Earnings Transcript for NICMF - Q2 Fiscal Year 2024

Justin Werner: Thank you, and welcome, everyone, to Nickel Industries 2024 Half Year Results Call. If I could ask the moderator to please move to Slide 2. Thank you. Starting with safety, 3.25 million man hours worked at the Hengjaya Mine with no recorded LTI. So that's a lost time injury frequency rate of 0.07, which is world class. Similarly, at our RKEF operations for the first half of 2024, 4.93 million cumulative hours worked. And that's a lost time injury frequency rate of 0.316, and there was 1 LTI reported at the ONI operation. In terms of group safety, first half of 2024, 8.18 million man hours worked with 1 LTI, and that's a lost time injury frequency rate 0.182 per million work hours. In terms of ESG, we continue to be a leader in the sector. We've maintained the highest MSCI ESG rating through an Indonesia-based mining and metals company. And then throughout the first half of this year, we continued to receive a number of awards, including 2 Gold Awards at the Nusantara CSR Awards and winner of the ESG Award for the nickel sector by TrenAsia and ENSIA, local domestic groups that have recognized and awarded us for our work in the industry -- sector. Finally, the Green PROPER rating, we've maintained again our Green PROPER rating and achieved the highest score of any nickel mining company in Indonesia as well as the fourth highest score of all mining companies audited across all commodities. If we could move to Slide 3, please. But this is a very proud achievement for the company. We have now established a local foundation. And through that, we've set up the university scholarship program and delighted to welcome our first 10 local indigenous students. Nickel Industries will be putting them through undergraduate degrees across a field of different studies, including metallurgy engineering, mining engineering, environmental engineering, and we will continue to do that. So by the end of year 5, there will be 50 students annually which will be going through these various fields. And it's one of the -- it's the first initiative, but of many under our recently established foundation in Indonesia. And so we look forward to tracking the progress of those students and obviously very proud of their achievements and wish them well in their studies. If we could just move to Slide 4, please. First half review, challenging due to its exceptional circumstances, but still robust EBITDA across our operations, just challenges, including the delay in issuing of mining licenses and then exceptionally high rainfall for the second quarter of this year. Maintenance of and declaration of AUD 0.025 per share interim dividend, which was fully funded from 100% of our conduit foreign income. In terms of nickel production, 63,000 tonnes for the first half of the year and 4,117 tonnes of nickel in MHP from HNC. I'll talk about HNC and ENC a little bit later on, but we're seeing exceptional results out of HNC and strong EBITDA, the tonne margins, which bodes well for ENC, looking at commissioning towards the end of next year. The mine continues to go from strength to strength. We saw realized mine EBITDA of USD 39 million. That was impacted somewhat by the first 2 months of this year. January and February, we were unable to make any sales, but we now are catching up. And in fact, we're on track for August to be a record in terms of ore sales to the mine. And then finally, on the corporate front, we've increased our equity interest in ENC HPAL project to 44%. So there's only a remaining 11% to be acquired. We announced the trial sales of nickel cathode to a leading western space and aeronautical company. And we are seeing a lot of interest in cathode, particularly for the alloying industries. And that's a market that is quite exciting for us, and I'll touch on that a little bit later on. We successfully syndicated out 2 loans, a USD 400 million from BNI and then a $250 million term loan facility. And as I mentioned, we were awarded the highest sustainability score in the Indonesian mining sector with our Green PROPER rating. If we could just move to Slide 5, please. Key numbers here. Sales, a slight decrease by about 9.5%, decrease in EBITDA from RKEF operations but pleasingly, a significant increase in EBITDA from mine operations. So that was up almost 50% from $26 million to $39.1 million. As I mentioned, we maintained the AUD 0.025 per share dividend. And this has been across the first half of this year. If you look at what's been happening in the global nickel market, we've seen significant global shuts and a number of operations that are loss making. And so despite that, as I mentioned, still robust EBITDA, and we are looking forward and optimistic to a strong second half of this year, which actually probably is reflective of similar sort of conditions for 2023. We had a somewhat slower first half of 2023, and then we came home very strongly in the second half of '23. And we're focused and optimistic of having the same result in 2024. If we could just go to Slide 6, please. EBITDA to profit reconciliation, you can see there the numbers as we work through them, increase in interest expenses, obviously, with the loans and some increase in interest given the difference in cash. And that's led to a profit after tax of USD 40 million. So numbers are pretty consistent there. If we go across to the next slide, please, Slide 7, just going into our RKEF and HPAL operations in a bit more detail, an increase in nickel and NPI tonnes of 25%, and that's really just a factor of we have ONI fully ramped up. Nickel in matte tonnes, a decrease. We decided at the beginning of this year to convert back to nickel pig iron and there was an increase in total nickel production tonnes from the first half of '23 to first half of 2024. You can see here the significant decline in the weighted average contract price, down 27%. So it was averaging 15,476 in the first half of '23, down to an average of 11,290 for the first of '24. Pleasingly, though, we are seeing our cash costs trend down in line with that contract pricing. So our costs have come down from $12,800 to $9,700, and we continue to focus on the levers that we can to improve the cash costs and also improve the yield out of our RKEF operations. So overall, that led to EBITDA from RKEF operations of USD 90.9 million. Moving across to HNC. You can see Nickel in MHP of 41,000. On an annualized basis, that's over 80,000 tonnes. And HNC has a nameplate capacity of 60,000. So you can see the material you'll beat there to the nameplate capacity that HNC is achieving. And we would be hoping for a similar result from ENC. We've provided there both the EBITDA and the equity accounted profit from HNC. And also at the bottom there, the combined pro forma of HPAL EBITDA of USD 22.6 million. Across the first 6 months, that gives you an EBITDA per tonne number of about $5,500. And pleasingly, that number is currently sitting around $7,000 to $8,000 a tonne. So we are seeing very strong margins in the HPAL business in intermediary and class 1 nickel. And so that bodes very well for ENC coming online next year. If we could just go to Slide 8, please. We continue to maintain a conservative balance sheet. The change in assets is really just a reduction in cash and inventory. But as of 30 June, debt of USD 753 million, cash of USD 350 million, so net debt of USD 402 million. Subsequent to the quarter, we drew down on the USD 250 million 5-year loan facility, and we also made a U.S. round at $379.5 million acquisition payment to increase our ownership in ENC to 44%. We brought that payment forward from the original schedule with the intention of bringing forward cathode and sulfate production from the contracted date of October next year. If we could just go to Slide 9, please. Hengjaya Mine, despite a challenging first half, which as you mentioned, delays in RKAB licenses. And that this year is just a result of greater scrutiny on mining operators across Indonesia. We were amongst the first 40 to be -- to receive our RKAB and those RKABs are now for a period of 3 years. So thankfully, it won't be a process that we will have to go through beginning of next year. So that resulted in 2 months of no sales for the first quarter of this year. And then we came into the second quarter, and we had exceptionally high rainfall, 1.3 meters, over the quarter, which is 48% and 91% higher than the prior corresponding periods in 2022 and 2023. We are now -- but we're in the dry season. I mentioned August, we're on track for record sales and production. During the dry season, we are now focused on doing a lot of work on our haul rate with the aim of making it available 24 hours during that period, and that's involving a lot of work in terms of resurfacing, sheeting the road, geotechnical work, drainage and things like that. So the goal will be that we will be prepared for next season where we will look to significantly limit the impact of any rain on ore sales. Pleasingly though, despite those challenges, as I mentioned, the 50% increase in EBITDA from the mine of $26 million for the first half of '23 to almost $40 million for the first half of 2024 and again, we expect a strong second half from the mine. We are seeing increasing ore pricing. And in fact, we're seeing premiums of up to $20 per tonne above the current HPM price. So that bodes well for a strong performance from our mine for the remainder of this year. If you could just go to Slide 10, please. Excellent progress has been made on the ENC HPAL. Earthworks and footings are now largely complete. And the key long lead critical items such as the autoclaves, the preheaters and the flash vessels, which are really the heart of HPAL, they have all been fabricated. You can see some photos there of the autoclave. They are ready to be shipped over the course of September along with other critical equipment. And that equipment, some of it is being sourced from Australia, from the U.S., Germany. And so all of those parts are ready to be shipped out. We're particularly excited to unveil that Tsingshan has committed to this project becoming a Green Forest living precinct. And this is a precinct that Tsingshan is building. This is not part of the ENC project, but it will house ENC staff, and it will be the support base for all of the ENC operations. And this will be state-of-the-art living precinct. You can see a photo there of the living accommodation. And it will be surrounded by shops restaurants, sports fields, so it really is going to be a world-class operation. Everything within it will be electric, so electric trucks, electric transport, electric forklifts, anything like that. So the aim is this really will be a showpiece of sustainable and world-class nickel production in the center of Indonesia. And so we're obviously delighted that Tsingshan has chosen the ENC HPAL for this particular project, which is -- I think will -- as I said, will be a world-class showpiece. If we could just move to Slide 11, please. This is just really a recap of the first half. So I've mentioned nickel cathode, and we're seeing good interest from nickel cathode. One of the attractive elements of ENC's ability to produce nickel cathode is that it's also LME deliverable. So we have a market that's there at all times and able to attract the spot price. If we could just move to Slide 12. Again, all of these points we responded. Finally, we announced the appointment of an Independent Non-Executive Director, Emma Hall. We warmly welcome to Nickel Industries. She brings a range of diverse industry experience, particularly across the global battery metal chain, and she has been involved in various roles. These are engineers, manufacturers across U.S.A., Europe, Japan, China and South Korea. So given the transition of the company into HPAL and to that EV battery market, we warmly welcome Emma. And as I said, she brings a tremendous amount of experience and expertise in the side of the industry. So in summary, despite some exceptional circumstances and challenges this year, we were able to still maintain robust EBITDA, again, against the backdrop of the global nickel environment where numerous producers were going out of business or shutting down. We are now set up for a strong second half of the year given much drier conditions, so -- and very strong ore pricing coming through for the Hengjaya Mine as well as an improvement in the nickel pig iron price. And then looking at our HPAL. Again, we've seen margins increase here, as I mentioned, $7,000 to $8,000 a tonne for MHP. So with that, I'll hand over to Q&A. Thank you.

Operator: [Operator Instructions] Your first question comes from the line of David Coates with Bell Potter Securities.

David Coates: Congratulations on the results this morning. Questions around the dividend, really positive surprise for me anyway to see that dividend increase. We've been expecting it to kind of come through, but a little early and expect, which I think is a great signal. Can you just give us a bit more background perhaps on the thinking behind that lift in the dividend?

Justin Werner: Yes, Chris, I'll let you go on if you like.

Christopher Shepherd: Yes, sure. Thanks, Justin, and thanks, Coates for the question. Yes. I think the dividend, obviously, it's up on the first half of last year, but it is a consistent number with what we paid for our final dividend back in February, so back in Q1. As you know, we announced a revised dividend policy in -- on the 30th of January, where we're moving from just maintaining the same dividend to actually basing it off our free cash flows. You'll note that of our free cash flow, this dividend -- I'm sorry, the range there and it's a guidance, it is a guidance, is 30% to 60% of free cash flows. We've come in just above that at 65%. However, as Justin alluded to, when we took you through our quarterlies as well, this was an exceptional quarter abnormally hit by some exceptional items to our EBITDA and our free cash flow. So when we back that out, the number, the -- when we consider the back out of those items, the payout ratio is more like 45%. So it's within our range that we've guided investors in the market, too. But you're right, some people would see it as a positive surprise. And I think it's just that's evidence of where we're seeing the market evolving over the next 6 to 12 months and the strength of our cash flows and where we see the company positioned when ENC commissions early next year and we get the boost from that.

Operator: Your next question comes from the line of Adam Baker from Macquarie.

Adam Baker: Thanks for the results. Just one on the share buyback, which was previously announced, the $100 million buyback. Just wondering what the status of that is and how that fits into the capital management framework.

Christopher Shepherd: Yes, I'll take that one as well, Justin. Yes, Adam, thanks for the question. We obviously -- it wasn't just a revised dividend policy on the 30th of January. It was actually a broader capital framework program, as you just mentioned. Part of it was the dividend, part was share buyback. We couldn't do anything in the share buyback for the first 6 or 7 months after announcing that because we're waiting for FIRB approval for our second largest shareholder to be able to increase through 20%. Subsequent to that, we've obviously had -- during that -- subsequent to that announcement on 30th of January, on that same day where we announced a record EBITDA quarter of $135 million, I think it's fair to say the next 2 quarters were significantly below that due to those abnormal factors that Justin has run you through. We've obviously just announced a Sampala acquisition as well, a project acquisition. And so we're balancing the returns of capital to shareholders, as we mentioned, we always would, to actually the capital requirements for the company and conscious of the operations of the company whilst we do -- we are positive on the outlook, hence the increased interim dividend. We think it's prudent to be a little bit cautious for now and particularly as our cash flows are significantly lower than we were expecting when we announced that share buyback. We're not saying it's off the table, but we're constantly monitoring it, the management team. And if we see a need to get to -- or if we see a desire to do that, we still have, I think, 10 or 11 months under that existing approval to continue on that buyback.

Operator: [Operator Instructions] We have a follow-up question from David Coates with Bell Potter Securities.

David Coates: Stuck on one the first time around, but I might give you a couple this time, guys. Let's see. So the margins that you're getting from the HPAL production, they're obviously not really, really strong and good relative to the current offtake. How is that -- has that kind of been impacting or affecting the consideration of a sell-down in the Excelsior Nickel Cobalt project interest?

Justin Werner: Yes, thanks, David. We still we're working through that process. And we do have a number of interested parties, some of which have submitted a nonbinding offer. They're now in the process of sort of appointing advisers and moving into a more thorough due diligence phase. And so that is progressing well as long as -- as well as we're in dialogue with a number of groups around offtake of MHP cathode and sulfate. So that process is progressing, and we look forward to updating the market so that -- hopefully more towards the end of this year.

Christopher Shepherd: Coates, you just said that there's no misreading of that, any sell-down would be by Tsingshan state, not of Nickel Industries. We will be remaining at the 55%.

David Coates: Yes, great. Understood. And secondly, Justin, you mentioned oil pricing is attracting some pretty good premiums at the moment. Can you just run us through some of the factors that are driving that?

Justin Werner: Yes, a number of factors. The cut down in the issuance of RKAB licenses, poor operators or those with a bad track record of mining have not been given any allowance for all sales until they rectify the defects that have been identified in their mining operations. So that has meant that there is a reduced volume of ore available to be sold. The significant rainfall obviously impacted ore mining and ore sales as well. And so that has led to a short squeeze in the ore market, which is being reflected with -- in June and almost 1 million tonnes of ore was purchased from the Philippines. This sort of highlights, I think the -- again, the advantage of NIC being fully integrated with the mine to our RKEF and HPAL operations. We're currently 50% self-sufficient with ore for our RKEF operations, HNI, RNI and ONI in IMIP. And with the Sampala acquisition that we also just recently announced this week, that will take us to 100% self-sufficiency for the next sort of 40 to 50 years. So it won't be an issue that we will have to concern ourselves with. But it is something that has arisen through a number of factors. But again, it just highlights the importance and the advantages of being fully integrated from mining all the way through to processing.

Operator: Your next question is from the line of Dim Ariyasinghe with UBS.

Dim Ariyasinghe: Just a couple of questions for me. Maybe just first on the market. You made some comments earlier about a recovering NPI price. Can you maybe just give us a little bit more on that? Like what's driving that? Is that demand led? Or is it some of the supply correction that we're seeing, please? I'll come back with the second.

Justin Werner: Yes. Thanks, Jim. No, you've highlighted there it is a bit of a supply correction as well as that what is interesting in the NPI market is, for the first time, we're now seeing a market outside of China. So we have European stainless steel producers that are actually now purchasing nickel pig iron as opposed to scrap nickel just given the cost benefits. And despite the sluggish conditions in China, stainless steel growth still, it looks relatively robust moving forward. And again, there has been a supply correction. So we have seen higher cost. It hasn't just been producers of class 1 and intermediaries globally that have been affected. There has been NPI producers in China that have also come out of the market, some of the higher-cost producers. So that's what sort of led to a strengthening and improvement in the NPI price as well as in Indonesia, there has been a lot of conversion of RKEF lines from nickel pig iron to nickel in matte, which has also taken a considerable sum of NPI out of the market.

Dim Ariyasinghe: And then just a follow-up question on Sampala. It appears a pretty good strategic move to secure ore supply and further integrating. Just wondering around that. Like is it -- was it a competitive process? And maybe some questions from the other day. But did you initiate proceedings? Or I'm just trying to get an idea of competitors for Indonesian ore supply and actually locking up volumes like you've done.

Justin Werner: Yes. No, look, thankfully for us, it wasn't a competitive process. So it was done in partnership with our long-term local partner who we have had a long-standing 15-year relationship with, and he's been our local partner in the Hengjaya Mine. And I say, thankfully, it wasn't a competitive process because if you look at the valuations that we had in the presentation, the most recent nickel mine transaction was done at a multiple of USD 272 per tonne of contained nickel metal. We're currently acquiring Sampala at USD 39. So it's very attractive acquisition price, very attractive terms in terms of deferred payment not -- for 18 months or longer. And look, our local partners always have a long-term view. We've said, we've worked together for a long time. With Hengjaya Mine now producing the volumes and the EBITDA that it is as a 20% shareholder, he's going to have a very strong dividend for the next 20 to 30 years out of Hengjaya and likewise for the Sampala project. And I think if you take those multiples even outside of Indonesia, if you look at the IGO acquisition of WSA, that was done at a $900 a tonne multiple and Mincor was done at $2,100, so USD 39 per tonne, very compelling acquisition, already over 2 million tonnes of contained nickel metal and just 20% of the project area. So the opportunity for this to be one of the largest global nickel resources in close proximity to our existing operations made it very attractive. But again, it was really a result of the strong relationship that we have with our local partner that the opportunity was only made available to us, and we've been able to capitalize on it.

Dim Ariyasinghe: Okay. Cool. I might squeeze one last one there if okay. I might have to take it offline, though. And maybe it's one for Chris. But just on the reclassification of some of the prior period expenses. Like I think there was a list of consensus on that. Is there a simple explanation for that? I might come back next week, but yes.

Christopher Shepherd: Yes. Okay. So Sorry, you cut out a bit then. What was the reclassification question?

Dim Ariyasinghe: Yes. So just on -- just like explaining it at a high level, like what you've done. So I note that there was a bit of a news to NPAT because of those reclassified expenses.

Christopher Shepherd: Yes, yes. So when we're going through the audit with KPMG, I think you're talking about where we reclassified some of the dividend distributions, so it was the withholding taxes on dividend distributions. When working through with KPMG, we just decided that, that was the best to come out of other expenses where it was previously sitting and put into income tax expense. There was also a foreign exchange gain in there as well that we've reclassified to financial expenses.

Operator: Your next question is from the line of Eddie Lee with MetLife Investment Management.

Eddie Lee: Just a couple of questions from me. First, could you give us a little bit idea on like a Sampala acquisition funding plan? So I know the actual payment could be further delayed, but just curious what your thoughts are on the funding side. That's my first one.

Justin Werner: Yes. So we have a 3-month due diligence period before we're required to pay a commitment fee of USD 2.965 for 2 of the projects, then an 18-month period where we've agreed an exploration program, and we will drill it out. And then based on only heavy dry metric tonne at 1.7%, so anything less than 1.7%, we don't pay for. We pay a multiple of $2.50 per dry metric tonne. So that payment based on the agreement is more than 18 months away. And pleasingly, the ETL IUP, which is the one to the far north, a lot of work has already been done in terms of feasibility studies being submitted, an environmental study that's been submitted. A haul road has already been planned and geotechnical work has been done on that, so applications to start construction of that haul road have been submitted as well as a mine plan for ETL. And so our target is that we aim to start mining from an ETL by the end of next year, which means that we should be able to be in production actually before we make the final acquisition payments. Our local partners are comfortable with that. And so for us, pushing out deploying the payments and allowing money to go into the ground in exploration and then in mine development to see us through the cash flow, obviously very attractive. And in terms of CapEx, less than $50 million. We don't have to build a jetty because we're not on the coast. We do have 22 kilometers of haul road to build but that then links into 30 kilometers of haul road that is already existing, and that leads directly into IMIP. So from a CapEx perspective, very low CapEx. And then if you look at the current ore margins, using an average of sort of $15 a tonne, our initial plan is to be at 6 million tonnes per annum, ramping up to 12 million to sort of reflect the run rate at Hengjaya Mine. Applying a $15 margin to those numbers, you can see that the payback is extremely quick and the ARR is sort of around 50%. So very healthy. These mining operations are long-term, low cost and extremely profitable.

Eddie Lee: Yes. My question was more like in terms of actual kind of consideration of cash you will hand over to your partner for purchasing Sampala. So just kind of curious on the debt and equity funding mix for that or internal cash.

Justin Werner: Yes. We -- I mean, we obviously won't know the final number until we complete that exploration program. But given the very strong cash flows out of Hengjaya Mine, we could fund the acquisition out of the cash flows of our existing mining operation. And we actually -- we did put in the presentation that, at this point in time, the acquisition price would be around $42 million for 62%.

Eddie Lee: Okay. Got it. And then my second question is just regarding the appointment of Ms. Emma Hall as an Independent Nonexecutive Director. Just curious, so how many Independent Directors you have onboard?

Justin Werner: At the moment, we have 2.

Eddie Lee: That's including Ms. Emma Hall?

Justin Werner: Yes. Yes.

Operator: [Operator Instructions] Your next question is from the line of Tim Zhao with Lazard.

Tim Zhao: Two questions for me. First one, just on the acquisition. Can you confirm that -- I mean, I understand the haulage road you have or you try to build. I think it probably bypass some of [Medecas] acreage. Can you confirm that, that is not an issue for you guys to do a haulage road there? Second question is can you -- I know you guys don't provide any cost guidance, but could you provide some maybe directional guidance on where you see cost. I mean, obviously, consider where the coal price is today or even to see soft price today. And I think your earlier comments about the ore price becomes quite expensive at the moment. So yes, can you just give us some directional comment on where do you see cost from here today?

Justin Werner: Okay. Apologies for some reason, a bad line, so I didn't quite catch all of that, but I understand the question was around costs and coal pricing. So look, we -- costs have come down, as you can see from sort of first half of '23 to the first half of '24. We are expecting a small increase given the issues that we've outlined with ore supply. But the -- I mean the benefit again of having the mine is that whilst we may see higher costs in our RKEF operations, we are actually seeing this being reflected in the higher NPI pricing. And so we're seeing some margin preservation through that. But pleasingly, we're picking up a significant margin improvement at our mining operation.

Christopher Shepherd: The other question was around the haul road and whose property it was going through. Tim might have thought it was going through [Medecas], but you might want to talk to him about BDM.

Justin Werner: Okay. I assume this is the Sampala haul road. That will go 22 kilometers from our project into Bintang Delapan, which is a mine that's 49% owned by Tsingshan, 51% a local partner and then using 34 kilometers of existing haul road there. So that's the plan at this point.

Operator: There are no further questions at this time. I'll now hand back to Mr. Werner for closing remarks.

Justin Werner: Okay. Well, thank you again, everyone, for your attendance today. And again, the sort of final comment I would leave you with is that the skies have cleared, and we're seeing that already in terms of mine production, strengthening NPI, strengthening HPAL margins. So we're very focused and look forward to delivering a strong second half to the year. So thank you again for your time.