Small Caps | May 18 2023
This story features NICKEL INDUSTRIES LIMITED. For more info SHARE ANALYSIS: NIC
Strong demand projections for nickel have put ASX-listed Nickel Industries on investors' radar, but the company's outlook is not risk-free.
-Demand for nickel is expected to grow at a CAGR of 5.5% a year until 2032, driven mainly by the rising usage of stainless steel in automotives, consumer goods, and infrastructure. The increasing adoption of electric vehicles is also a factor
-Nickel Industries' strength lies in three main areas: growing demand for nickel, high switching costs for its customers, and its constant acquisition of new projects
-Major risks are regulatory and producer risk
By Stella Ong, Markets Analyst at Stake (https://hellostake.com/au)
Nickel Industries ((NIC)) engages in the mining and production of nickel ore through its mining operations predominantly based in Indonesia. Its main products include nickel, nickel ore, and nickel pig iron.
The company was incorporated in 2007 in Australia, and commenced mining operations in Indonesia two years later after acquiring an 80% interest in Hengjaya Mine. Producing only nickel ore at the time, the Indonesian government’s ban on unprocessed mining exports forced the company to shut down operations in 2014.
Fortunately in a partnership with Tsingshan, the world’s largest producer of both stainless steel and nickel, the company built processing plants in Indonesia, allowing Nickel Industries to restart operations in late 2015.
The company IPO’d in 2018, and currently still owns 80% interest in Hengjaya Mine. Additionally, Nickel Industries now also owns 80% interest in each of these projects: Hengjaya Nickel, Ranger Nickel, and Angel Nickel, which are all rotary kiln-electric furnace (RKEF) processing plants. This year, the company also increased its stake in Oracle Nickel, another RKEF plant, to 70% from 40%.
NIC is currently one of the most traded ASX nickel stocks on the Stake platform.
Despite its short history, Nickel Industries has been able to grow its revenue exponentially in the last few years – from $18.3m in 2018 to $1.8bn in the year ending December 2022.
It began reporting profits as early as 2019, with the last year recording $234m. While the majority of new entrants spend several years raising cash for growth, Nickel Industries has already been rewarding investors with dividends at a TTM-yield (trailing twelve months) of 4.30%.
Its strength lies in three factors: growing demand for nickel, high switching costs for its customers, and the ability to expand production through its acquisitions of new projects.
Growing demand for Nickel
To the unfamiliar, nickel is subdivided into two classes – class 1 nickel, which is high-purity nickel used in the manufacture of batteries for electric vehicles (EV), and class 2 nickel, lower-purity nickel used for stainless steel.
Nickel Industries currently specialises in the mining and processing of class 2 nickel, specifically nickel pig iron (NPI). The company mines nickel ores in the Hengjaya Mine, and uses its RKEF processing plants to increase the quality of its ores.
Despite the rise in demand for EV batteries, the manufacture of stainless steel is presently still the largest contributor to global nickel demand. Almost 75% of nickel was used for it in 2020, while batteries only accounted for 8.8%.
The strong demand for class 2 nickel is proven by Nickel Industries’ selling all its NPI inventory from two out of its three processing plants in Q1 of FY23, despite soft demand from China due to its Covid-19 lockdowns.
Source: Fortune Business Insights
With China finally shifting away from its zero-Covid policy, the construction of dwellings and infrastructures rebound from lockdowns, and EV manufacturers now increasing their output, nickel demand is expected to soar in the coming years.
For the stainless steel market alone, demand is forecast to go by a CAGR of 5.5% for the next 10 years, according to a report done by Future Market Insights. The current valuation for the industry is at US$119.8bn, and it is expected to reach US$183.9bn in 2032.
Some of the main factors for this are the increase in automobile production, which accounts for 12% of the global stainless steel demand, and forecasted growth in the “flat products” segment, which accounts for 73%.
Flat products are the semi-finished products of stainless steel such as steel sheets and steel coils, which are raw materials for end-use items in building and construction, homewares, transportation, and more.
Demand for the U.S. alone is set to soar after the U.S. government introduced a US$2trn infrastructure plan in 2021 to repair and construct buildings, highways, and EV charging stations, amongst others.
Nickel is also heavily used in creating batteries, most especially for electric vehicles. The metal has been found to boost a battery’s energy density, and most cathodes are now composed of 60% nickel, with some going up to 90% nickel.
The below table from Glencore, shows the required metals for EVs to take 30% market share of new car sales by 2030.
To take just 30% market share requires 1.1 million tonnes of nickel per annum from 2017 (the year Glencore’s research was done) until 2030.
In comparison, the total nickel produced by the top 5 nickel-producing countries only totalled to 1.784 million tonnes in 2021.
With stainless steel still accounting for two-thirds of nickel demand, growing EV demand will soon create a supply deficit for the metal. The war between Russia and Ukraine makes matters worse – Russia supplied 11% of the world’s nickel supply in 2021, and it has now left a gap in the nickel supply chain.
The growing demand and lessened supply has helped Nickel Industries catapult its production and revenue. The company has been able to quickly turnover its inventory despite constantly growing its manufacturing volume.
High switching costs for customers
Nickel Industries’ one biggest customer would be its partner, Tsingshan. The stainless steel manufacturer collaborated with Nickel Industries back in 2014 when the former invested in building the Indonesia Morowali Industrial Park (IMIP).
The IMIP, which is now the largest nickel-based industrial area in Indonesia, houses several processing plants focused mainly on stainless steel and nickel (the RKEF).
Tsingshan initially pioneered the RKEF process, but Nickel Industries now holds ownership stakes in several of the RKEF plants, alongside owning majority of the Hengjaya mine – one of only two nickel mines in proximity to the IMIP.
With the strategic alliance between the two companies and Nickel Industries’ processing plants all being a short distance away from the IMIP, Tsingshan would face extremely high switching costs if it decided to switch nickel suppliers. Additionally, the two companies have signed contracts that specify the amount of nickel that Tsingshan must purchase from Nickel Industries.
Thanks to its strong relationship with its customer, Nickel Industries has been able to grow both its outputs and revenues with limited issues.
Acquisition of new projects
As mentioned previously, Nickel Industries started out as a mining company, owning a stake in only one nickel mine (the Hengjaya mine). The amazing growth the company has experienced lies in its management’s ability to grow the number of projects it owns and operates – which as of May 2023, is six projects with at least 70% equity.
By partnering with Tsingshan and taking ownership in RKEF processing plants, the company was able to diversify its product portfolio, now moving from nickel ore alone to nickel pig iron.
Nickel Industries mainly dealt with the class 2 nickel used for stainless steel prior to 2021. However, some news the company released last year is that it had signed a binding agreement with PT Huayue Nickel Cobalt (HNC) to supply the latter’s nickel for use in its HPAL facilities.
HPAL stands for high-pressure acid leaching – an innovative process used to, in simpler terms, turn class 2 nickel into class 1 nickel, the ones used for EV batteries. Yes, this means that with this agreement, Nickel Industries gained indirect exposure to the growing potential of the EV market.
Additionally, this year was another busy year for the dealmakers in the company. In its September 2022 quarterly report, Nickel Industries announced it had signed another long-term agreement that provides more exposure to the EV industry.
Partnering up with QMB New Energy, a concentrator plant would be built near Hengjaya Mine that would allow for nickel ores to be supplied to QMB’s HPAL plant via a pipeline. This would lead to Nickel Industries supplying QMB a total of 5-7m wet metric tonnes per annum ‘wmtpa’ of limonite ore over a 20-year period. Additionally, there is potential for Nickel Industries to obtain equity participation in the QMB HPAL.
More good news for the company is that it will soon transform its Hengjaya Nickel’s production to go from nickel pig iron to nickel matte. Diversifying its product mix to include nickel matte is another way for Nickel Industries to enter the EV battery supply chain. Major Chinese and South Korean battery manufacturers now use nickel matte to produce nickel sulfate (class 1 nickel).
Warnings and risks
Highlighting the potential of Nickel Industries above, investors may understand how Nickel Industries is one to watch. However, investments come with risks and Nickel Industries is not immune to them.
Nickel Industries’ biggest risk is regulatory/governmental risk, especially in Indonesia.
Having its projects located in one area, the company was once in the middle of the country’s enactment of its economic strategy for downstream industries. As previously stated, the government banned the exportation of raw minerals – companies were required to process them inside Indonesia. This required Nickel Industries to close down for a year before Tsingshan built the IMIP.
The Indonesian government went another step further this year, requiring companies to process resources into ready-to-use items. This most especially applies to nickel, which is the country’s largest reserve.
Aside from business limits imposed by Indonesia, the country may potentially enact rulings on climate change that could heavily impact the operations of Nickel Industries.
For one, the processing of nickel requires heavy usage of coal. The combustion of coal results in a significant amount of greenhouse gas emissions and carbon dioxide, threatening ESG initiatives.
Turning class 2 nickel into nickel suitable for use in EV batteries is even worse, with its processing releasing two-to-six times more carbon dioxide than producing class 1 nickel straight from high-quality ore. Even the conversion of nickel pig iron to nickel matte produces three times as many greenhouse gas emissions as HPAL processing.
If Indonesia were to introduce sanctions for environmental waste, the operations and financials of Nickel Industries would be directly impacted.
Additionally, the regulatory risk for the company does not lie solely on Indonesia’s government. The Chinese government had recently pledged that it would stop building coal-powered plants overseas – most especially in Indonesia and Vietnam.
This announcement directly impacted Tsingshan and Nickel Industries, and it had forced the companies to move towards using solar power. Currently, a few solar projects are in construction in the IMIP. The good news for those concerned with ESG initiatives is that Nickel Industries’ Hengjaya Mines has received seven Environment and Social Innovation awards (ENSIA) for its sustainability initiatives.
Producer risk is typically described as the risk that a good product gets rejected as a bad one by the customer. Nickel Industries does not have that exact risk, but has a very similar one – customers with high ESG requirements may potentially reject Nickel Industries as a supplier. The issue for the company is that most EV manufacturers have pledged to only use “low-carbon” nickel.
Currently, most of the company’s nickel is produced with its coal-powered plants. This means it has a high carbon footprint and great environmental risk.
While the company is moving towards renewables such as solar energy, the move would undoubtedly take time. If its potential customers move to sign long-term agreements with other companies in this period, Nickel Industries would miss out on the opportunity.
This does not constitute financial product advice. Past performance is not indicative of future performance.
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