Company Overview: Nickel Mines Ltd is an Australia-based company that is focused on producing nickel pig iron (NPI). The Company, through its subsidiary PT Hengjaya Mineralindo, owns the Hengjaya Mineralindo Nickel Mine (HM Mine). The HM Mine is located in the Morowali Regency of the east coast province of Central Sulawesi, Indonesia. The HM Mine covers an area of approximately 6,200 hectares.

NIC Details

Production from RKEF Transitioned from ‘Nil’ in CY19 to 10K t in Sep Qtr: Nickel Mines Limited (ASX: NIC) was incorporated in the year September 12, 2007, within the jurisdiction of the State of New South Wales, Australia. It is a low-cost producer of nickel pig iron (NPI), a key ingredient in the production of stainless steel. It holds a 60% interest in a 2 line Rotary Kiln Electric Furnace plant (RKEP), Hengjaya Nickel and 60% interest in another 2 line RKEP plant, Ranger Nickel. It also holds an 80% interest in the Hengjaya Nickel Mine, which is a large tonnage, high-grade nickel laterite deposit located in the Morowali Regency of Central Sulawesi, Indonesia. Looking at the past performance over FY15 to FY19, total revenue of the company has grown with a CAGR (compounded annual growth rate) of ~314%. Group’s total revenue improved from US$0.22 Mn in FY15 to US$64.94 Mn in FY19. The company posted a profit for the first time in the period FY15-19. Net profit stood at US$65.53 Mn in FY19 as compared to a loss of US$3.73 Mn in FY15. On balance sheet front, group’s cash and cash equivalents at the end of FY19 stood at US$49.0 Mn as compared to merely US$0.8 Mn in the previous year.

Company’s September quarter was highly productive, underpinned by Ranger Nickel production broadly in line with Hengjaya Nickel and well above nameplate capacity. NIC’s achieved a remarkable feat from having nil production from its RKEF project at the beginning of CY19 to 10,000 tonnes of nickel production for the September quarter. Moreover, despite significant flooding in the June quarter, negatively impacting operations at Hengjaya Mine, the site witnessed a strong bounce back with a record quarter production. Now, it is advancing on its several initiatives to materially increase mining rates of its saprolite and limonite ore resources.

The Hengjaya mine is undergoing an infill drilling inside IPPKH 1 and 2 with an upgraded resources model, expected to be completed by early 2020. Moreover, mine infrastructure and jetty expansion work along with commissioning of additional mine site laboratory are expected to help the company in delivering a sustainable returns for its shareholders in the long run.


September Quarter Key Metrics (Source: Company Reports)

Key Highlights of September’19 Quarter: NIC completed commissioning and ramp-up phase for Hengjaya Nickel and Ranger Nickel RKEF projects. Nickel metal production for RKEF for the quarter (100% basis) stood at 10,019 tonnes. Total production for the quarter was 33.5%, above monthly nameplate capacity, which was 1,250 tonnes Ni per month for each plant. Sales for RKEF (100% basis) for the quarter stood at US$117.2 Mn, including first NPI sales from Ranger Nickel in August. EBITDA for RKEF (100% basis) for the quarter stood at US$50.2 Mn.

Weighted average cash costs for Hengjaya Nickel and Ranger Nickel for the quarter stood at US$7,523 per tonne and US$7,552 per tonne, respectively. Company’s cash, receivables and inventory at the end of the quarter was reported at US$154.7 Mn, as compared to US$103.1 Mn in the previous quarter. During the quarter, NIC made early debt repayments against Ranger debt facility.

Group held cash balance of US$33.0 Mn as compared to US$49.0 Mn in the previous quarter. The cash balance included US$17.7 Mn held by Nickel Mines; US$1.2 Mn held by PT Hengjaya Mineralindo, in which Nickel Mines holds an 80% interest; US$9.5 Mn held by Hengjaya Nickel and its related entities, in which Nickel Mines holds a 60% interest; and US$4.6 Mn held by Ranger Nickel and its related entities, in which Nickel Mines holds a 60% interest.
Group’s trade receivables for the period was reported at US$84.5 Mn, as compared to US$45.2 Mn in the previous quarter. Trade receivables comprised US$47.6 Mn held by Hengjaya Nickel; US$34.6 Mn held by Ranger Nickel; and US$2.3 Mn held by Hengjaya Mine.

Group’s inventory value for the quarter was reported at US$37.2 Mn, as compared to US$8.9 Mn in the previous quarter. Inventory value included US$22.2 Mn held by Hengjaya Nickel including US$6.0 Mn of NPI and US$16.1 Mn of raw materials; US$14.6 Mn held by Ranger Nickel including US$4.7 Mn of NPI and US$9.9 Mn of raw materials; and US$0.4 Mn of nickel ore held by Hengjaya Mine.


RKEF Monthly Nickel Production Data (Source: Company Reports)

FY19 Key Highlights for the period ended June 30, 2019: Sales revenue for the full year period increased from US$13.551 Mn in FY18 to US$64.937 Mn in FY19. Net income for FY19 stood at US$71.826 Mn, as compared to a loss of US$2.271 Mn in the previous year, mainly due to an increase in financial income. Cash balance at the end of the period was reported at US$49.003 Mn, as compared to US$0.807 Mn at the end of the previous year.


FY19 Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 66.26% of the total shareholding. Shanghai Decent Investment (Group) Co. Ltd. and Xu (Yuanyuan) hold maximum interests in the company at 11.67% and 10.78%, respectively.

Top 10 Shareholders (Source: Thomson Reuters)
 
A Quick Look at Key Metrics: Its gross margin and EBITDA margin for FY19 stood at 33.2% and 27.5%, better than the FY18 results. Net margin for FY19 stood at 110.6% better than the industry median of 11.0%, implying an improvement in the company’s fundamentals. Return on Equity for FY19 stood at 34.1%, better than the industry median of 12.4%, implying that the company generated better returns for its shareholders than its peer group. Its current ratio for FY19 stood at 2.29x, better than the industry median of 1.75x, implying that the company is in a better position to address its short-term obligations. Its debt to equity ratio for FY19 stood at 0.01x, lower than the industry median of 0.13x.


Key Metrics (Source: Thomson Reuters)

Key Risks: The company is susceptible to certain financial risks such as credit risk, liquidity risk and market risk (including foreign currency risk, interest rate risk and commodity price risk).

What to expect: As per the company reports, several key initiatives for Hengjaya Mine are expected to increase the production. These initiatives included a widening of the existing haul road from 9 meters to 14 meters in preparation for the 45 tonnes haul trucks, as part of the production ramp-up. Moreover, work related to upgradation of mine infrastructure and jetty expansion is under progress.

In addition to the above data, additional mine site laboratory sample preparation and assay equipment have been fully commissioned and operating at a suitable level. The construction work of the camp and mine infrastructure facilities are expected to finish by initial months of 2020.

Nickel Outlook: Second half of the September quarter witnessed a sharp appreciation in the London Metal Exchange (LME) nickel price and a disconnect with Nickel Pig Iron (NPI) prices. Increase in LME nickel price can be attributed to the Indonesian government announcing a reinstatement of the full export ban on nickel ore; and an intensified drawdown in LME stockpiles partially in response to the reintroduction of the export ban. With the supply deficit concerns, nickel prices may see further rise in the coming times, benefitting nickel explorers around the globe. Moreover, production in stainless steel is expected to rise with an increase in infrastructure projects and Electric Vehicle segment is witnessing huge up-shift, leading to rise in Nickel demand in the future.

Due to Nickel’s impressive characteristics such as corrosion resistance, greater toughness, more strength at high and low temperatures, and special magnetic and electronic properties, it is mostly used for alloying elements, medical equipment, mobile phone, buildings, transport, jewellery, power generation, etc. More than 60% of Nickel usage belongs to the production of ferronickel for stainless steel and rest in the production of non-ferrous alloys, alloys steels, planting, foundry and batteries.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies
Method 1: Price to Earnings (PE) Multiple Approach

Price to Earnings Multiple Approach (Source: Thomson Reuters), * 1 USD equals ~1.46 AUD (as on 8 January 2020)

Method 2: EV/Sales Multiple Approach


EV/Sales Multiple Approach (Source: Thomson Reuters), * 1 USD equals ~1.46 AUD (as on 8 January 2020)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock posted a return of 44.32% in the past six months and 182.22% in the span of one year. Currently, the stock is trading above the average of 52-week high and low of $0.750 and $0.220, respectively. Company’s September quarter production for RKEF stood decent. Company’s top-line and bottom-line for FY19 showed good performance along with a decent cash position on the balance sheet and improved profitability margins. Looking at the business prospects over the long-term and Nickel outlook, we have valued the stock using two relative valuation methods, i.e., Price to Earnings and EV/Sales multiples and arrived at a target price of lower double-digit growth (in % term). Hence, we recommend a “Buy” rating on the stock at the current market price of A$0.650 per share, up 2.362% on January 8, 2020.

 
NIC Daily Technical Chart (Source: Thomson Reuters)

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