Nickel Industries Limited ($NIC)

Thank you for standing by, and welcome to the Nickel Industries Limited March 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. Thanks everyone for joining me, Nickel Industries' March quarterly results call. If I could ask the moderator just to move to slide 2, please. Kick off with safety and sustainability. Company-wide 12-month lost time injury frequency rate across Nic controlled entities was 0 with no lost time injuries recorded during the quarter against 4.8 million safe man-hours worked. For the 12 months to 31 March, the 17.7 million man-hours worked without any LTIs. Company-wide TRIFR at the end of March was 0.45. We were sad in the report that there was unfortunately a fatality involving a contractor engaged by PT Fajar Metal Industry, who's building the ENC HPAL. It occurred on the construction of the transmission lines between the ENC plant and the slurry plant and dry stack tailings facility, which is being built on the company's Hengjaya Mine. Full support has been offered to the victim's family. Following a comprehensive investigation by the relevant authorities, all activities have recommenced within the Hengjaya Mine operations, except for work on the transmission lines, and we expect work to recommence there shortly. In other sustainability work, Hengjaya Mine is one of only a handful of mines that has been awarded a biodiversity area. As at the end of the quarter, we were 50% complete in terms of construction of various facilities with inside that biodiversity area, which will allow endemic flora and fauna to be studied, act as an area of education, but probably most importantly, to be able to preserve those species. Finally, we're pleased that we've been able to increase our university scholarship program. We're entering our 3rd year of that particular program, and we're expecting to be supporting 30 students by year end. If we could just move to slide 3, please. Pleased to report USD 135.6 million in adjusted EBITDA from operations. That's our strongest quarter since December '23, where we reported $135.4 million, which was an unadjusted number. Yes, it's the strongest quarter in a while. RKEF production remained steady and pleasingly we saw a very strong increase in margins, that's reflected in the EBITDA rising from $35 million last quarter to $85.8 million for the March quarter. Our HNC HPAL continues to perform well above nameplate capacity, over 40%, and we saw increased EBITDA there, particularly in EBITDA per ton. Mining ore sales back at levels that we were pre the RKAB issuance and we were pleased to announce that we were able to secure 14.3, which is a nearly 60% increase on the 9 million tonnes that we held last year. That's against the backdrop of many of our peers receiving significant cuts. The mining EBITDA was close to USD 30 million. If we could just move to slide 4, please. Looking at our RKEF operations, the real story here is the significant increase in the NPI price. Sale price was up 19%, the average sale price went from $11,100 in the December quarter to $13,201 in the March quarter. Pleasingly, costs were only up about 4% over the same period, that allowed us to expand our margins by 155% from $1,114 in December to $2,842 over the March quarter. If we could just move to slide 5. HPAL operations at HNC. Again we saw an increase in the sale price there, up 15%, from 17,110 to 19,690 in the March quarter. EBITDA was up, EBITDA per tonne was up as well. We are seeing some cost pressures from increase in sulfur price. The average sulfur price for the quarter was around $570 a tonne. In terms of sulfur supply and security, we still maintain healthy stockpiles and at this point, there appears to be no issues with securing supply of sulfur. If we could just move to slide 6, please. The commissioning of ENC is progressing very well. We've been pre-commissioning a number of the major assets, power, water, acid plant, Counter-Current Decantation, thickeners, precipitation tanks, autoclaves. That's in preparation for commencing fully integrated commissioning in May. Next month. We're targeting to have to achieve 100% of nameplate expected by around the end of October in 2026. Slight delay there, but still progressing very well. Coming to addressing the challenges with sulfur. We have stockpiles which will last us up till the end of September. They required an average price of $450 a ton, which is well below the market price at the moment at this point, which is $900 to $1,000 a ton. We are also pleased to announce during the quarter that Sphere completed the payment for acquisition of 10% at a $2.4 billion valuation. Sphere is 1 of only 3 accredited suppliers to SpaceX, and they are the only one with a long-term contract. We also have now started the process, or about to start the process for registration with the LME for our nickel cathode. Assuming we're successful in that registration, that will see our nickel cathode hopefully commanding a premium to the LME nickel price once registered. If we could just move to slide 7, please. Again, touching on RKAB, very pleased to announce that almost 60% increase to 14.3 million, when a number of our peers have had significant cuts. The mine has had another strong quarter. Over 3 million tonnes of ore was sold. Subsequent to the quarter, just recently on the 15th of April, the Indonesian government announced changes to the benchmark price or the HPM. In terms of saprolite pricing, the HPM pricing will bring the pricing more in line with what the current market price is. In fact, it will still remain below the market price. We don't see any real change to the saprolite pricing. However, it will increase limonite pricing. At this point in time, and we supply to third-party HPALs. None of the HPALs in Indonesia have adopted this new pricing regime. We'll obviously continue to monitor that and see how it sort of plays out. If we could just go to the next slide, please. In terms of new projects and development of our Sampala project, we're making very good progress. You can see that in the photograph there on the top left of the haul road. We've completed 8 kilometers of a required 24 kilometers, which you can see on the bottom there, that haul road into the IMIP. That's progressing very well. The remaining 16 kilometers, we'd love to start building that today. We do need to wait for the necessary permits and approvals, which are in process. In terms of the ability to mine, we're also well progressed in terms of approval of feasibility studies, particularly at the ETL project. On our Siduarsi project in Papua, we're also well advanced in gaining approval for a feasibility study. That feasibility study envisages a 2 million wet metric tonne per annum DSO operation of limonite. Obviously, given the recent changes in the pricing of nickel ore, we remain very focused on looking to develop these projects in the near term, given the very attractive economics of ore sales at the moment. If we could just move to slide 9. I'll just hand over to Chris for the next two slides on cash flow and the recently announced debt refinancing.

Thanks, Justin. Morning, everybody. As Justin mentioned, we had an extremely strong EBITDA from operations this quarter of just over $135 million. The cash flow effect of that across the operations, across the RKEF business, the mining business, and the HPAL business did not appear as strong with cash outflow across those three operations of approximately $10 million. This was predominantly due to the first item being trade payables reduction of $72 million. We had quite a lot of December inventory purchases that we paid in January. We also had some quite hefty December contract standby costs at the mine when the mine was on standby, as everyone's aware, due to the RKAB issues in December. We paid that during Q1 as well. Our trade receivables increased by $38 million. That's quite very simply due to the increase in the NPI prices, as Justin mentioned throughout the quarter. The HNC EBITDA of $16 million, that's removed as this is equity accounted and there's no cash inflows from HNC yet as HNC continues to focus on debt reduction, which is nearly down to zero. We also brought forward at Xing Creation, our trading arm also brought forward the payment cycle to HNC. All shareholders brought that forward. We received some late payments for our sales, for March sales in April. We received some of that cash back in April. Other key cash flow items included the ENC payment, our final payment for 2% of ENC, which was USD 46 million. The bank loan principal repayments, which was $25 million during the quarter. Bank and bond interest of $44 million. We had some CapEx as well of $15 million. That was the HNI line repairs at the HNI RKEF operation, some line repairs and some contractor set up costs at the mine post the Hengjaya Mine post the standby. Can I move to the next page, please, operator? To page 10. As we announced yesterday, we successfully refinanced our existing bank loans. We had $398 million of bank loans outstanding. On the 28th of April, we announced a USD 450 million new unsecured facility, so we've removed all security from our bank loans now. That $450 comprises a $350 million term loan and a $100 million revolver. We've increased our revolver from $50 million to a $100 million. This refi or the financing was led by BNI. Very obviously, BNI have been with us since day one in our bank loans. It also included six other banks, which was a mix of Asian and European banks. We continue to thank all of these banks for the ongoing support that they give to Nickel Industries. The interest rates we are at so far, which is currently around 3.6% plus 3.5% for the first 6 months. That's exactly the same as where we are with our existing bank loans. Then it's a leverage linked margin. As we reduce our margin, as our cash, as our operations increase, as ENC ramps up, hopefully Hengjaya, we increase that beyond the $14.3 million stage and we bring Sampala on. We expect to see our leverage naturally fall. As a result, our interest margin will fall as well. We have managed to give ourselves a 6-month amortization holiday on these new bank loans. And you can see the effect of that on the right-hand side, with the charts. It's for that reason why we're paying 3.5% for the first 6 months. Our current leverage would have us below 2.5x, so we'd be in a much lower margin. However, we decided to pay that additional interest for the 6 months in order to give ourselves the cash flow benefit of the principal reduction as ENC ramps up. The loans have a final maturity of June 30, 2030, and we will continue with quarterly principal repayments. You can see on the right-hand side in the bottom chart the new bank loan amortization. I think we believe that's good discipline to continue to reduce the debt in the bank loans. The post-refinancing, we will have net debt of just under USD 1 billion, so USD 994 million, USD 800 million of the senior notes, the 144A notes expiring September 2030, and USD 256 million of cash. We have changed the covenants. The covenant improvement in our previous bank loans was 2.5x, so net debt to EBITDA of 2.5x. We have now increased that to a maximum of 3.5x, which again reflects the bank's views and their credit committee's views of our strengthening business as we bring on ENC and we ramp up the mining operations. Importantly, we have included a covenant carve-out for the Sphere Corp loan guarantee. The Sphere Corp, the credit enhancement that we gave to the Sphere Corp lenders back in at the end of January, there's a guarantee under there and under certain conditions, if Sphere Corp was to default, Nickel Industries would be required to take on that loan. That obviously has that contingent liability obviously has covenant effects. For the purposes of these new bank loans, we have carved out the Sphere Corp loan contingent guarantee for our covenant purposes. This refinancing has really, I think given the company significant additional flexibility through the cash flow benefit over the next 2 to 3 years via the reduction in principal amortization and given us the ability to react or not be constrained by a 2.5x net debt to EBITDA covenant as in a very cyclical industry as we're currently seeing the nickel industry to be. We and again, we think that's very. It's a very strong result for the company and we are thankful to our, particularly the BNI, but to all banks, for their support. Justin?

Yes. Thanks, Chris. Look, in summary, another very productive profile quarter. Just touching on Chris's comments, obviously optimizing the balance sheet holds us in very good stead given that there is some market volatility at the moment. Outside of that, our focus remains on just completion of the ENC, particularly around the commissioning and then just ensuring that we meet that ramp up at the end of October of this year. Given the significant increase in the value of ore resources in Indonesia, we remain extremely focused on delivery of the Sampala and the Siduarsi projects in the near term. Whilst we are experiencing some cost pressures, it should be noted that we've also seen a significant increase in the LME nickel price. That's up from $14,892 average price for the December quarter to $17,338 for the March quarter. Current spot price is well over $19,000 a ton. Whilst we are seeing some increase in cost pressures, we are also seeing the LME nickel price rising in step with those rising cost pressures. Given the integrated nature of our operations, that stands us in much better stead than a lot of our peers. With that, I'll hand over to questions.

[Operator Instructions] Your first question today comes from Richard Knights at Nickel Industries. Please go ahead.

I'm working for you guys now.

Don't tell anyone.

Just on the cash generation, perhaps could you just dig a little bit deeper into the cash generation at the RKEFs in particular? It just seems a little odd to me that it was so low given the $86 million of EBITDA, and I think it was $3.5 million of operating cash flow at the RKEFs.

Chris, do you want to take that?

Yes. I can take that. The big one in it is the reduction there in payables. We had a significant decrease in the trade payables. We did, Richard, we took a decision in December when the mine was on standby and where there was uncertainty around the RKAB. We really did build up a lot of the, we had December inventory purchases, quite a large stockpile build. We paid for a lot of that. Obviously, the payments for that came in Q1. That was a very large part of it. I think that's turned out to be a very prudent decision given where we've seen ore prices continuing to increase. I think buying it, buying back then was the right thing to do. And we're very happy that we made that decision with [ Tsingshan ] to do so.

Okay. I mean, would you expect that to sort of unwind, or are you going to keep inventories at an elevated level?

Oh, look, you can see that it's a very uncertain period at the moment. Ordinarily, I would say yes, we expect it to unwind. I think we really need to carefully monitor the market situation in response to the ore pricing formula changes. I It won't have a huge effect in the RKEF business, the saprolite. Yes, I would expect it to unwind, but it's more we just have to watch how things evolve over the next couple of months.

Yes. Okay. Maybe on, just on the sulfur issue, can you remind me just, what your cost sensitivity is in the HPALs, i.e., how many tonnes of sulfur per tonne of nickel production?

Chris, do you want to take that one, or you want me to take it?

No, that's fine. The sulfur, I don't think we've actually given the specific tonnage and I don't think we are in a position to give that, Richard, given we're a 10% minority shareholder, where ENC is obviously not up and running yet. We have given some information around the effect of what an increase for every $100 increase in the sulfur price increases our operating cost by about $1,000. That's the expectation when ENC is up and running. So a $1,000 per tonne of sulfur. Yes.

Yes. You know, given the given the current situation, I mean, how are you thinking about inventory levels and when you'll need to restock? Obviously, it's a day by day thing I suspect you don't want to run that 3 to 4 months of inventory down to zero.

Look, we.....

What do you think about that?

Again, it's not only ore, the ore situation which is fluid. The ore market is a fluid situation. But with, as Justin mentioned, we've got, I think the inventory's out to August to September as it currently stands. And that inventory was purchased, the sulfur was purchased at $450 a tonne. Clearly, when you've got a current spot price of well over $1,000 a tonne, we're well positioned. As you said, we're not going to run it down to zero, of course. If we have to go into the market and secure more sulfur at a later date, we'll take that decision at the time.

Yes. Okay. I mean perhaps you can't answer this one, but just in terms of the broader industry, I mean, non-integrated producers must be really feeling the pinch right now of these limonite price hikes and obviously higher sulfur prices. Is there any evidence or any comment you could make around the broader industry and what their reaction has been to, a, these price hikes and the input, the limonite price hikes, and b, the sulfur squeeze.

Yes, Justin, I'll hand that one over to you.

Yes. Thanks, Chris. Look, they're, I think the reaction to the increase in limonite pricing has been that the broader industry hasn't adopted it and looks like it's unwilling to adopt it. We'll see how that plays out. I mean, you are seeing. We had an announcement recently of a non-integrated HPAL producer, Huafei. They're taking this opportunity where we've got sort of high volatility, high prices in terms of ore and sulfur to do some maintenance on their HPAL. We will see some tonnes coming out of the market, and there's reports of other producers, again, non-integrated, potentially sort of either reducing production or taking the opportunity to do maintenance as well like Huafei. I think once again, what it's highlighting is the advantage of being a fully integrated producer from mining across RKEF and HPAL projects as well as having our own captive power. But look, margins at this point still remain very healthy across HPAL and RKEF. I think it really comes back to your question of we have significant stockpiles across all of our operations, which I think was the right decision, to go into the market and buy, before a lot of this volatility, was introduced. We'll obviously continue to monitor the market in terms of the appropriate time to come in and refresh our stockpiles of ore and sulfur and other key consumables for our operations.

Your next question comes from Austin Yun at Macquarie. Please go ahead.

Just 2 questions from me. The first one is just extension to the sulfur exposure you have. Understand you're a minority stakeholder. I'm just keen to understand if you can provide some color, like knowing that the price is going to be doubled, is there any kind of a hedging or any special price protection or cost protection mechanism in place? We should just think once you switch to spot market, the cost going to go up? That's the first one. I'll circle back with a second. Thank you.

Look, thanks, Austin. At this point, no hedging of sulfur. I would add that we've been very active as well in looking at alternative supply sources for sulfur and there are a number of alternatives to the Middle East. Look, at this point, given that we have at ENC stockpiles out till almost the end of the year, we are, as we've said, continuing to monitor the situation. Look, depending on how things play out, we'll react accordingly.

Okay. Second one on the new HPM regime. You mentioned that this hasn't been implemented. I just keen to understand if you have a view on how quickly or how slowly this can be rolled out. Also, given that, Nickel Industries has a bit of exposure, how should we think about the exposure from the royalty cost perspective? Thank you.

The HPM has been implemented by the government. It's just it hasn't been adopted on the limonite pricing by current HPAL producers within Indonesia. Based on the initial work that we've done, the net for our business across obviously an increasing saprolite price means better margins for our Pangaiwa mine, which we own 80% in, could potentially put pressure on margins at our RKEF business, which we also own 80% in. Net, there's not a big change. We're just simply transferring margins from RKEF operations to mine operations, although we will lose the benefit of the tax holiday that we currently enjoy within the RKEF operations. Then on the HPAL side, as I said, at this point, the new pricing regime has not been adopted by any HPAL producers. Assuming that remains in place they do have the buying power at the moment, given that limonite is in abundance. There's a number of producers with very limited RKABs that need to be able to sell ore. I think that may stay in place. Again, it's obviously a very dynamic environment at the moment, not just in terms of nickel pricing, but in terms of global volatility and what's happening in the Middle East.

Your next question comes from David Coates at Bell Potter Securities. Please go ahead.

Some really good color from both of you there on the result. Just, apologies if I missed this, but, Talked about sulfur, and what about on the diesel front? In Indonesia is reportedly close to self-sufficient and the government does have a hand in setting pricing. Can you just give us a bit of background on prices and availability and the outlook for diesel in Indonesia, please?

Thanks, Dave. As you've correctly pointed out, Indonesia is self-sufficient in terms of supply of diesel. There's no supply disruptions anticipated in the pipeline. Given that it is heavily subsidized by the government across the whole archipelago, we've seen very modest increases in diesel. I should note that in terms of our operations, our refining operations, our RKEF, our HPAL use very little diesel. The only real major usage is in our mining operations and we have contract miners who obviously are responsible for sourcing fuel for their equipment. Over 30% of our fleet, in terms of trucks is electric. We haven't seen any real interruptions or any significant cost pressures from the increase in diesel prices, which has obviously impacted other operations globally.

Excellent. Good news. Just finally on the ENC HPAL commissioning, you've given some dates of October as sort of hitting full nameplate. Can you just give us I guess some background on what delays have been and how that ramp up is looking from here?

The real unfortunate delay has been the fatality of the contractor to FMI. That sort of set us back a couple of weeks. Challenge being is that sort of prior to that we had somewhere sort of in the vicinity of about 3,000 contract workers on Hengjaya Mine, working on the slurry pipeline, on the dry stack tailings facility, and on that transmission line. With the temporary stoppage of work and then the restart, it obviously was challenging to recruit and bring back that large number of workers. That's sort of what's led to the delay in commissioning. I think obviously testament to Tsingshan, they've still been able to start the pre-commissioning of a lot of the key pieces of equipment, and that's progressing very well. It's really now the key milestone for us is the slurry pipeline, which obviously is going to feed ore into the plant, completion of that, and that's now back on track. Whilst we've lost a small amount of time Tsingshan remains extremely confident of the ramp up profile and hitting that nameplate capacity by fourth quarter of this year, which is, you know.

Brilliant. Excellent.

It's a very if you look at it's a very quick ramp up, but they've done it before.

Yes. Well, the agency is a great template.

Yes.

Your next question comes from Mitch Ryan at Jefferies. Please go ahead.

Just with regards to the HPALs electing to not pay the HPM or not adopting it, are they challenging it on legal grounds, or are they just literally ignoring the government regulation?

Yes. No, no challenge on legal grounds, simply just ignoring the government regulations. Pushing the burden back onto the mining operations in that the mine, whilst they can sell at a lower than HPM price, they will still have to pay a royalty on the HPM price. They will still have to pay tax on that deemed HPM price as well. You know, on mining operations that pass is actually being, rather than being passed on to the refineries at this point, it's simply being passed back to the miners. Look, that's just on limonite. There's saprolite, the HPM actually brings the price in line, or actually still a little bit less, but in line with what the current market price for saprolite is. Obviously the government receiving royalty on a $26 saprolite price when the current market price is around $40, they're losing out on that, on the royalty on that $40. That I think is sort of what drove the decision to revise that HPM pricing. I think they've probably overcooked the limonite pricing, and as I said, we'll see how that plays out over time.

Okay. The government's still getting its take from the limonite, on the limonite pricing. It's just from the miners.

Correct. Yes. At this point in time, that change is being borne by the miners themselves. I mean, look, I do think the HPALs probably have some pricing power here in that mines have limited RKAB and very limited customers that they can actually sell limonite to.

Your next question comes from Jit Ming Tan at Barclays Bank. Please go ahead.

Just one question here. Looking at your mining unit operating costs for the quarter, that's significantly higher than what it was a year ago. Were there any other reasons besides the contractor standby costs?

No. Look, predominantly driven by the contractor standby costs. You know, we have had increases in mining costs, driven by obviously, inflation also, increases in the diesel price. Mostly we've seen standby costs last quarter. We saw a small amount of standby costs this quarter related to the temporary stoppage with the incident that occurred. Overall, costs at the mine remain pretty stable and we don't see that changing.

Your next question comes from Donavan Tan at BlackRock. Please go ahead.

I think I have a couple of questions. I'll start with the first one. I think you guys mentioned on the sulfur side about the ME supply, Middle East supply. I was kind of just reading about the China banning the export from May to December. Do you guys think that that will have a impact on your margins?

China's banned the export of sulfuric acid. We have our own sulfuric acid plant, so we make our own sulfuric acid. We obviously buy sulfur. The Chinese ban purely relates to the end product, sulfuric acid, which we don't, we don't buy or consume.

Got it. Understand. All right. The second thing is more of a clarification point. In your covenant cover for the Sphere loan guarantee, what's the cover like? Because I'm assuming that this is if you guys take over the loan, then that wouldn't be included in the leverage calculation, is it? If that's correct.

Yes. Thanks for the question, Donavan. It's the covenant I'm really focused on is the net debt to EBITDA. We've got a 3.5x net debt to EBITDA cut max, up from 2.5x. As it stands now, as it's a contingent obligation, it is not included in that calculation of in the net debt to EBITDA calculation. If it is exercised, it will come in, and we will need to. If Sphere defaults and it ends up that they cannot cure and Nickel Industries ends up taking over that loan, it gets put to us, then it will be included in the calculation, and we will address that as and when we get to that situation. One of the things we did when entering into the agreements regarding the Sphere loans and providing that credit enhancement, we started having those discussions in late 2025. For that same reason, we started looking to refinance our bank loans in 2025 to accommodate this. We've worked with our existing bank loans over the last five months to give us as much flexibility regarding that Sphere loan guarantee.

Got it. Just one final question on my end regarding the registration of your products on the LME site. Is this basically like a almost confirmed kind of thing or?

Sorry, what was that?

I think Donavan's asking is it a formality? Once we produce the cathode out of the ENC project and start to seek to qualify it with the LME, is it a formality? Is that correct, Donavan?

Yes, that's correct.

I mean, look, there's certainly a process. It's not a formality in terms of its being guaranteed registration. We're extremely confident given that we've passed a significantly extensive and exhaustive testing process from Sphere and SpaceX in terms of the quality of cathodes. That is not a formality, but we're very confident of being able to meet those the LME requirements for registration.

Your next question comes from Aman Aggarwal from JPMorgan. Please go ahead.

I had a couple of questions, firstly on the payables. Are these payable reductions mostly to Xinxian or are these third party? What is generally the split there?

Sorry, Aman. It just cut out there halfway through regarding the payables. Can you re-ask the question, please?

Yes, sure. These payable reductions, are these to Xinxian or are these to third parties? What is the split there?

It's predominantly for the ore. There's payables to, not to Xinxian per se. It's HNI, RNI, and ONI which are purchasing ore from Hengjaya Mine. Also, payables to... The payables, the majority of it is going from the industrial parks. It's from the industrial park as opposed to Xinxian.

I see. Is it fair to say that these are mostly third party?

Oh, yes. Yes.

All right. Okay, and you said this is mostly RKEF. Why is there substantial cash outflow from the HPAL operations?

The HPAL operations is slightly different. There's a few things that you need to look at there. We have brought forward payments to HNC. When I say we, all shareholders. There's three shareholders of HNC, being Wanlu Cobalt, CMOC Group and Xing Creation, which is Nickel Industries. All of them, the payment cycle was reduced under agreement by all shareholders and the board and shareholders. We ended up bringing forward payments. Tsingshan brought forward payments. We've had cash outflow from Nickel Industries or from Xing Creation. We also had our Xing Creation trading division. We had March some shipments of our sales where we didn't actually receive the cash until first of April. You'll see quite a bit of that cash come in the next quarter. HNC, the HPAL HNC is a 10% minority interest. We show the EBITDA to show an overall adjusted EBITDA number, we're currently not getting cash flows directly from being a 10% shareholder in HNC. HNC is focusing on prioritizing the reduction of debt, which we're very happy about in this environment, to be honest. Hopefully throughout the course of this year, we'll actually see that get down to zero and commence actually getting cash dividends from HNC.

All right, you're expecting cash dividends from HNC maybe starting next year.

Right.

In the meantime, your trading division would still generate cash.

Exactly.

All right. Understood. My second question was on the Weda Bay RKAB cut. For ANI, how are we sourcing feedstock there, and do you expect any margin impact if there's an increase in ore prices?

Yes. Weda Bay is sourcing from third party suppliers. The change in the saprolite HPM actually has not had any impact on the actual market price. The HPM actually remains still below the saprolite market price. We've been paying that market price at ANI for a number of months now. We don't expect any change in ore pricing. The only thing that will impact ore pricing is obviously changes in the LME nickel price.

All right. Also very quickly, I think your grade, NPI grade has dropped this quarter. Any reason for that? Where do we see that trending going forward?

Look, that's just reflective of, lower grade saprolite ore, going into the operations. I think I don't think we'll see that continuing to significantly decline. Where we've moved from the, in the past couple of years is we've moved from sort of an average grade of around 1.8 down to around an average grade of 1.4, 1.5. There is significant resources of 1.4, 1.5 that remain in Indonesia. We think we'll probably trend around these levels for a long time. Again, what it highlights is just the advantage of our Hengjaya Mine and our ANI project, given that they host significant high grade saprolite resources. Our intention is with developing the Sampala project, is that we become fully self-sufficient, which means that we'll be able to supply higher grade if required to our ANI operations.

[Operator Instructions] Your next question comes from Bharat Shettigar from Standard Chartered Bank. Please go ahead.

A few questions from my side. Firstly, in terms of the mining quota, what is the ideal mining quota you would require for next year, assuming the ENC is operating at 100% and you have the RKEF requirements as well? What's the ideal quota you would want?

The ideal quota would be around 12 million to 14 million tonnes of limonite. If we were to maintain our current supply profile of saprolite, which is about 6 million tonnes, we'd be somewhere around that sort of 19 million tonnes, which is the number that we were targeting for this year. We weren't given that, given that we obviously not going to have a full year of ENC this year. If nothing else changes, the current RKAB that we have of 14.3 million means that we're fully self-sufficient for ENC, which is key. We will be making and we're entitled to make an application for an increase in the middle of this year, which we'll be doing. I think we'll probably be more likely to have success in increasing the RKAB at the end of the year. When we resubmit for next year, once we can demonstrate that ENC is ramped up and operating nameplate capacity, and we can demonstrate the ore requirements there.

Sure. The other question is there's been a lot of chatter about potentially, export taxes on, minerals. Anything that you heard on, the nickel side? Could NPI face an export tax, sometime in the future?

Yes, there has been talk. If it was applied to nickel pig iron, the majority of our nickel pig iron is consumed in country in Tsingshan stainless steel operations. There wouldn't be, it wouldn't be applied to ONI, HNI, RNI. If it was to apply to ANI where we do export some of that, we'd simply look, given Tsingshan's our largest shareholder, to just divert that NPI in country. I think we're well-shielded from any potential export tax on NPI. The talk has been around potentially that tax being applied to MHP. Again, given the integrated nature of our operations at ENC, we actually go through to nickel cathode and nickel sulfate, higher value product, which at this point in time the government has said they don't want to tax because they want to encourage further downstream value-adding, which is what we're doing by taking MHP through to nickel cathode and nickel sulfate.

Sure. Understood. Final question is on the loan covenants. A couple of points on that. Firstly, is the loan covenant of net debt to EBITDA of 3.5 calculated based on full consolidation of ENC? Or is it based on a proportional 46% consolidation of ENC?

Yes. Thanks for the question, Bharat. No, it's not consolidating ENC. For the covenant purposes, clearly we are not consolidating ENC. We have no intention to consolidate ENC. It's not going to include in the 100% basis. There was a lot of discussion about how we would deal with it. We've settled on, rather than consolidating the full 100%, we will be proportionally taking on the 46% for both obviously the earnings for the earnings there at ENC. We've got quite a bit of flexibility there, which is great. Again, it's something which we managed to negotiate with the banks over the last five months, and we're very supportive for them of that. Having said that, Bharat, we've increased it from 2.5x to 3.5x. I want to make it very clear to all, everyone on call, equity and debt investors, we do want to bring down our leverage to something significantly below where it is now, sitting just under 2.5x at December 31. I'd like to see it half that level, so around 1 to 1.25x net debt to EBITDA. I think the margin grid which we have, you can see that incentivizes us to do that.

Right. I mean, in the annual report, there was a section where you had said that for 2026 you would not be in compliance with the earlier covenants. Just trying to understand, was that related to net debt to EBITDA or some of the other covenants in the earlier loans?

Yes. That was in the earlier loans. It didn't say we wouldn't be in compliance. There was a potential that we wouldn't at June 30. That entirely related. Well, it didn't entirely relate. It was very much to do with the Sphere. If we included the Sphere guarantee at the full $210 million loan, there was a potential, depending on how margins went in Q1 and Q2, i.e., how EBITDA was in Q1 and Q2, that we could have been in breach of our covenants at June 30. That's entirely the reason why I commenced. Well, it's not entirely. It's, it's one of the, it's a very key reason why we looked to refinance that, those two bank lines in, into a single bank loan and accommodate the Sphere guarantee, so we didn't have any issues come the middle of the year.

Right. Now based on the new covenant definition, what's the net debt to EBITDA as of, let's say, December or March?

We haven't released March, so obviously I'm not going to say that it's still 2.3x.

Your next question comes from Cindy Huang at Invesco. Please go ahead.

Just a few questions. I think you mentioned that about stockpiling for ENC till the end of the year. I just wanted to understand what kind of working capital we expect for the ENC. After you've got stockpile to September, is that just for the HNC or you've also started, you've got the stockpile for ENC as well?

Yes. I'll take those if you like, Justin. When we talk about our stockpiles, we're talking purely in relation to ENC, the numbers we said earlier. HNC again, and I know this is difficult, but as a 10% minority investor, we're limited in what we can release, and we wait for HNC to release their numbers, and then we can effectively report on those. I can't give advanced discussions on their stockpiles. ENC, which is obviously the key one for investors, is out until the end of Q3. The other question, working capital. Yes. There will be some working capital build obviously, at ENC that will be borne by all shareholders and our share of that's 46%. It clearly depends. You've got sulfur to continue. We bought a lot of the sulfur already, obviously. There will be sulfur for Q4 that will be required. I can't tell you the size of that because I don't know the price. Then obviously we're waiting, as we said earlier, the ore price, the limonite ore price is currently very fluid on what we'll get paid from ENC or any of the HPALs, in the market. But there will be over the course of this next, call it six months, there'll be a working capital build, of the Nickel Industries share of somewhere between $50 million to $75 million.

$50 million to $75 million. Okay.

I'm sorry, I can't be more accurate. Given what's going on with the sulfur price and the limonite ore price, it's very difficult.

Okay. Understood. Final question from me. You mentioned the cathode registration. Can I just check how much of the ENC will be nickel cathode? Is it just for the 10% Sphere offtake, or we will be producing more than the 10%?

Yes, we have capacity to produce 40,000 tonnes of cathode a year.

Okay. You mentioned it would be a premium off of the LME price. Is there an indication of how much premium of the LME price we can expect for our nickel cathode?

At this point in time, the LME-registered premium is around $200 to $300 a tonne above the LME price.

That does conclude our question and answer session for today. I'd like to hand the call back for closing remarks.

Yes. Look, thank you, everyone. I gave some closing remarks earlier. We will end the call here. Thank you again for attending and your questions. I think, look, we look forward to focusing on delivering another strong second quarter for this year and delivery of ENC. Thank you, everyone.

That does conclude our call for today. Thank you for participating. You may now disconnect your lines.