Nickel Mines Limited

Company Overview: Nickel Mines Limited (ASX: NIC) engages in the low-cost production of nickel pig iron (NPI) which is used in the manufacturing of stainless steel. In Indonesia, it operates the Hengjaya nickel (HNI) and Ranger nickel (RNI) projects. Currently, NIC is commissioning ~4 RKEF (Rotary Kiln Electric Furnace) lines at the Angel nickel project (ANI - ~80%) located in Indonesia Weda Bay Industrial Park (IWIP). It is also developing ~4 RKEF lines at the recently invested Oracle nickel project (ONI).

NIC Details

This report is an updated version of the report published on 27 April 2022 at 3:55 PM GMT.

Investor Presentation Highlights: NIC consistently posted a robust EBITDA for nickel sold per tonne despite the increase in costs from December 2020 to December 2021.

RKEF EBITDA Performance, Source: Analysis by Kalkine Group

• NIC expects new capacity expansion within the next 12 months with the addition of ~4 RKEF lines each at the ANI and ONI projects. NIC anticipates no risk of cost overrun at the projects.
• ANI and ONI projects are estimated to have ~20% larger nameplate capacity than the current RNI and HNI operations. Both projects are expected to generate ~20% saving on electricity costs.

Commissioning RKEF Lines Ahead of Delivery Date: NIC has started commissioning its 3^rd RKEF line and plans to begin commissioning the 4^th line by April-end at the ANI project.  Production levels at the first two installed RKEF lines are progressing according to expectations.

Material Tax Concessions at the ONI Project:  On 14 March 2022, NIC reported that PT Oracle Nickel Industry, the operating entity of the ONI project in Indonesia, has been granted significant corporate income tax relief (~100%) for ~10 years from the start of the commercial production year.

Financial Highlights of FY21 (Ended 31 December 2021): NIC recorded growth across key metrics in FY21 versus FY20 despite significantly higher global energy costs depicting the strength of business operations across all commodity price environments.

Comparative Key Metrics Growth, Highlights; (Analysis by Kalkine Group)

Showing profitability trend below reflecting slight deterioration in net margin in FY21 over FY20, while the company maintained its operating profit marign despite macro headwinds.

Profitability Margin Trend (Analysis by Kalkine Group)

Key Metrics: NIC reported a higher net margin of ~27.2% in FY21 versus an industry median of ~11.6%. The operating margin also stood higher at ~30.0% in FY21 than the industry median of ~15.7%.

Top 10 Shareholders:

The top 10 shareholders together form ~52.17% of the total shareholding. Decent Investment International Pte. Ltd. and PT Karunia Bara Perkasa hold a maximum stake in the company at ~11.74% and ~6.91%, respectively.

Source: Analysis by Kalkine Group

Key Risks:

• Nickel Price Volatility: NIC faces the risk of changes in nickel price which can be further exacerbated by supply & demand factors, production levels, and macro conditions.
• Exploration Risk: NIC faces the risk of nickel mineralisation on the newly identified targets and deposits.

Key Dates and Expansion Plans:

• NIC plans to publish its Q1FY22 results on 28 April 2022 and may witness volatility due to the release of the results, though the earnings outlook seems optimistic.
• NIC plans to hold a virtual EGM (extraordinary general meeting) on 3 May 2022 at 11.00 AM (Sydney Time) and seek investors' approval to issue ~108.12 million shares to Shanghai Decent Investment (Group) Co., Ltd. (‘Shanghai Decent’).
• NIC expects to receive the Industrial Business Licence at the ANI project in May 2022 post which it plans to begin the commercial sales of NPI.
• Completing the commissioning of ANI and ONI projects will increase the attributable nickel-metal nameplate capacity from ~24,000 tonnes to ~78,000 tonnes per year.

Valuation Methodology: P/E 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 negative return of ~19.23% in the past three months and a positive return of ~5.96% in the past six months. The stock is trading lower than the 52-weeks’ average price level band of $0.885 - $1.790. The stock has been valued using the P/E-multiple-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’ mean P/E multiple, considering rise in its debt-to-equity ratio, new project acquisition risk, and changes in the nickel price and demand. For this purpose of valuation, a few peers like Western Areas Ltd (ASX: WSA), Mincor Resources NL (ASX: MCR), IGO Ltd (ASX: IGO), and others have been considered. Considering the robust demand for nickel, growth in FY21 key metrics, expected growth in EBITDA and production profile in the next twelve months, material corporate income tax concessions granted at the ONI project, an indicative upside in valuation, associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.120, as of 27 April 2022, 10:35 AM AEST (GMT+10), Sydney, Eastern Australia.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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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