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
 
Robust Financial Performance for FY15-19: Nickel Mines Limited (ASX: NIC) is a global significant low-cost producer of nickel pig iron, a key ingredient in the production of stainless steel. The company held 60% interest in a 2-line Rotary Kiln Electric Furnace (‘RKEF’) plant (‘Hengjaya Nickel’) and a 17% interest in another 2-line RKEF plant (‘Ranger Nickel’) by the end of FY19. Later on, its interest in Ranger Nickel was increased to 60%, and to 80% in the Hengjaya Nickel Mine (‘Hengjaya Mine’). Hengjaya Nickel Mine 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 turned into profit for the first time in FY19 during 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.

During the December’19 quarter, sales of US$141.1 million for 10,755 tonnes of nickel metal, underlying EBITDA of US$56.6 million and an underlying net profit of US$52.8 million, were reported for the combined Hengjaya Nickel and Ranger Nickel projects. Despite the fact that the market struggled to comprehend the implications of the early re-implementation of the full Indonesian nickel ore ban and trust the large drawdowns in LME stockpiles, the company recorded financial performance of the RKEF operations. As the LME nickel price progressively weakened, the modest bifurcation of NPI pricing from LME prices that became evident in the September’19 quarter eased somewhat in the December’19 quarter.

As per the company’s outlook, its Bete Bete is running at steady state with the focus for FY20 on the commencement of production from the IPPKH2 area with the first pit known as Central 21. The company is finalising the geological and block models and are due for the completion during the first quarter of FY20.


Production Summary for December’19 Quarter (Source: Company Reports)

December’19 Quarter Key Highlights: The company reported record quarterly nickel production at both Hengjaya Nickel and Ranger Nickel RKEF projects. RKEF production increased by 9.5% (from 10,019.6 tonnes) to 10,968.3 tonnes of nickel metal (on 100% basis), as compared to previous quarter. NIC attributable nickel production for the period increased by 27.5% from 5,161.0 tonnes to 6,580.9 tonnes of nickel metal, as compared to previous quarter. RKEF sales for the period increased by 20.4% from US$117.2 million to US$141.1 million (100% basis), as compared to previous quarter. RKEF EBITDA for the period increased by 12.7% from US$50.2 million to US$56.6 million (100% basis), as compared to previous quarter. RKEF cash costs for Hengjaya Nickel and Ranger Nickel for the period stood at US$7,778/tonne and US$7,886/tonne, respectively.

Production from the Hengjaya Mine declined by 2.4% to 194,159 tonnes as compared to the previous quarter.


Monthly Production Data from Both Hengjaya Nickel and Ranger Nickel (Source: Company Reports)

Trade receivables for Dec’19 Qtr Stood at US$86.7 million: Under balance sheet, cash, receivables and inventory at the end of the period accounted for US$190.6 million, an increase of 23.2% on the previous quarter. Additionally, group liabilities at the end of the period were reduced by US$21.1 million over the quarter. The group held cash equivalent of US$49.8 million, as compared to US$33 million in the previous quarter, comprising US$3.8 million held by Ranger Nickel and its related entities, in which Nickel Mines holds a 60% interest; US$19.5 million held by Hengjaya Nickel and its related entities, in which Nickel Mines holds a 60% interest; US$2.4 million held by PT Hengjaya Mineralindo, in which Nickel Mines holds an 80% interest; and US$24.1 million held by Nickel Mines.

Group’s trade receivables for the period was reported at US$86.7 million, as compared to US$84.5 million in the previous quarter, comprising US$2.2 million held by Hengjaya Mine; US$39.1 million held by Ranger Nickel; and US$45.4 million held by Hengjaya Nickel.

Group’s inventory (valued at the lower of cost or net realisable value) for the period was valued at US$54.2 million, as compared to US$37.2 million in the previous quarter, comprising US$0.2 million of nickel ore held by Hengjaya Mine; US$26.5 million held by Ranger Nickel comprising US$5.5 million of NPI and US$21.0 million of raw materials; and US$27.5 million held by Hengjaya Nickel comprising US$7.2 million of NPI and US$20.3 million of raw materials.
 

Cash Flow Information (Source: Company Reports)

Recent Update:
On January 29, 2020, the company along with its operating partner Shanghai Decent informed the market about the concerns regarding the outbreak of Coronavirus (inception from ‘Wuhan’ in China) and speculation of its impacts on the RKEF operations at the Indonesia Morowali Industrial Park (‘IMIP’) in Sulawesi, Indonesia. Since 26 January 2020, IMIP has implemented strict access controls for the personnel, where all non-Indonesian staff are currently prohibited from entering the IMIP unless exceptional circumstances require their entry or if they are free from medical screenings with their travel history analysed. On the other hand, Chinese workers’ rostered leave has currently been suspended. On 28 January 2020, 674 employees worked at Ranger Nickel, out of which 4 are currently on rostered leave in China and 718 employees worked at Hengjaya Nickel, out of which 13 are currently on rostered leave in China. These 17 employees on rostered leave will have their return delayed, and their position, for the time being will be managed by other rostered employees currently on site, including Chinese employees who have had their rostered leave suspended. The company has made it clear that as number of Chinese employees on rostered leave are small, there will not be any adverse effect on both Hengjaya Nickel and Ranger Nickel operations.

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 12.7%, implying an improvement in the company’s fundamentals. Return on Equity for FY19 stood at 34.1%, better than the industry median of 12.3%, 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 1.82x, 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 release, the exploration during the quarter included 210 holes for 4,503 metres, where the program included infill drilling to improve mine planning and scheduling. This drilling program is expected to continue throughout 2020 targeting exciting new areas of limonite and saprolite ores identified by ground penetrating radar and historical drill data. The program includes infill drilling to support mine planning and scheduling for the production ramp up in both Bete Bete and Central pits. In addition to nickel ore exploration, the company has started identifying significant quality limestone deposits inside IPKKH1 which may be used for future off-take agreements. Moreover, NIC is expected to provide a comprehensive resource update during the March’20 quarter.

The company is actively planning for Limonite Ore supply where 76,338 tonnes of suitable HPAL limonite had been successfully stockpiled in Bete Bete pit areas during the December’19 quarter, for future supply to HPAL projects. For this, the haul road alignment for the new PT Hengjaya to IMIP road has been defined, and the company has commenced its work on detailed ground truthing, surveying and road design. This haul road has been estimated to be 17 kilometers in length and intends to haul ore for both the Hengjaya Nickel and Ranger Nickel RKEF plants and for supplying limonite ore to 3rd party HPAL plants.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Earnings (PE) Multiple Approach 

Price to Earnings Multiple Approach (Source: Thomson Reuters), *1 USD equals ~ 1.48 AUD

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

Stock Recommendation: NIC’s stock posted a whopping one-year return of 87.30% and in the span of six months, it generated a return of 15.69%. Considering the company’s business model, historical financial performances, December’19 quarter results, profitability ratios, current challenges due to coronavirus outbreak, recent updates, outlook provided and current trading levels, we have valued the stock using a Price to Earnings based relative valuation method and arrived at a high single-digit upside (in % terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $0.59 on February 5, 2020.

 
NIC Daily Technical Chart (Source: Thomson Reuters)

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