2023-08-01 20:09:02 ET
Nickel Industries Limited (NICMF)
Q2 2023 Results Conference Call
July 30, 2023 09:00 PM ET
Company Participants
Justin Werner - Managing Director
Chris Shepherd - CFO
Conference Call Participants
Michael DAdamo - Canaccord
Cameron Taylor - Bank of America
David Coates - Bell Potter
Presentation
Justin Werner
Thank you very much. And could I please ask that you turn to Page 2 of the presentation, and we'll start there. Everyone who's on the call, thank you for your attendance today at the Nickel Industries' June quarterly results presentation.
Once again, very pleased to report record nickel metal production of 32,558 tonnes. Apologies -- could you -- it's Page 2, you're on Page 1, if you could just move to the next slide, please. Record nickel metal production of 32,558 tonnes. That was almost 20% higher than the March quarter, which was 27,399 tonnes. And it includes 10,141 tonnes from Oracle Nickel.
We expect a further 20% scale up across the September quarter, so there's still significant production upside to be delivered across the September quarter and I'll talk a little bit more what that means for the -- for our financial profile.
For NIC's attributable production, that was 25,000 tonnes. That on a quarterly basis now takes us to in excess of 100,000 tonnes of nickel on an annual basis, and so making us firmly cements as a top 10 diversified global nickel producer. As I mentioned, further production growth expected across the September quarter with the power plant that we announced commissioned at the end of June, and I'll talk a bit later on about what that means.
RKEF revenue was down 11%, USD 434.3 million, primarily driven by lower realized contract pricing. We believe that we have seen the bottom and we have seen a bit of an uptick and I'll talk about that as well a little bit later on. RKEF EBITDA was $43.9 million. That was lower than the March quarter, as I mentioned, primarily driven by the lower realized contract pricing. But pleasingly, we are also seeing corresponding reduction in OpEx between 8% to 15% and we expect this reduction in OpEx to continue across the September quarter.
The production weighted EBITDA per tonne was $1,533 , which as I said, it was down significantly from March, although -- and I'll talk again about this a little bit later on.
ANI still maintained very robust margins of [$2,754]. That weighted average number of $1,533 was dragged down lower by ONI, which had a margin of about [$744]. As I stated earlier, as the power comes on this quarter, we expect to start to see ONI matching the ANI EBITDA per tonne margin of that $2,700 that we experienced this quarter. So there's about a $2,000 a tonne margin upside that we expect to start capturing across the September quarter.
Another record this quarter for the Hengjaya Mine, 2.7 million tonnes of ore, which was 10% higher than the March quarter. The opening of the HM mine to IMIP haul road is imminent, and we will expect to start to see a significant scale up in our mine production once that haul road is officially opened. Mine EBITDA was USD 12 million, slightly lower than our March quarter, predominantly driven by lower realized saprolite ore prices. Whilst that has an effect on our mine EBITDA, it will also -- those lower saprolite prices, which we're starting to see will also push our RKEF costs lower. Underlying cash generation from operations of USD 48.6 million. And based on the performance for the first half of this year with a record EBITDA in March and a strong EBITDA for this quarter given where the nickel price currently sits, I'm happy to announce an interim dividend of AUD 0.02 per share.
If we could just move to Page 3, please. Happy to report on the environment and safety front, 5.5 million man-hours without an LTI for our RKEF operations since January of this year, more than 7.3 million man hours since the last recorded LTI at our mine operations back in November of '21. These are obviously significant numbers. Couple of million man hours without an LTI is a tremendous achievement given the number of employees that we have across all of our operations.
Also pleased to report across the quarter that the Hengjaya Mine received 2 gold trophies at the Nusantara CSR Awards and Most Promising Transition award at the ESG World Summit in Bangkok. And so the hard work and the focus that we've placed on ESG continues to be acknowledged and we remain focused on being the most sustainable and responsible integrated nickel producer in Indonesia.
If we could just move to Page 4, please. A summary of the numbers versus the March quarter. As I mentioned, record for nickel metal tonnes, 32,558, almost 20% increase on March. Our attributable production 25,000 tonnes, as I mentioned, that takes us to an excess of 100,000 tonnes on an annualized basis. And then the Hengjaya Mine, 2.7 million tonnes, again, almost a 10% increase on the March quarter.
In both of those nickel metal production numbers and Hengjaya Mine production numbers, as I said, we look forward to working towards delivering an increased number on both of those across the September quarter.
If we could just move to Page 5, please. You can see here since the June quarter of 2022, where we reported 15,556 tonnes of nickel metal production, we've increased that 110% since that point in time to the record number today of 32,558 tonnes. ANI produced 12,422 tonnes of that 32,000 tonnes, which was 38%, an ONI of 10,000 tonnes, which is about 31%, so those 2 operations accounted for about 69% of our production. As I mentioned, with the commissioning of the power plant, we expect ONI to start to replicate ANI. So ANI did 12,400 tonnes, ONI, 10,000 tonnes.
We would expect that ONI will start to operate towards that same number, 12,400 tonnes, and we expect those additional nickel units to come online across the September quarter. Not only that we -- only do we have that further production upside. But more importantly, we had further EBITDA and EBITDA per tonne upside at our Oracle Nickel operations. I mentioned ANI was still very strong. Margin was $2,754 for the quarter. And that delivered 75% of our June quarter EBITDA, which was $33.2 million from Angel Nickel alone.
The ONI EBITDA per tonne margin was $744 a tonne, and that was about delivered USD 7.5 million of EBITDA or 17% of the total number. So combined, our 2 ANI and ONI operations delivered about 93% of the RKEF EBITDA for the quarter. As I've mentioned, we expect now with the Oracle Power Plant commissioning, EBITDA per tonne margins to replicate those of Angel Nickel, so further not just production upside but also EBITDA upside.
We did experience -- we have experienced a softening of LME and nickel pig iron pricing across the quarter. That declined about 17% compared to the March quarter. But we are also seeing a corresponding decline in OpEx costs, not at the same speed, but we do believe that those OpEx cost reductions will continue across the September quarter.
If we look at ANI, we saw an 8% reduction from 11,800 in much to about 10,900 in the June quarter. And these reductions are being driven primarily by lower ore costs and lower power costs. To give you some idea that ANI, our power was down from $0.062 a kilowatt hour to $0.052 a kilowatt hour above -- across the quarter. And to give you some idea of that upside that exists at Oracle Nickel, our cost for the quarter or $0.082 per kilowatt hour. If they come down to match the $0.052 a kilowatt hour of Angel Nickel, as I said, there's -- we see strong EBITDA and margin upside at Oracle across the September quarter.
All costs were down about 10%, and that's been reflected in -- from the results from our Hengjaya Mine, where we saw about a 10% reduction in the average saprolite price received.
If we could just move to Slide 6, Page 6, sorry. As I mentioned, record months in terms of production, 2.7 million tonnes. The average price received for saprolite, as I mentioned, was down. It was $44 in the March quarter, down to about $40 in the June quarter. And so there may be some further decreases in that price received, but that will flow into upside on our RKEF costs.
Limonite production continues to remain strong, and you can see the very, very strong margins there. Average price received actually increased from the March quarter from $18 to $20 and we had a reduction in the cost of production of our limonite from $3.60 to $3.11.
If we could just move to Page 7, please. Pleased to announce that the opening of the Hengjaya Mine to the IMIP haul road is imminent. We expect the opening of that haul road very soon. That will, once open, will allow us to ramp up our production from 3.5 million tonnes last year to annualized rate of around 10 million tonnes, which will comprise about 6.5 million tonnes of limonite and 3.5 million tonnes of saprolite. So we can expect to see almost tripling in our mine EBITDA over the coming months as we ramp up production.
And so we see strong upside there from our Hengjaya Mine operations as well, and we look forward to reporting the opening of the haul road very shortly. The haul road also will make us one of the largest ore suppliers to the IMIP. And so obviously, it just underscores the significant strategic value of the Hengjaya Mine to our operations and to the IMIP.
If we could just move to Page 8, please. We announced during the quarter a conditional share placement and collaboration agreement with UT Tractors for AUD 943 million at an issue price of AUD 1.10 per share, which at the time of the announcement was a 27.2% premium to the last rated price on the 8th of June, which was AUD 0.87 premium has since grown since that point. Those shares issued would represent 9.9% of the company's issued capital. And along with that, a conditional collaboration agreement for UT to acquire a direct 20% equity interest in the HNC HPAL project at a valuation of USD 500 million for their 20%, which translates into a USD 2.5 billion project valuation, which is higher than the actual project valuation of USD 2.3 billion, which we also recently announced and pleased to announce a reduction.
So since the announcement of the HNC HPAL, we've seen a 20% increase in the capacity from 60,000 tonnes to 72,000 tonnes and a 10% decrease in the cost from $2.5 billion to $2.3 billion. Again, those numbers come with a CapEx guarantee. And I can only remind people how strong and the value of that CapEx guarantee, given I'm sure we're all familiar with the recent write-down of a significant Western Australian nickel asset.
In terms of [indiscernible], they're one of Indonesia's largest listed conglomerates, FY '22 revenue of USD 8.3 billion, 33,000 employees, very strong balance sheet, USD 2.3 billion in cash. The ultimate beneficial owner is Jardine Mathison, global diversified Fortune 500 company, very strong presence across Asia in automotive, mining, mine services, property, retail, finance, over 425,000 employees and FY '22 revenue of USD 87.7 billion. We believe that UT is one of Indonesia's best blue-chip investors and partners and obviously subject to shareholder approval. We do look forward to walking them as an investor into NIC. That investment obviously then means that we are pretty much fully funded for the HNC HPAL project for our percentage of that.
And it was announced that with them taking 20%, Tsingshan Holding 25%, that NIC's ownership in that would be around 55%.
Pleased to announce the FIRB approval for the placement to Shanghai decent for the acquisition of 10% in the HNC HPAL, which was executed at $1.02. There was also strong support from members of the NIC Board with shares issued to Mark Lochtenberg and to Shanghai Wanlu. The HNC HPAL has the world record for [indiscernible] build and ramp up, one of the lowest global OpEx and lowest carbon intensities. It will give us immediate access to 6,000 tonnes of marketable MHP, which we can diversify this further into the EV battery market. And it also gives a see-through into what a successfully operated HPAL looks like.
ENC will effectively be a replicate of HNC, but as Tsingshan does do, it will have some improvements. And ENC will also further diversify to producing not just MHP, but also go further to nickel sulfate and to nickel cathode providing product diversity and therefore, allowing us to maximize margin opportunities where they exist in different parts of the nickel market.
If we could just move to Page 8, please. The ENC project I've just touched on, feasibility is well advanced. We expect to make a final investment decision sometime in the September quarter. To reiterate costs have gone -- sorry, production has gone up from 60,000 tonnes to 72,000 tonnes, a 20% increase. And the CapEx guarantee is actually reduced from USD 2.5 billion to USD 2.3 billion.
I've touched on the shareholding, subject again to a positive FID being taken by the Nickel Industries Board. We then would expect construction to commence in Q4 of FY '23. And the CapEx guarantee comes also with a timing guarantee of the projects commencing commissioning within 24 months of commencing construction.
If we could just turn to Slide -- Page 10. The placement to UT and the collaboration agreement for them to potentially participate for 20% in Stage 1 of ENC also flows through into their potential participation into 20% of Stage 2, which would effectively just be a doubling of the project from 72,000 tonnes to 144,000 tonnes. I should add that the FID that will be taken in September is purely on Stage 1 -- Stage 2. That decision will be taken over time depending on a number of factors.
We -- as I've touched on, we commissioned the Oracle Nickel Power Plant, and we expect that to deliver upside of 20% on our production from Oracle Nickel. We also expect a 36% reduction in costs, assuming that Oracle will mimic ANI's performance. So we also see EBITDA upside across the quarter and in our Oracle -- from our Oracle Nickel operations. Finally, as I said, I'm pleased to announce an interim dividend of AUD 0.02 per share.
So in summary, we look forward to another busy and productive September quarter. As I mentioned, we expect further ramp-ups from ONI and further EBITDA growth from our ONI operations. We look forward to the opening of the Hengjaya Mine to IMIP haul road and the ramping up of production from our HM mine. We look forward to the 10% of the acquisition of 10% of the HNC HPAL and also a final investment decision for the ENC HPAL project. And I should just quickly touch that we are also working on a maiden JORC resource for our Siduarsi Nickel Cobalt project.
So in summary, we believe that we've seen the bottom of the soft pricing environment, and we have seen an uptick in both NPI and LME pricing more recently. We still do have cost decreases to flow through, and we believe that we still have further OpEx cost reductions from all, which we should start to realize in July and in power in August. So with over 100,000 tonnes of attributable nickel metal production, we remain very well positioned to take advantage of any upside in pricing and strengthening of the nickel market. And I think that, that was reflected in our March quarter, where we were able to report record EBITDA margins.
With that, that concludes the presentation, and now I hand over for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Michael DAdamo from Canaccord.
Michael DAdamo
Just a couple of quick questions. Firstly, thanks for the call. The matte grade, why such a decrease on last quarter's matte grade?
Justin Werner
Yes. So the decision was made during the quarter to -- rather than sell high-grade matte to sell low grade matte. The reason for that is that the profitability is actually better selling a low-grade matte rather than what we were doing before, which was selling a high-grade nickel matte, which on top of that attracts a processing cost to convert it from low-grade matte to high-grade matte before it's then sold. So by selling a low-grade matte, which is what the reduction in the grade is, we've removed that additional processing cost. It has flowed into a lower realized price, but if you compare the realized price versus that additional sort of $1,800 to $2,000 a tonne processing cost, we're actually achieving better results from just selling a low-grade matte rather than a high-grade matte, which is what we were doing previously.
Michael DAdamo
The other thing I've noticed is in the March quarter activities report, you've got total RKEF production for December and March. The numbers are actually different than what you've put into the total production for December and March in this recent quarterly report. So there are -- yes, so I think it's about 23,072 tonnes versus 23,433 tonnes for December and then 26,665 tonnes versus 27,399 tonnes for the March quarter. Why are those numbers changed?
Justin Werner
Yes, Chris.
Chris Shepherd
Yes. It's Chris Shepherd, CFO. I think that, Michael, will be reflecting a bit [indiscernible] previously, we were doing high breaking [indiscernible] The numbers we were announcing or reporting was the high-grade. Obviously, the high grade and low grade, it's not the exact same production volumes. So we've gone in and [indiscernible] low grade and to show local like-for-like. There are also adjustments from the quarterly from our contracts, which we've announced that you got in this quarter, the contracts actually changed across quarters. Final contracts [indiscernible] the production numbers [indiscernible] deliver at the end of the quarter. There are slight adjustments for it.
Operator
Your next question comes from Cameron Taylor from Bank of America.
Cameron Taylor
So just quickly, you mentioned last quarter that you had or this quarter, you had lower margins for nickel matte comparably similar to nickel pig iron now. How does this affect your sort of strategy going forward? You mentioned some time ago that you would be converting future RKEF lines to nickel matte production, notably the Angel RKEF mines. Is this still the idea, the diversification or given the lower margins, have you been forced to rethink that?
Justin Werner
No, I think this just sort of highlights and reinforces our ability to have that flexibility. It was only sort of 2 quarters ago where nickel matte margins were around $7,000 a tonne. So at this point in time, we just have 2 of our much older lines, which don't have the benefit of the power that had the ability to produce nickel matte. So we see that by increasing that capacity, we will be able to take advantage of periods when there is a stronger price that's being realized for nickel matte as opposed to nickel pig iron.
Again, obviously, the real advantage for us is that we do have the flexibility to go back to the production of NPI. And look, we will monitor margins. We're not sort of guided sort of flip and flop regularly between the 2 products. We will sort of take a view and see where we think the price is going and where the margins appear to be. But no, I think, look, this -- it just highlights that the margin realization that can be achieved by having the 2 different products. And it's up to us as a management team to try to maximize those margins by ensuring that we we're getting the most profitable product out there at the right time.
Cameron Taylor
Okay. It's fantastic having that flexibility is key, I guess. And secondly, the question around HNC HPAL. So it was mentioned that there was -- you were seeing margins of around $10,000 a tonne from [indiscernible] . Given the softening of LME nickel and nickel prices this year, what sort of kind of assumptions do you use going forward for those EBITDA margins? And does that affect your ENC FID? Do you have an IRR hurdle for FID of ENC? And what sort of EBITDA margins do you predict for those?
Justin Werner
Chris, happy to let you talk about ENC, the margins and finance.
Chris Shepherd
Yes, no problem. Thanks for the question, Cameron. Look, as a minority shareholder, we're not -- we’re not in a position to actually disclose those margins of [indiscernible] and [indiscernible] Position. However, it’s quite -- it is obvious to assume that if the market softening, those margins are currently depressed versus where they were last year. When we take our decision on ENC, obviously, margins are a factor. But we're not looking at a quarter-by-quarter investment strategy here. So we will take a call, FID, we'll take a call through the cycle and where we expect margins to be and make our decision accordingly.
Operator
[Operator Instructions] Your next question comes from David Coates from Bell Potter.
David Coates
Thanks for the call. Just following on from a couple of those questions. The ability to switch between low-grade and high-grade nickel matte or [indiscernible] specifically with the matte. What kind of -- I mean you've got the ability to change, what sort of time frame which you typically sort of notionally look at making that sort of taking advantage of that optionality sort of between the 2 products in a quarter-by-quarter basis or lock it in for half a year? Or how do you [indiscernible] About that at the moment?
Justin Werner
Yes. I think certainly longer than a quarter-by-quarter basis, Coty. I would think at a minimum sort of 6 months. And so -- and the other -- I guess it will be driven by -- and we've had strong interest from a number of groups, and we're considering it whether we do look to some longer-term contracts, whether we want to commit to those and fill those, but I think any decision would certainly be longer than a quarter-by-quarter basis given it's not as simple as flicking a switch. There is a period of time where you have to transition backwards and forwards between products. So you sort of take that into consideration as well.
David Coates
Cool. And you talked to NPI pricing as you've seen the markets soften, which seemingly on [indiscernible] demand for [indiscernible] factors there. But what do you guys -- when you look at the market, what are you guys seeing as supporting the price? Is it a recovery in that sort of downstream steel demand? Or are you seeing cost and production support at the higher end of the cost curve? What's -- what are the key kind of exactly you see supporting that into price or bring it off the bottom here o say.
Justin Werner
Yes. Again, costs, so marginal NPI producers in China currently not profitable and typically costs support that at the higher end to keep them in business. We are pleasingly seeing, obviously, a reduction in OpEx costs. Tsingshan of the view that we've seen the bottom and that moving forward, the demand will be relatively strong. I guess the big unknown is the meeting of the polyp bureau and whether China sort of pulls the trigger on further stimulus which obviously, we -- we'd expect to have a meaningful impact on pricing. But at this point in time, we think we've seen the bottom. There has been an uptick more recently. But I think importantly, from our perspective, sitting on that very bottom end of the cost curve with our costs, which should continue to trend down across the September quarter. As I said, our margins from our main operations, ANI are still very robust and ONI, there's still about $2,000 a tonne margin opportunity that we hope to be able to capture along with the production increase across this quarter.
David Coates
Right. Excellent. And just sort of a high level and probably a hypothetical question. In terms of [indiscernible] I was getting great margins at Angel and you're going to replicate those at Oracle. Is it a sort of strategic -- strategically available option for us to consider sort of selling out of the older RKEF lines and sort of trading up in the newer ones and sort of I guess optimizing your asset portfolio that way? Or much more about kind of getting those margins up product optionality or other things like that, like [indiscernible] From those older mines off?
Justin Werner
It's a good question. And look, there always is that opportunity as long as there's a willing buyer. I think -- and look, if you look at the government is no longer providing any tax incentives for any new RKEF lines, I think Indonesia is now pretty much built out, so look, anyone wanting to enter that space. Look, absolutely, we do have mature operations that someone may have an interest in. And so absolutely could potentially be an opportunity in the future, assuming there's a willing buyer at the right price.
Operator
Your next question comes from [CW Moy from Acan Capital.]
Unidentified Analyst
So I got a couple of questions. The first one being, I think you guys mentioned earlier that ENC is now fully funded. So does that assume that there's a certain level of debt that's going to be taken at the project level? If you can give us a little bit of details, that would be great. And then I have a follow-up after that.
Justin Werner
Chris, I'll let you chat on the funding.
Chris Shepherd
Yes. Thanks, [indiscernible]. Thanks for the question. There will be a level of debt [indiscernible] previously sold the market, we'd be looking around 50-50 debt equity. However, even without that debt, we like in our RKEF acquisitions, say, the recent ANI project and ONI project, we will be having a deferred payment schedule in Shanghai Decent effectively buying schedule, which will give us several years of lead time in order to actually fund the project. So with or without debt, we consider ourselves fully funded, and we will not be issuing further equity for the ENC project at this stage.
Unidentified Analyst
Okay. Got it. Second question is I remember -- if I remember correctly, the nickel matte that's been produced in HNI, what's being sold in existing Tsingshan contracts to third parties? And then needed -- I think that's what Qsingshan renegotiate some of those contracts into kind of your own contracts selling to third parties yourself. So is there any progress in that in terms of actually getting kind of third-party contracts into the system?
Justin Werner
Yes, those discussions are still on.
Unidentified Analyst
Okay. So nothing important. All right. Last question for me is I saw a headline a few weeks ago, that there was an Indonesia onshore ForEx deposit rule. And basically, what I said was if you generate kind of export revenue and potentially in U.S. dollars and you had to put that revenue into the bank for a certain period of time, so does that affect you guys? Is there any clarification as to whether like that's going to affect you guys and how that affects you guys financially?
Justin Werner
Yes. We aren't flowing any of our dividends back into Indonesia, which is where that requirement for a sort of a 3-year deposit, would set, so ours flow directly out from Indonesia into Singapore. And then in the case of NIC directly into Australia, so that's not something that would affect us. It's more for locally domiciled Indonesian companies that are flowing -- taking advantage of Singapore structure, but then flowing funds back into Indonesia, which isn't our case. And Chris, happy for you to add anything further to that.
Chris Shepherd
No, that's the right adjustment.
Unidentified Analyst
All right. Maybe I can take that offline because it seems a little bit more complicated than that, so I'll e-mail you guys after the call. Thanks.
Operator
Thank you. There are no further questions at this time. I'll now hand back to Mr. Werner for closing remarks.
Justin Werner
Look, thanks, everyone, again for your attendance this morning. Just to reiterate, again, another record production for both nickel and mine production, and we look forward to continuing that growth across the September quarter with the added upside of strengthening margins at Oracle Nickel, a ramp-up in mine production, and finalizing the -- securing the acquisition of 10% in the HNC HPAL project. So once again, thanks very much for your time. And as always, myself, Chris, Cam, always available for any questions. Thank you.
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Nickel Industries Limited (NICMF) Q2 2023 Earnings Call Transcript