Company Overview: Nickel Mines Limited (ASX: NIC) is an emerging low-cost producer of NPI (nickel pig iron) which is a key component in the production of stainless steel. NIC owns ~80% economic stake in the Hengjaya nickel (HNI) and Ranger nickel (RNI) projects in Indonesia. It picked ~80% stake in the Angel nickel project (ANI) and currently constructing a power plant and Rotary Kiln Electric Furnace (RKEF) lines at the IWIP (Indonesia Weda Bay Industrial Park) in NIC.  

NIC Details

Acquisition Highlights of 70% Interest in ONI:  

• Recently, NIC implemented a binding definitive agreement with Shanghai Decent Investment (Group) Co., Limited (Shanghai Decent) and Decent Resource Limited (‘Decent Resource’) which is an affiliate of Shanghai Decent to purchase ~70% equity stake in ONI (the Oracle Nickel project) for ~US$525 million (inclusive of shareholder loans).
• The consideration payment has been structured in stages and upon completion of specific milestones. NIC plans to raise ~US$225 million equity to acquire an initial ~30% interest in ONI and the First Shareholder Loan. It has successfully raised ~US$106 million via an institutional placement comprising of 108.1 million new shares at A$1.37 per share in mid-February 2022.
• SPP Offer to Shareholders: NIC has initiated an SPP (share purchase plan) on 16 February 2022 for the eligible shareholders (those with a registered address in New Zealand or Australia as of 8 February 2022 -the Record Date) to apply up to $30,000 of shares at $1.37 per share.
  

Partnership with SESNA for Renewable Energy Supply: Post Q4FY21-end, NIC inked a MoU with PT Sumber Energi Surya Nusantara (SESNA), wherein SESNA will act as the project initiator to develop ~200MWp solar capacity to supply renewable energy to the company’s Hengjaya Nickel and Ranger Nickel processing operations. As per the proposed agreement, NIC will act as the long-term offtake partner for SESNA. The indicative electricity tariff is anticipated to be constant during the project life.

Financial Spotlight for Q4FY21 (Ended 31 December 2021):

• Steady Production: NIC reported ~10,087 tonnes of nickel metal production from the RKEF operations on the Hengjaya and Ranger nickel projects in Q4FY21 versus ~10,113 tonnes in Q3FY21 (September 2021).
• Rise in Sales Revenue: The sales revenue from the combined RKEF operations stood at ~US$187.1 million (100% basis) in Q4FY21 compared to ~US$168.9 million in Q3FY21, up by 10.8% QoQ.
• Improved Liquidity Position: NIC held cash and cash equivalents of ~US$ 137.90 million as of 31 December 2021 versus US$120.8 million as of 30 September 2021.
• Dividend Declaration: NIC announces a final dividend of $0.02 per share for 2HFY21 payable on 10 February 2022. It plans to release FY21 results in February 2022.

Other Key Developments:

• Peter Nightingale resigned as the CFO and Executive Director during the quarter and was replaced by Mr. Chris Shepherd in early August 2021.
• The company increased its ownership interest in Angel Nickel Project (ANI) to ~80% on 30 September 2021 and has started the integration of the project at the group level.
• NIC entered a conditional share purchase agreement (CSPA) with Bolt Metals Corp. (Bolt) to purchase ~100% of the Tablasufa nickel project in West Papua Province, Indonesia. Bolt is listed on CSE (the Canadian Securities Exchange).

Robust Cashflow Conversion in 2021, Highlights; (Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 56.46% of the total shareholdings, while the top 4 constitutes the maximum holding. Decent Investment International Pte. Ltd. held the maximum number of shares with a percentage holding of 11.74%, followed by The Vanguard PT Karunia Bara Perkasa holding 9.92%, as also highlighted in the chart below:

Key Metrics: Gross Margin grew considerably from ~10.6% in FY17 to ~31.5% in FY20. The trend of EBITDA margins improved from -38.7% in FY17 to +37.7% in FY20. The current ratio witnessed a sharp increase from ~3.52x in FY19 to ~9.33x in FY20.

Improving Trend of Current Ratio; (Source: Analysis by Kalkine Group)

Key Risks:

• Commodity Price Changes: The prices of nickel ore, coal, and nickel pig iron (NPI) commodities can vary rapidly and are impacted by various factors such as production cost levels, commodities’ demand, macro-economic factors (interest rates, inflation, etc.) NIC doesn’t have long-term agreements in place to hedge against the commodity price risk.
• Acquisition Risk: NIC faces the risk of not being able to achieve operational synergies, or stated goals, partly or completely as expected post completion of its interests in projects such as ONI. This could adversely impact its financial performance or the return on project investment.

Outlook:

• The surplus proceeds from the recent equity raise will be used for overall corporate needs and strengthening the balance sheet.
• NIC expects the addition of ANI and ONI projects to be transformative for its production and financial growth. It has started project commissioning at ANI in January 2022 and expects all the four RKEF lines to be operational to produce NPI by April-2022-end.
• The ONI project addition is expected to triple the size of the RKEF business. The production of attributable nickel is estimated to reach ~100,000 tonnes per annum (tpa) and establish NIC emerge as one of the leading nickel producers.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of NIC gave a positive return of ~32.52% in the past six months and a positive return of ~39.28% in the past in nine months. The stock has a 52-weeks’ low level of $0.885 and a 52-weeks high level of $1.650. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ average EV/Sales multiple, considering an uptick in the debt-to-equity ratio, longer cash cycle days, and associated risks of project acquisition, and development at ANI & ONI. For this purpose of valuation, a few peers like BHP Group Ltd (ASX: BHP), Pilbara Minerals Ltd (ASX: PLS), 29Metals Ltd. (ASX: 29M), and others have been considered. Considering the current trading levels, rise in revenue, and underlying free cash flows in Q4FY21, an upward trend of NPI prices, ongoing commissioning of plants and capacity on ANI & ONI, an indicative upside in valuation, decent long-term outlook, and associated key business risks, we give a ‘Buy’ rating on the stock at the current market price of $1.365, as of 16 February 2022, 1:02 PM (GMT+10) Sydney, Australia.

NIC Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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