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

NIC Posted Net Profit for the First Time in the period FY15-19: Nickel Mines Limited (ASX: NIC) is involved in the acquisition, exploration and development of nickel mining projects. It focuses on becoming a globally significant, low-cost producer of nickel pig iron (NPI), a key ingredient in the production of stainless steel. At the end of FY19, the company held a 60% interest in a 2-line Rotary Kiln Electric Furnace plant and a 17% interest in another 2-line RKEF plant. Subsequent to the year-end, its interest in Ranger Nickel has increased to 60%. Moving forward, NIC also holds an 80% interest in the Hengjaya Nickel Mine, 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, wherein net income improved from a loss of US$3.73 Mn to a profit of US$65.53 Mn in FY19. 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.

Production at Hengjaya Mine bounced back strongly after experiencing a difficult June quarter, impacted by flooding. Similarly, production at Ranger Nickel improved in the months of August and September 2019. With the completion of camp and mine infrastructure facilities by 2020, the company is expected to further improve its operational efficiencies and deliver better value to its shareholders.


Production Ramp-Up at Hengjaya Nickel and Ranger Nickel (Source: Company Reports)

September’19 Quarter Key Highlights: The Group held cash and equivalents of US$33.0 Mn as on September 30, 2019 as compared to US$49.0 Mn in the previous quarter. Cash and cash equivalents comprised US$17.7 Mn held by Nickel Mines, US$1.2 Mn held by PT Hengjaya Mineralindo (80% interest of NIC), US$9.5 Mn held by Hengjaya Nickel and its related entities (60% interest of NIC) and US$4.6 Mn held by Ranger Nickel and its related entities (60% interest in NIC).

The Group held trade receivables of US$84.5 Mn at the end of the quarter as compared to US$45.2 Mn in the previous quarter. The 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.

The first sale of NPI was not recorded until early August as Ranger Nickel’s kiln 1 and kiln 2 commenced production in late May and late June, respectively. Standard IMIP NPI payment terms of 60 days are now in effect for Hengjaya Nickel and Ranger Nickel, meaning August and September sales receivables will translate into physical cashflow across October and November. The US$45.2 Mn in trade receivables reported at the end of the June quarter has been received in full.

Group’s inventory (valued at the lower of cost or net realizable value) at the end of the quarter was reported at US$37.2 Mn as compared to US$8.9 Mn at the end of the June quarter. The inventory value comprised US$22.2 Mn held by Hengjaya Nickel, including US$6 Mn of NPI and US$16.1 Mn of raw materials, US$14.6 Mn held by Ranger Nickel including $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.

During the quarter, the company made a voluntary early repayment against the Ranger debt facility totaling US$15 Mn. Hengjaya Nickel also repaid a further US$3 Mn of a US$9 Mn working capital loan to Nickel Mines and a further US$2 Mn of a US$6 Mn working capital loan to Shanghai Decent.

NIC reported record sales for the quarter at 231,487 wet metric tonnes at an average grade of 1.9% nickel. The average cost of production was significantly lower than the previous quarter, which was adversely affected by heavy rain.

On safety standards, no lost time injuries were reported during the quarter. Project loss time injury frequency rate (LTIFR) currently is 0.69 per million work hours. The Hengjaya Mine site continues to develop and maintain a safety management system. Training of staff and the workforce is conducted on a regular and routine basis.


Production Summary (Source: Company Reports)

FY19 Key Highlights for the period ended June 30, 2019: Sales revenue for the period increased by 379.19% to US$64,937,347 as compared to the previous year. Profit after tax for the period was reported at US$71,826,428, as compared to a loss of US$2,926,833 in the previous year. Cash and cash equivalents at the end of the period stood at US$49,002,977 as compared to US$806,574 in the previous year. Trade and other receivables were reported at US$43,666,416 as compared to US$387,412 in the previous year. Inventory value stood at US$8,917,474 as compared to US$588,843 in the previous year. Trade and other payables stood at US$42,249,023 as compared to US$2,855,385 in the previous year. Borrowings for the company at the end of FY19 stood at US$4,180,333.
 

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 company’s fundamentals. Its ROE 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 1.87x, 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: Several key expansion activities during the September quarter support the Hengjaya Mine’s plan to increase production, including widening of the existing haul road from 9 meters to 14 meters for the 45 tonnes haul trucks, which form part of the production ramp-up. Additional mine site laboratory sample preparation and assay equipment have been fully commissioned and are operating at a suitable level to cope with the explorational, infill drilling programs, lower turnaround times and associated costs. The construction of the camp and mine infrastructure facilities are expected to be completed early in 2020.

Nickel Outlook: The second half of the September quarter saw a sharp appreciation in the LME nickel price and disconnect with nickel pig iron (NPI) prices. The LME nickel price rise can be attributed to the reinstatement of the full export ban on nickel ore by the Indonesian government and an intensified drawdown in LME stockpiles, partially in response to the reintroduction of the export ban.

Whereas NPI price pressure was driven by a significant margin pressure by global stainless-steel markets, underpinned by Chinese stainless-steel producers not willing to match historic payabilities for nickel in NPI. It is unclear whether the disconnection between the LME nickel price and NPI prices will be short-term or long-term.
 

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 ~1.475 AUD (as on 27 November 2019)

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

Stock Recommendation: The stock price rose by 36.90% in the past six months and 139.58% 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. The September quarter was a highly productive period for the company, underpinned by no production of NIC’s RKEF projects in production at the beginning of the year to a remarkable production of 10,000 tonnes of nickel production for the quarter. As per mine expansion initiatives, the company is materially increasing mining rates of both of its saprolite and limonite ore resources. Looking at the business prospects over the long-term, we have valued the stock using a relative valuation method, i.e., Price to Earnings multiple and arrived at a target price of double-digit growth (in % term). Hence, we recommend a “Buy” rating on the stock at the current market price of A$0.580 per share, up 0.87% on November 27, 2019.
 

NIC Daily Technical Chart (Source: Thomson Reuters)

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