Nickel Mines Limited

 
Strategic Collaborations to Aid Earnings Visibility: Nickel Mines Limited (ASX: NIC) is engaged in production of nickel pig iron, a key raw material used for the production of stainless steel. The company holds a 60% stake in two-line Rotary Kiln Electric Furnace (RKEF) plant and a 17% stake in another two line RKEF plant. Apart from that, NIC holds an 80% stake in Hengjaya Nickel Mine, located in the Morowali Regency of Central Sulawesi, Indonesia. NIC has operational and strategic partnership with the largest global stainless-steel producer Tsingshan group, based in China.
 
Recently, the company has notified that it has agreed to modify 2 major terms of the Collaboration and Subscription Agreement (CSA), signed in September 2017, with Shanghai Decent Investment (Group) Co., Limited.  These terms are with regards to the contractual rights and obligations of each party with respect to HNI. These terms are-

(a) The parties have agreed to restrict its contractual option to further equity stake in HNI up to 80% from 100%, earlier. Nickel Mines currently holds a stake of 60% of HNI.

(b) The option period during which Nickel Mines can acquire further equity interest in HNI has been extended to 30 November 2020 from the earlier, 31 January 2020.

 
FY19 Operating Highlights:Nickel Mines Limited reported its FY19 financial results for the year ended 30 June 2019,wherein it posted revenue from operations at US$64.93 million, higher by 379% on pcp and a net profit of US$71.826million as compared to a loss of US$2.926 million on FY18. During FY19, NIC mined a total volume of 454,615 wet metric tonnes (‘wmt’) of nickel ore with an average stripping ratio of 1.9. The company sold 484,268 wmt of nickel ore with an average grade of 1.96% nickel during FY19. Combined production of nickel pig iron and nickel metal from Hengjaya and Ranger facilities stood at 42,105.8 tonnes and 5,787.7 tonnes, respectively. The company reported a cash of US$49 million, and property, plant and equipment (PPE) of US$340.09 million as on 30 June 2019. Net assets of the company stood at US$454.766 million during the end of fiscal year 2019.
 

Snapshot of FY19 Operations (Source: Company Reports)
 
Stock Recommendation:The stock of NIC is quoting at $0.695 with a market capitalization of $1.09 billion. The 52-week trading range of the stock stood at $0.220 to $0.710 and the stock is trading close to its peak of 52-week trading range with some potential based on the nickel price scenario and positive developments at hand. The stock has generated stellar return of 59.76% and 57.83% in last three-months and six-months, respectively. NIC produces one of the key components stainless steel and its revenue is directly linked with the global consumption of stainless steel. Strategic collaboration with Tsingshan group underpins the company’s vision to become ‘low cost producer’ in nickel pig iron. Considering the aforesaid factors, we believe that the business is well positioned to deliver earnings growth in FY20. We recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.695, up 6.107% on 10 September 2019 taking cues from the amendment to HNI collaboration and subscription agreement.

 
Independence Group NL

 
Operational efficiency in FY19 led to margin improvement:Independence Group NL (ASX: IGO) operates in mining and processing of nickel, copper and cobalt mining and processing at the Nova Operation, non-operator gold mining from the Company’s 30% interest in the Tropicana Operation and ongoing mineral exploration in Australia and overseas. Recently, IGO issued 1,916 and 278,059 Ordinary Fully Paid Shares for the purpose of 50% vesting of 2017 and 2018 Series Service Rights pursuant to Employee Incentive Plan approved at the AGM on 18 November 2016.
 
FY19 Results Highlights:Independence Group NL posted revenue and other income for the year ended 30 June 2019 at $792.9 million, up 2% on y-o-y, aided by increased product revenue from Nova facility. The company reported NPAT of $76.1 million, posting a growth of 44% on y-o-y. Underlying EBITDA of IGO came in at $340.7 million, 1% higher than FY18 with an EBITDA margin of ~43%. Production of gold from Tropicana plant during the year stood at 11% higher than the previous year of 518,172oz while the company posted total gold sales at 154,402oz, up 11% on y-o-y. During FY19, the company delivered high margin gold production on continuous basis, reporting cash costs at $680/oz, down by 5% pcp. All-in Sustaining Costs (AISC) stood at $951/oz, up 10% from FY18. During FY19, NOVA reported a 38% y-o-y increase in nickel production at 30,708 tonnes, while Copper production came in at 13,693 tonnes, up 43% y-o-y, Cobalt at 1,090 tonnes, ~47% higher than FY18. The company reported net cash from operating activities at $372 million followed by a cash balance of $348 million at the end of 30 June 2019. The company reduced its debt from $142.9 million in FY18 to $85.7 million in FY19. Shareholders’ Equity at the end of FY19 stood at $1,849.1 million.
 

FY19 Financial Highlights (Source: Company Reports)
 
The company announced a 97% franked dividend of AUD 0.08000 per ordinary share, payable on 26 September 2019.
 
Outlook: The Management highlighted that in FY20, the company is expected to produce 28,500 tonnes of nickel, along with 11,750 tonnes of copper and 900 tonnes cobalt. The cash cost is expected at A$2.25/lb payable nickel, inclusive of royalties and by-product credits. As per FY20 guidance, IGO is expected to produce 475,000oz of gold at an estimated AISC of A$1,150/oz of gold sold. Exploration expenditure and Evaluation expenditure is expected to be $66 million and $7 million, respectively.
 
Stock Recommendation:The stock of IGO is trading at $6.440 with a market capitalization of $3.74 billion. The 52-week trading range of the stock stood at $3.560 to $6.500 and currently, the stock is quoting near the upper band of its 52-week range. The stock has delivered robust returns of ~42.89% and ~31.88% in last three- months and six-months, respectively. Considering the results for FY19, recent price movement and company’s constant delivery of high margin gold production, etc., we recommend a ‘Hold’ rating on IGO at the current market price of $6.440, up 1.738% as on 10 September 2019.

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