Nickel Industries Limited (NIC) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Nickel Industries Limited Sampala project overview. [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 attending this call in regards to the acquisition of the Sampala Nickel portfolio. If I could just ask the slide moderator to move to Page 3 of the presentation, please. We are delighted to announce the acquisition of the Sampala portfolio, comprises 3 highly prospective, advanced, contiguous nickel IUPs, covering an area of 6,654 hectares with an initial JORC 2012 compliant resource of 2.3 million tonnes. Could I just confirm that you'd move to Slide 3, please. The project has a significant amount of historical exploration, which includes 574 kilometers of -- line kilometers of ground penetrating radar and 46,982 meters of drilling. It's in very close proximity to IMIP and to our existing Hengjaya Mine operations. And of the prospective area of 4,700 hectares of laterite, only 20% of this has been drilled. So we already have a resource of 2.3 million tonnes of contained nickel metal in a resource area of just 900 hectares with a total prospective area of 4,700. So the Sampala project has the potential to host in excess of 10 million tonnes of contained nickel metal, making it one of the largest known nickel resources globally. The acquisition was transacted on very favorable terms from our existing local partner, with whom we've had a 15-year long-standing relationship. And as I mentioned, on very favorable terms, which I'll touch on a little bit later on in the presentation. A majority of the acquisition payments are pushed back to at least 18 to 24 months from the signing of the CSPA. So it's not -- there's no requirement for immediate upfront large payments. As I mentioned, it's done over a period of 18 months and I'll talk about the commercials a little bit later on. If you look at the map on the right-hand side there, you'll see the Sampala Project there. It inhabits that area, which is shaded in white. That's also very attractive because that is not a forestry area. Every other site that you can see there in yellow and in the different shades of green is forestry and forestry does require significant amount of permits and other requirements to be able to use it. We have actually acquired 7,000 hectares of that land. So we own all of the land and all 3 of the IUPs are operation production IUPs. So they're actually already permitted to commence mining. What the Sampala Project will do, is ensure that NIC becomes fully self-sufficient for its IMIP downstream operations for at least the next 40 to 50 years. And security of ore and ore supply is increasingly becoming a major issue within Indonesia. And so the opportunity to acquire such a large project in close proximity to our existing operations is very exciting for us. If we could just move to Slide 4, please. The strategic rationale for the Sampala Project acquisition. It's a world-class nickel resource as I've outlined, only 20% of the prospective area is being drilled already, there's 2.3 million tonnes of contained nickel metal. We believe the potential for that to increase to somewhere around 10 million tonnes. It's an advanced project. So as I mentioned, it's already operation production IUP. It already has a significant amount of historical exploration. And there's already been a lot of work done in terms of designing a haul road, mine planning, geotechnical work, land acquisition and other things like that. As I've touched on, it enables us to be self-sufficient in terms of nickel ore without fully degraded nickel operations and we see this as being extremely important. Attractive acquisition terms and we'll look at how it compares to recent market acquisitions in Indonesia and also outside of Indonesia. And what's very attractive about nickel mining operations in Indonesia is that off a very low capital base, there's very attractive economics with a very short payback. And if you look at our Hengjaya mine, our fourth quarter EBITDA for 2023 was USD 42 million. And so these mines are very profitable with a very long mine life. If you could just turn to Slide 5, please. You can see that Nickel Industries is progressing. So we have the Sampala Project there, the blue bubble, 187 million dry metric tonnes at 1.2%, combined with Hengjaya mine, which is 300 million dry metric tonnes at 1.2%. You can see the combination of those. And our intention is to continue to grow that bubble in size and also to continue to advance down the right-hand side of that curve to the point where our aim is to sit on the largest known nickel resources globally and that gives us a number of benefits, not just security of ore supply, but also we see nickel mine economics as being extremely favorable and attractive. If we could just move to Slide 6, please. Location is everything. And the location of Sampala is excellent. It's one of the closest mines to IMIP. We were able to actually leverage existing all our facilities that already exist from the BDM mine, which you can see there, is the purple. With purple road, we've already designed a 22-kilometer haul road, which is the green section, which will link up with the existing 34-kilometer haul road that's already built and allow us to take all directly into our operations in IMIP. This has the advantage of obviously significantly reducing the required CapEx when we're talking about a 22-kilometer haul road. Given its location as well, we will save CapEx on -- there is no requirement to build a jetty. And so that will also save a significant amount of CapEx. We're targeting first ore production by the end of 2025 with an initial run rate of about 6 million wet metric tonnes of ore. And thereafter, we expect the ramp-up to follow in a similar vein to Hengjaya mine, which is 12 million tonnes and then ramping up to 22 million tonnes, which Hengjaya mine is in the process of getting the approvals to ramp up to 22 million tonnes. If we could just go to Slide 7, please. You can see there on the left, our -- in the blue, HNI, RNI, and ONI RKEFs. 80,000 is the nickel tonnes that are consumed per annum. And you can see that currently, about the Hengjaya mine feeds about 50% of our [indiscernible] for HNI, RNI and ONI RKEFs. Moving to the right, with Sampala coming online, saprolite will come 100% from Nickel Industries controlled mining operations as well as our NIC HPALs, which is ENC and always one of the biggest levers, along with power that we can use to improve RKEF performance. So by being able to have a better control of grade of silica to magnesia ratios of RN to nickel ratios, we will be focusing on improving the performance of our RKEF operations so to self-sufficiency of all supply. If we could just move to Slide 8, please. I mentioned the attractive economics and just to run through them at a very high level. So we've agreed an 18-month exploration program, which is about 90,000 meters of drilling and that's at a cost of USD 5.8 million over the 18 months. We do actually from signing have a 3-month due diligence period before that event starts and we pay a refundable commitment fee of $2.965 million for both the MJN and the ETL projects. At the end of that 18-month exploration period, we will then calculate the JORC resource and we'll then be paying $2.50 per dry metric tonne of ore for every tonne at 1.7%. We don't pay for anything less than 1.7%. And so if you look at where we currently stand today, for MJN, we had 28.6 million dry metric tonnes at 1.7%. If you multiply that by $2.50 a tonne and then multiply it by our 60% ownership, you come up with USD 42.9 million, plus the additional $2.965 million commitment fee. So that brings it to a total of USD 45.9 million. And then the same for ETL where we have 4.9 million dry metric tonnes multiplied by $2.50 a tonne, multiplied by 60%, which gives you USD 7.4 million plus the $2.965 million commitment fee, which equals USD 10.4 million. So in total, the valuation today sits at about USD 56.3 million and that's for that 2.3 million tonnes of contained nickel metal. If you look at the chart there, you can see what others have paid in Indonesia per tonne of nickel. And so starting at the left there, you can see SCM, $59; PT Position, $61. They are older transactions. If you look at the most recent transactions of Stargate and AKP, you can see $172 and $272 per tonne of contained nickel metal. AKP is the most recent and you can see the steady increase in the value of ore resources in Indonesia. If you look at the MJN and ETL projects, you can see what we're paying there, $47 for MJN, $23 for ETL, on a combined basis, $39. That compares very favorably to other market-based transactions in Indonesia, particularly recent transactions such as AKP, which is up at $272. And then if you were to look at, compared to other global transactions such as Australia, the IGO acquisition of Western Areas is valued at about $900 a ton. The value acquisition of Mincor about $2,100 per tonne of nickel. We're buying it at this point at around $39. And then finally, if you look on the far right there, the Hengjaya Mine based on the Independent Experts Report is valued at $139 per tonne of contained nickel metal. So very attractive project economics and that really has come about through the long relationship that we've had with our local partner, but the fact that he is a long-term investor. We can see this is a 40- to 50-year mine life. We, obviously, will retain 40% and aging this for the long life and actually has been since the inception of the company back when we started in Indonesia in 2008. I should add that there is a third IUP. The commercial arrangement for that is simply at $7 million for 624 hectares. We've paid USD 5 million already. And then there is an additional payment if we secure an additional 491 hectares, of $4 million. So that brings the total to USD 11 million. So extremely attractive acquisition terms spread out over a long period, so 3 months due diligence, 18 months of drilling and then we don't make payment until that point. So it gives us confidence in the resource. But what I should point out is that we don't pay for anything below 1.7%. Currently, 1.6% nickel ore is selling at greater than $40 and 1.3% ore is selling at around USD 22. So both grades below 1.7% is still highly economic and making very strong margins in today's price environment. And the only final point to add on the commercial is that, that commitment fee of $2.965 million across both MJN and ETL that is repaid preferentially through an agency fee from first production. If we could just move to Slide 9, please. You can see Hengjaya Mine, 12 million tonnes of production, of CapEx of around $50 million. Sampala project, we'll be targeting initially half of that but moving to then 12 million, similar CapEx number of less than $50 million, and we've already done a lot of work on that. Just you're looking at...

It's Slide 10, please, operator. You're on Slide 10.

Okay. Yes. Sorry, if you could jump to the next slide, Slide 10.

That's the one. We can see it now.

Yes. Just to rehash, Hengjaya mine CapEx of $50 million, 12 million tonnes, annualized EBITDA of USD 170 million. The Sampala project, as I mentioned, initially $6 million, moving to $12 million. We've already done high level CapEx and we're looking at less than $50 million. Based on the numbers that we've modeled, we're looking at a $500 million NPV, which is similar to our Hengjaya mine and around a 50% IRR. As I mentioned, there is a very quick payback on these mining projects, very attractive IRR. The project is very advanced. I mentioned we've acquired all of the land. We've already submitted a feasibility study and an environmental study. We've already developed block models and mine plans for the first production. And we're just simply awaiting those approvals. Once they are approved, then we can start construction on the 22 kilometers of haul road. Once that is complete, then we'll be able to complete a pre-strip and get stuck in the mining. So it is very advanced. As I said, we see production targeting production towards the end of next year. If you look at the ore situation in Indonesia currently, all imports have actually jumped 5x month-on-month to almost 1 million tonnes in June. Ore from Philippines has hit its highest price since November 2023. And there is now a premium above the market price of $10 to $20 over the -- over what's called the HPM price for saprolite ore currently. So the economics of ore is extremely favorable but also security and declining high grades in Indonesia is impacting the cost of particularly saprolite ore. So given that we have already a very good high-grade core to the drilling that we've done and we expect to grow that. We see this low CapEx, quick payback and extremely attractive economics for the next 40 or 50 years. That completes the presentation. So happy now to hand over to Q&A.

[Operator Instructions] Your first question comes from Kate McCutcheon from Citi.

The deal is to grow to 60%. Can you just remind me on the foreign ownership limit, so they're still at 49% and how do you navigate that? Is that why this is a share purchase agreement. And similarly for Hengjaya, where does that -- given you're still at 80%?

Yes. So you are legally able to implement the dual share class structure. And by implementing a second class of shares, those shares have no voting rights. And the only economic interest that they have is a nominal dividend per annum which is a couple of thousand dollars a year. And that dual class share structure has been implemented across a number of projects in Indonesia. So it has been tried and proven.

Okay. That makes sense. And then the timing, why now, what is the catalyst for this? Obviously, you've no new projects for a while, is it becoming hard as you get third party or is there more scrutiny on traceability as you grow downstream and that's another sort of lens to look at it through?

Yes. Look, I think, given the ore premium that's emerging, $10 to $20 a tonne that's currently being paid, the increasing imports up to 1 million tonnes from countries outside of Indonesia. The AKP transaction where they -- USD 166 million valuation, so barely 0.5 million tonnes of contained nickel metal. And we're seeing more of that sort of valuation being asked by holders of nickel licenses in Indonesia because of the commercials, because of the relationship with our local partner, because of the proximity to IMIP and because of the size and scale, this transaction made a lot of sense and with the deferred payment and the extremely quick payback. And obviously, our very strong ESG credentials, we think that this project brings a lot of value to -- it's not just a company but also to our integrated operations, just ensuring that we have self-sufficiency.

Okay. And then final question. At a high level, is this sort of portfolio completion now? I mean, there's certainly been a lot of deals. I don't know if you do [indiscernible] prior to go through, but I guess I'm wondering how I think about you buying more things now and how you're thinking about the portfolio?

Yes. Look, Okay, yes, it's done and look, even -- we're not interested, but even if we were, the government has obviously put out a hault on any further issuances of RKEF licenses, which we see as a positive particularly for the NPI market. HPAL, we're obviously fully funded for ENC and we'll be putting out a construction update soon, but that's progressing very well. Our focus is really just on ensuring that ENC comes online and ramps up and delivers the sort of margins that we're seeing at HNC, which we're seeing margins at HNC at the moment of around $7,000 a tonne. So our focus at the moment in terms of other opportunities is really just on ENC. And we've been [ bragging ] for some time that we've been working on resource acquisitions. We are still looking at other potential resource acquisitions. There are opportunities that are -- that we have identified that are at earlier stage in this but significantly cheaper, given the very early stage. So we are looking at them. But as with everything, look, we assess it on a case-by-case basis. It is value accretive but certainly at the moment, there is nothing that we're looking at acquisition-wise that is going to require a significant amount of CapEx or upfront acquisition costs.

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

Just wondering on the current resource. I think you got about $187 million dry metric tonnes, about 74% of that is in limonite and the rest in saprolite. Just wondering on the nature of the ore body and the nature of the drilling that's currently being conducted that you've got that higher proponent of limonite. Is that just a factor from the current depth of drilling that you've got? And if some of those holes were pushed a bit deeper, you would have defined more saprolite resource? Or is there another factor currently swinging in favor of the higher limonite proportion?

Thanks, Adam. All of the holes, we drill the bedrock. So we drill basically through the limonite and saprolite zone. So there aren't any holes where we've ended in mineralization. We will always go through to bedrock. But the ETL IUP is predominantly limonite whereas the MJN IUP, we are seeing some nice high-grade saprolite. So we have, for example, about 45 million or 30 million dry metric tonnes at 1.6% of saprolite in Hengjaya whereas in ETL, we only have sort of 10 million, so a significantly smaller amount. So that's just the geology of the area. So North ETL is predominantly limonite. The center of MJN is very good areas of high-grade saprolite. And obviously, as we drill, I think we expect to see that high-grade continue in MJN. But as with everything, look, we won't know until we drill it out what the proportion of limonite to saprolite is.

I guess, if you got more limonite, the grade is going to be lower. So therefore, all the limonite you kind of define, you're not actually paying full in a way, given the contingent pricing structure that you got set up. Maybe you just could have told.

[indiscernible]

Yes. Okay. it seems like the more you drill, the more you find and what's there stopping you from, I guess, pulling back on the drilling program? Are you just committing to that 90,000 meters and then recutting after the resource and then determining the payment structure from there. Just wondering if you could talk through that.

Yes. So the commitment for the 18-month exploration program that was drilled as part of the conditional share purchase agreement. What that meant is, it just meant that on both sides, we were comfortable with the resource that we were buying and also allowed vendor the opportunity for some of the upside if there is high grade. And so that was how it was priced. But I think if you look at it, again, coming back to that valuation slide relative to recent transactions in Indonesia and then outside of Indonesia, it's still on extremely attractive terms. So currently, RKEF plants have got a fee date of about 1.55%. So as you correctly pointed out, anything at 1.5%, 1.6%, it all still makes a good margin, even 1.2%, 1.3% limonite, there is a market with a margin. Basically, everything below 1.7%, we are getting for free and it comes with a very healthy margin.

[Operator Instructions] Your next question comes from David Coates from Bell Potter Securities.

First question is just, I suppose, on, I guess, sort of the timing of, I guess, milestones over the next 18 months. So you've got the resource drill out to be completed in that time. You've also sort of flagged first production in that time. And then you also have the -- and have submitted and presumably awaiting approval in that time. How do you kind of expect that? What's the timeline going to look like with each of those milestones for the next 18 months?

Yes. So the milestones really are ETL related. That is the IUP that has been drilled out in terms of most of your prospective area. And that's the one that we are focused on, in terms of submission of the feasibility and we've also received our RKAB, which is basically your work permit or if you submit your planned activities and that gets approved and that's been approved to do all these activities. We are aiming to hopefully have the sort of feasibility [indiscernible] out to the haul road completed this year, which should allow us to sort of commence construction of that haul road beginning of next year. And then with a target to commencing first production out of ETL at the beginning of -- sorry, the end of next year. In side-by-side, with development of ETL and early cash flows there, we will be drilling out MJN to the South. And that's obviously quite a large IUP cap sales hectares. So there's a lot of challenge to be done there on 100 meters spacing.

Okay. Cool. And you've outlined a high-level kind of case for the performance of the Sampala Project. But in comparing with the existing Hengjaya Mine, well, I guess, sort of some of the key kind of performance or profitability [indiscernible] like the longer haul, but is it higher grade or you've got shipping out of HM, still, I believe, what are the sort of pros and cons in terms of economics between the two projects?

Yes. So we will save on CapEx in terms of there's no requirement to develop a jetty, which is probably will save about $15 million to $20 million. The haul road that we will need to build is only about 22 kilometers and the haul road that we had to build from HM to IMIP was around 16 kilometers. So there's not a great difference in terms of the haul road that needs to be built. The only different state, the group mining costs will be consistent across both projects. The only difference is just that there will be a slightly higher hauling cost between the 2 projects, just given that Hengjaya is currently about 16 kilometers and Sampala will be about 50 kilometers but we see that as only adding sort of a couple of dollars a tonne, not a large number and given margins at the moment are very strong, there's still more than enough even with that additional couple of dollars a tonne hauling costs to make it a very good margin.

Excellent. And just final sort of a high-level question. What's driving the increase in value of these assets and the importing of ore from the Philippines? What are the sort of market dynamics driving those sort of changes in the laterite ore market in Indonesia?

Yes. It is getting -- it's certainly getting more challenging to identify and acquire large high-grade assets. If you were to look at Indonesia, it's sort of particularly the nickel mining industry, it's segmented into hundreds of small little IUPs, many of which have had next-to-zero exploration, although they're all highly prospective, very little exploration is being done. The vast majority sit in forestry areas, which require permits, which is -- it requires time and efforts. So the development time frame, assuming that you, a, firstly, can drill up and make a reasonable discovery. Logistics. Obviously, good to be logistically competitive. You need to be either close to the coast or in the case of Sampala, close to either IMIP or IWIP and there's very limited large tonnage mines that are left in close proximity to IMIP or IWIP for that matter. So you are seeing ore having to come from further distances. And from mines, it probably have logistics that weren't as favorable as they have been in the past. So we see this transaction as a -- project of this size and scale at this sort of price is being extremely attractive.

Your next question comes from Kate McCutcheon from Citi.

You have said the projects have got the RKAB licenses for '25 and '26. Is that correct? And then what are they permitted for?

Correct. So RKAB isn't just for ore sales. It's actually -- it's an all-encompassing work plan. So the RKAB that we have currently is to complete geotechnical drilling, to do mine planning, to do drilling of the resource and to submit a feasibility in AMDAL which we've done. Once those are approved, we will then do a revision to [indiscernible] RKAB will be in the form of the intended mining volumes that we'll be wanting to sell.

Okay. That makes sense. And then finally, the BDM haul road, how do you ensure you get the tonnes through that? Is there a payment that you make to use that product, to say?

There is, yes. So we've been in close dialogue with -- and in fact, the BDM mine is 49% owned by Shanghai Decent but we know the other 51% shareholder very well and we've been in close dialogue in terms of just negotiating a fee to be able to use that existing haul road.

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

Just a final follow-up for me. How important -- you mentioned traceability and this obviously gives you much greater control over that, how important is that for offtakers and in terms of securing sales with Western customers, I suppose, in particular. And presumably, one of your objective levers will be to match the standards at the HM mine -- will take a standards of the HM Mine to Sampala and achieve a green proper rating in time. Is that sort of -- is that part of the plan?

Absolutely, we've worked very hard to develop the best ESG credentials of a nickel mining company in Indonesia. And so we'll be looking for that to follow into Sampala. And look, it's not just the traceability, which is in a lot of Western counterparts, actually the key thing that they look at. But for us, it is things like RKAB approvals. We were one of the first to get our RKAB approved, didn't know there was a delay at the beginning of the year. And that all stems from the fact that all of our reporting is up to date, all of our mine rehab we've met. Basically all the provisions of the license we've met or exceeded. And so that's what has allowed us to actually not only have our RKAB consistently reissued, it also increase the tonnes -- for the tonnes that we've been mining.

Your next question comes from Adam Baker from Macquarie.

Just to break down when you're planning on mining this and putting the volumes through the haul road, how should we think about the breakdown of saprolite versus limonite?

Yes. So in that first -- as we ramp up to 6 million, the split would be about 2 million sap, 4 million limonite.

Great. And with regards to strip ratio, I'm guessing it's similar thing, not a lot of strip there is, straight into ore.

Exactly. Straight into ore. Yes.

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

Yes. Thanks, everyone, again for your attendance. As always, any follow up questions, please don't hesitate to reach out to any one of us. But again, we're excited by this transaction. The economics of mining nickel in Indonesia is extremely attractive for the reasons of very low CapEx, very fast payback. And then the other benefit of self sufficiency of ore for our RKEF operations, obviously, our ESG credentials. I think if you look at some of our peers in Indonesia, their mines are valued at $2 billion to $3 billion in some instances. And if you're looking at a cash flow of $150 million plus or USD 150 million to USD 200 million EBITDA per annum for the next sort of 30, 40, 50 years, it's not hard to see how you can reach that sort of valuation with the potential size of the resource that we think could be hosted at the Sampala Project. So we look forward to providing further update as we continue to take mine development forward and look to commence drilling. And thank you, again, everyone for your time.

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