Nickel Industries Limited (NIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nickel Industries Limited Sampala Project Monetization and HPAL Integration Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Justin Werner, Managing Director.

Thank you very much. Could I ask the moderator to please move to the next slide. Welcome, everyone, and thank you for joining this morning's call. The two transactions announced this morning really expand on the previously signed MOU for ore supply from our world-class Sampala project. We're pleased to, obviously, announce recently a significant upgrade in the resources to -- in excess of 1 billion wet metric tonnes at 1.2% nickel. And these transactions further diversify us into the HPAL chain. But I think, importantly, the CNE transaction allows us to monetize some of the value in our Sampala resource at a significant value uplift. The upshot of these transactions, it will deliver approximately 17,000 tonnes of attributable nickel in MHP. This is at nameplate for USD 169 million cash consideration. That's the only cash consideration required and that -- at face value, that's a $10,500 capital intensity versus current Indonesian projects, which are sort of between $20,000 to $30,000 a tonne. So it's a very attractive capital intensity. It's to be funded from existing cash and operating cash flow, with a debt backstop at commercial terms from Tsingshan, if required, again, highlights the strength of the relationship with Tsingshan, removes, I think, importantly, removes the risk of any equity overhang. It requires -- the CNE deal requires no cash. And as I mentioned earlier, validates the Sampala project value at over USD 1.3 billion, which is a 5.4x value uplift from NIC's acquisition price, which we haven't even paid for it yet, and we're already getting this value uplift. This brings Sampala more closely aligned and integrated with downstream HPAL processing. It delivers on the government objectives, and we believe strongly positions the project for a favorable RKAB outcome, which was demonstrated with the RKAB quota that was delivered to our Hengjaya Mine operation. And finally, it further diversifies us deeper into the EV battery supply chain, with a number of blue-chip Korean and Japanese partners, and an undisclosed strategic investor in the EV supply chain. If we could just go to the next slide, please. Thank you. Just an overview of the transactions. The first transaction, TMI, again, comes with a CapEx guarantee. That's $965 million. We will be acquiring 17.5% of that project for $169 million cash. The payment is due in November of this year. As mentioned earlier, if there is any requirement, Tsingshan will provide any required debt funding to bridge any shortfall. It has a production capacity of 38,640 tonnes, that's at nameplate. So our attributable production there will be 6,775 tonnes. As I mentioned earlier, some blue-chip Korean, Japanese investors, LS MnM and Hanwha as well as a strategic investor in the EV supply chain. The date for reaching nameplate of TMI is around September of next year. So the project is very well advanced. And then CNE, the valuation there is $671 million. The effective share swap will see us move to a 36% interest in CNE. It will see us reduce from 60% in Sampala to 42%, but still retaining the largest shareholding in Sampala. Being a share swap, obviously, there's no cash consideration. It has a production capacity of 28,357 tonnes. So our attributable production there is 10,208. And the other shareholders will actually be our local partner, who is our local partner from the Hengjaya Mine as well, and we've had a long-standing 15-year relationship with our local partner. So we're very pleased that he's been able to participate in this transaction as well, and we'll share some of the upside of being a shareholder in the CNE HPAL. Ore for both of these projects will be supplied via, sorry, a pipeline similar to ENC from the Sampala project. And there's no additional CapEx requirements from NIC in either of the projects. If we could just go to the next slide, please. So here is just an overview. You can see this is on the left, CNE corporate structure post-transaction. Post-transaction, in the Sampala project, Nickel Industries will move from 60% to 42%. Our local partner will move from 40% to 28% and Hengjaya will come in for 30%. The Sampala project combined will hold 85.7% in the CNE HPAL, of which NIC will hold 36%. And [ Blue Zone Singapore ] will hold the remaining 14.3%. As mentioned previously, again, 100% of the limonite ore supply will come from Sampala project. So effectively, we're swapping an 18% interest in the Sampala project, and this is the ANN and ETL IUPs only. It doesn't include the third, Gita Flora IUP. The implied cost there is $44.7 million and effectively gives us 36% of the CNE HPAL at an implied value of $241.8 million. So that is a 5.4x value uplift on our Sampala project stake, requires no cash, no additional CapEx. And as I said earlier, that's an implied capital intensity of approximately $10,500, which is significantly below the industry peers. If we could just go to the next slide, please. So these transactions effectively bring to a conclusion our investment journey into the high-margin HPAL segment of the market. That started with HNC, and we hold a 10% interest there, with attributable production of 8,500 tonnes a year, currently producing at 40% above nameplate capacity. Q1 margins were $9,992 a tonne, very high-margin business, and it has a tax holiday of 15 years plus an additional 2 years at 11%. We then moved into ENC, again, nameplate capacity of 72%, NIC holds a 46% interest. We were able -- and again, I think reflective of the strong relationship with Tsingshan, we were contractually bound to acquire 55%. We only moved to 46%. It's the first HPAL globally to produce MHP, sulfate and cathode. So it further diversifies our nickel products. Our attributable production from that project is about 33,000 tonnes. We're expecting first MHP in next month and targeting nameplate capacity by October of this year. It also has a tax holiday of 15 years plus another 2 years at 11%. And at the ENC project, I think that project was really validated by the incoming investment of Korean-listed Sphere, who's the only accredited super alloy supplier to SpaceX and the only supplier with a long-term 10-year contract. These final two transactions, as I said, this really caps our investment journey into HPAL, given that the Indonesian government is no longer approving any more HPAL projects. We think that we've been able to get these on highly attractive valuation terms. TMI targeting nameplate by September of next year, 39,000 nameplate, and NIC to hold 17.5%, so that's 6,775 tonnes of attributable production. There's some very good names, Korean and Japanese in there. And as I mentioned, the strategic EV player in there. Again, CapEx guarantee, nameplate guarantee. And then finally, the CNE transaction, which is effectively a share swap. We will be taking a 36% interest in that HPAL and reducing our interest by 18% in the Sampala project. And to run through the numbers at a very high level, if you assume that ANN and ETL had a 20 million tonne a year RKAB, and if you use current margins of $10 a tonne, NIC pre-transaction with a 60% interest would have 12 million tonnes of attributable ore sales a year. At a $10 margin, that's USD 120 million in EBITDA. So that's pre-transaction. NIC had just retained its 60% interest in ANN, ETL. Moving to 42% of ANN, ETL, that brings our attributable nickel sales down from $12 million to $8.4 million. So again, at a $10 margin, that's $84 million in annualized EBITDA from our retained shareholding in ANN, ETL. But I think importantly, the additional 17,000 tonnes of attributable nickel that we're bringing on for just $169 million. At today's margin of $10,000 a tonne, it would also deliver an additional $170 million in EBITDA. So if you combine the $170 million and the $84 million, you come up with $254 million. If you wanted to use a more conservative number for HPAL margins, say, $5,000 a tonne, you're looking still at the $84 million of the 42% holding in ANN and ETL, and at $5,000 a tonne margin on 17,000 tonnes of attributable nickel. Again, this is all at nameplate. You've got an additional $85 million. So the $85 million and $84 million brings you to, actually, to $169 million, which indicates a 1-year payback. So we think these are highly value-accretive transactions. Both companies have applied for tax holidays. And this, as I said, really sort of, I guess, marks the conclusion of our investments into the highly -- into the high-margin HPAL segment of the market. And I think being able to monetize Sampala at such an early stage in the project cycle, I think, really validates the decision to look to acquire the Sampala project and the value -- the long-term value that not just Sampala, but both of these projects will deliver to NIC shareholders. That brings -- concludes the presentation. I'll hand over to Q&A.

[Operator Instructions] Your first question comes from Austin Yun with Macquarie.

Good to see you further diversifying your product mix. I'm just keen to understand, what's the perfect mix for Nickel industries? How should I think about, in a long-term view, the mix of NPI and HPAL product [indiscernible].

Yes. Look, I think obviously, we're sitting at around sort of 125,000 tonnes of nickel in NPI production annually. As you know, there's a moratorium on any new NPI production, so -- that we won't be expanding on the NPI, and we would have no intention to, anyway, even if the opportunity was available. If you add up our attributable production from HNC, ENC and TMI and CNE, you're looking at about sort of 60,000 tonnes a year from HPAL. So we're looking at about 1/3 coming from HPAL, 2/3 from NPI. And I think even more importantly, ENC is attractive because it offers us further diversification, further downstream from MHP into the sulfate and cathode market. So I think we have a good balance at this point. And I think what's also pleasing is we're seeing a strengthening in the nickel pig iron market being reflected, obviously, in the May numbers. And we think that, that -- those robust nickel pig iron numbers should certainly remain. And we think once some of the volatility comes out of the market and there's resolution to the Middle East war, that we'll see HPAL margins strengthen again and certainly, at $10,000 a tonne currently, they're very high and very healthy.

Just the second one is a bit of heavy question. So I have to admit I don't know TMI and CNE very well. So I'm just keen to understand who are the builder of those two projects. Should we think these two projects share exactly the same technology as the ENC one, or if there's any differences? And also, I understand the commissioning of Sampala is around mid-2027. How should we think about the key milestones from now to then?

Yes. So look, these TMI and CNE are effectively an expansion of ENC. And you can see those in the ENC video. You can see where these projects are being built. In terms of the timing, TMI, we're looking at nameplate by September of 2027. And in terms of CNE, we're looking at the commissioning in mid-2027. So certainly, by -- before the end of next year, both projects should be at nameplate or potentially even above nameplate before the end of next year.

Yes, sure. Just one last quick follow-up. Given each facility has a different shareholder structure, how should we think -- but I understand this is both kind of ENC expansion. How should we think about the procurement of the key input in addition to ore? Will there be any competition in terms of sulfuric acid energy and also prioritization of product?

The two key inputs are really ore and sulfur. Obviously, the ore is coming from Sampala for both projects, and that will be at the market price. In terms of sulfur, look, the projects won't be competing. They will be both operated on an even footing. And so there's no issues with competition for facilities or resources.

Your next question comes from Aman Aggarwal with JPMorgan.

Congratulations on the announcement. I just had a couple of questions. Firstly, on the assets, could you explain how much debt do we have sitting on these assets already? And what is the cost of debt, if any?

Chris, I'll hand over to you for that one.

Yes, that's fine. Currently, it's all equity funded, Aman. So no debt at the asset level. And obviously, if that changes, we'll let the market know in due course.

All right. So that valuation is full equity valuation. And also on the ENC, could you give an update on when we expect commercial production and how much we expect to produce this year?

Yes. So we're targeting first MHP in July. We're targeting to hit nameplate by October of this year. And so that will give us a target of around sort of 20,000 tonnes of nickel in MHP for this calendar year.

Got it. Okay. And then just in terms of time line, so we have the $28.5 million advance payment for ANN, ETL. That's going to come up in a couple of months, I believe. Then we have the $169 million in November for TMI. And then in first quarter next year, we will have another $149 million. So that time line remains the same, right?

Yes, not quite. We've already made the $28.5 million advance payment. So that's already done. The remaining $149 million, we'll be making $5 million of that for ETL in coming months and $144 million for ANN. That's due in April '27. So you've got $5 million in the next few months, the $169 million for the TMI investment, and then the remaining $144 million for ANN will be made in April next year. As we said, and we wanted to be very clear, as Justin mentioned, we want to be very clear with investors that we believe that we're fully funded from existing cash reserves and existing cash and our upcoming cash flows. But we thought it was very important to ensure that if for whatever reason, I guess, margins weren't what we expected over the next 6 months, 6 to 9 months that we had that commitment from Tsingshan to ensure that we would not be coming back to the equity market for issuing any new shares.

Your next question is from Daniel Gage-Brown with Argus Media.

I just had a couple of questions. My first question was just on the point you mentioned that the Indonesian government has announced a moratorium on new HPAL projects. I was just wondering if you could help me understand when that was announced and what the rationale behind that is?

I can't give you specific dates on when it was announced, but it was some time ago. The rationale behind it was, I think the Indonesian government took some learnings from the rapid growth in RKEF and nickel pig iron production. And what you saw for a period of time there was oversupply. That led to a deterioration in margins in the NPI business. When we first started, we were experiencing margins of sort of $6,000 a tonne to sort of -- over the course of 2014 and most of -- sorry, 2024, 2025, margins of sort of $1,500 to breakeven on some of the older RKEF assets. Obviously, from a tax perspective, that's not attractive for the government, given that it's given out significant tax holidays and you then had a number of these RKEF operations rolling out of tax holidays, but in an environment where they were breakeven or some even loss-making. So I think having learned from that experience, and given that Indonesia, at the end of this decade, will produce 75% of the global nickel output, the Indonesian government has demonstrated that it wants to intervene. It wants to maintain prices that will deliver strong margins for producers. And I think it wants to -- and it's done that through RKAB quotas. It's done that through moratoriums on NPI and HPAL. And so given that we were early-stage investors into NPI and into HPAL and MHP, we've set up a very strong production base of diversified nickel products, which I think if you look at NPI now, you've got growing demand from stainless growth in China and India, but you have a cap on NPI, and that's led to some strong price increases in the NPI over the last couple of months. So we think, as I said, the government has learned from the NPI experience, they've got in probably ahead of the curve. And so look, now, I think even if you wanted to fund an HPAL project at the moment, it would probably be -- I don't think you would get it funded. So this sort of represented the final opportunity to secure more nickel units via HPAL at a very, very attractive capital intensity.

Okay. I just had one more question. Sorry if you already covered this in your presentation, and I missed it. I just wanted to ask, so will the output that Nickel Industry receives from its investments in CNE and TMI be proportional to the equity stake that it holds, like 36% and 17.5% of the nameplate?

Correct. So the 17.5% in Teluk Metal will give us about 6,775 tonnes, that's at nameplate. And the 36% interest in CNE will deliver us about 10,000 tonnes at nameplate.

Your next question comes from, [ David White ], a private investor. David, your line maybe [Audio Gap] Your next question comes from [ Warwick Mars ], a private investor.

Justin, congratulations on the deal. I just want to get an update from you on the likely dividend timetable and what impact these transactions will have on that.

Apologies, Warwick. That was a bit muffled. I don't know, Chris, did you hear that question?

Thanks for the question, Warwick. It was just around dividends, Justin. Warwick, we -- as per usual, the Board will be meeting in a month or two after each half-yearly period. We haven't had that meeting yet regarding dividends, and we'll wait to see how the quarter evolves and our outlook. So no dividend decision has been made yet.

Right. And what impact would the transactions you've outlined today have on future dividends?

Well, obviously, depending on how our margins go over the next few quarters, we're paying $169 million from an investment, which would not be available for dividends. So that's the clear impact. But the precise outlook for dividends is clearly depending on our Q2 and beyond earnings, which we'll be releasing to the market in due course.

Your next question comes from Jit Ming Tan with Barclays.

Congratulations on the transactions. A couple of questions from me. Firstly, for the TMI and CNE MHP output, do you know if the companies have buyers in place for their eventual production? So that's question number one. Question number two is relating to TMI. Your announcement says that the consortium shareholder includes LS MnM and a strategic investor. Is there a reason why the strategic investor is unnamed?

Yes. Look, in terms of other shareholders and what they -- where the product is going, I can't comment on where that product will be going. And look, unfortunately, the strategic investor has asked that their name not be disclosed. But as I mentioned, they are a strategic investor in the EV supply chain.

[Operator Instructions] The next question comes from Mitch Ryan with Jefferies.

Can you just comment on growth opportunities beyond Indonesia? I think you've started seeing China starting to, in the press, look beyond Indonesia, some Indonesian companies are investing in mining assets outside Indonesia, given the growing regulatory changes that are occurring in Indonesia. Do you see anything on the horizon for Nickel Industries?

Yes. Thanks, Mitch. No, look, we're not -- we're sort of -- we've been very focused in Indonesia. Obviously, with a moratorium on NPI and HPAL, we don't think there'll be any further investment opportunities there. I think really, the remaining investment opportunities within Indonesia are really in nickel ore resources. And I think we've seen that in the Sampala acquisition, given almost 5.5x value uplift in a very short period of time. So I think any further opportunities we see will really be upstream in resources. Outside of Indonesia, look, there's really just -- there's no one really that has the size of ore resource, the grade and the existing infrastructure or even the government incentives. I don't know anywhere in the world where you could go and get a 15-year tax holiday on your investments. So look, we certainly are actively looking overseas for any other opportunities outside of Indonesia. And as I said, I think our focus looking forward, and it has been for some time now, is if we could do another Sampala transaction, I think we certainly contemplate doing it, given the long life value of that resource, the low capital intensity to develop the mining operations and the very low acquisition costs.

And given -- I guess, as you've outlined the value of the ore deposits and the mining deposits, can you just help me understand the total volume of ore from Sampala required to feed ENC, TMI and CNE? And so I guess what I'm asking is what's the required RKAB size you'll need?

Yes. So for ENC, that will require about 12 million to 14 million tonnes of limonite a year, which will be coming from Hengjaya. And TMI, CNE will require the same volume, about 12 million to 14 million, which will be coming from Sampala. So the minimum RKAB in both instances, for HM and Sampala, is 14 million. I guess one of the benefits of Sampala is given it's actually three individual IUPs, you're actually then looking at an aggregate number rather than a headline number. So if we were only to get 7 million at ETL, 7 million at ANN, that would mean that we'd be at that 14 million. And even -- we've got a third IUP, which could feed in. So having that ability to sort of split that $14 million requirement across the three IUPs, we think gives us a very good benefit as well.

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

Look, thanks, everyone. I appreciate you jumping on the call at short notice. Look, as always, Chris and myself are available for any further questions that you may have. And look, we look forward to providing further updates on ENC and now, TMI, CNE in our upcoming quarterly. So thank you again, everyone, for your time.

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