? And have you taken a view now that your share price is depressed at this current point?

Look -- Justin, happy for me to take that?

Yes, [ go ahead, Chris ].

Look, obviously, with our new capital management program or framework that we've announced, we are focused on increased shareholder returns. We've heard the market loud and clear on that. And we are starting off with the -- we are including the share buyback of up to $100 million over the 12 months. Clearly, with any share buyback, we stuck firmly of the view that where we're sitting around the $0.60 level as of this morning, we are severely undervalued, and we continue to hold that view. Remember, it's not long ago that we brought in a strategic investor at $1.10. So, we do believe that we're strongly undervalued. The main point around the timing, Alex, is around for approval for United Tractors or DTN. They're sitting just under 20%. So, with them going through 20% when Nickel Industries buys back shares, they will need further approval as one of our largest shareholders, obviously, a long-term strategic shareholder. The Board has taken the decision that it's in everyone's best interest for them to get [ fair ] approval. And then as soon as that happens, we currently intend to commence that buyback?

And time line on that sort of approval process?