Nickel Mines Limited (ASX: NIC): Becoming a Significant Player in the Global Nickel Industry; Interview with Justin Werner, Managing Director
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By Dr. Allen Alper, PhD Economic Geology and Petrology, Columbia University, NYC, USA
on 11/10/2019
Nickel Mines Limited (ASX: NIC) is on the cusp of becoming a significant player in the global nickel industry, having established a financial, operational and strategic partnership with China’s Tsingshan group, the world largest stainless-steel producer. We learned from Justin Werner, Managing Director of Nickel Mines, that it is more industrial than a mining company. They have an option to move to an 80% interest in the Hengjaya and Ranger Nickel Mines. According to Mr. Werner, Nickel Mines Limited is the only nickel story that offers the exposure to the lowest cost nickel units anywhere in the market, with growth optionality.
RKEF Project
Dr. Allen Alper: This is Dr. Allen Alper, Editor-in-Chief of Metals News, interviewing Justin Werner, who is Managing Director of Nickel Mines Ltd. Could you give our readers/investors an overview of your Company and also tell them what differentiates Nickel Mines from others?
Justin Werner: We've been operating in Indonesia for more than 10 years. We initially went there with the intention of starting up a direct shipping operation, and at that time 1.8% nickel ore was selling to China for about $60 a ton FOB with a $20 mining cost, so mining 2 million tons a year, it was a very good business, low CAPEX and low OPEX. We identified a world class project called Hengjaya Mine, undertook exploration, permitting, feasibility and got it up into production, selling a couple of vessels to China and one to Japan.
But then, as you may be aware, the Indonesian government, and it had been talking about it for some time, enacted the minerals ban, which was a ban on the export of unprocessed or raw ores. That came into effect in 2014. Most people including ourselves thought that the government wouldn't go through with it, but actually in their wisdom, and it's turned out to be a very good decision, they went ahead with it. So that left us unable to sell our ore anywhere, and we'd just spent all of this capital to develop a mine.
Serendipitously, about 10 km as the crow flies from us is Tsingshan, the world's largest stainless steel producer, who will produce about 12 million tons this year, almost a third of the world's stainless output had identified the opportunity to shift their new stainless operations to Indonesia because of the cost of cheap ore. They had actually already started building, what they call, the IMIP, which is the Indonesia Morowali Industrial Park, even before the ore ban came into effect.
RKEF Project
Since they first broke ground in late 2013, they've turned that park into the world's largest, fully vertically integrated, stainless steel park, with about 3.5 million tons per annum of stainless steel production capacity. It's over 7 billion US of direct investment, currently employs 30,000 local Indonesian employees and has more than two gigawatt of captive coal-fired power. It is one of the most impressive nickel processing facilities that's been built anywhere, probably ever. How did we get involved with Tsingshan? We started off supplying them with ore, so we were able to restart our mining operations. And we were, for a period of time, around eighteen months, their highest grade ore supplier. We were supplying them with ore at an average grade of greater than 2%. That was the genesis of the relationship.
That led to us signing a collaboration subscription agreement (CSA), in September 2017, where we took an initial 25% stake in two rotary kiln electric furnace lines (RKEF), called Hengjaya Nickel, with a minimum guaranteed capacity of 14,000 tons of nickel per annum, as Nickel Pig Iron (NPI) for US$50 million. On a 100% basis, we also had a capital guarantee that the RKEF lines would not cost more than US$200m, placing them in the lowest quartile for capital intensity. Under the agreement, we also had the option to go to 60% for US$120 million, with further optionality to go to as much as 100%, 12 months post the production of first NPI.
RKEF Project
The CSA and the move to 25% of Hengjaya Nickel was completed pre-IPO. Around May of 2018 we went out to initially raise 125 million Aussie to allow us to increase our stake in Hengjaya Nickel from 25% to 60%. The story was very well received and we up-scaled the offer to 200 million making it the 2nd largest resources IPO on the ASX in recent years. In fact when we closed the book, we had almost 400 million in bids. So it was quite heavily oversubscribed. Unfortunately, as you know, last quarter of last year was particularly brutal for everyone. So we IPO'd into a soft market, but happy to say, we're well above our issue price at this point in time. And that's off the back of delivery of a number of milestones, well ahead of schedule, with production from all 4 kilns well exceeding name plate capacity and opex costs coming in below guidance.
Funds raised from the IPO allowed us to utilize some of the excess funds in another two RKEF lines of identical capacity, which we call Ranger Nickel. Happy to say that Hengjaya Nickel commissioned its first line at the end of January, this year, which was well ahead of scheduled guidance of second quarter of this year. Both lines are now operating at well above nameplate capacity, and costs are coming in well below $8,000 ton, also well below guidance, and in the first quartile for NPI producers.
We have also just recently completed an increase in our interest in Ranger Nickel from 17% to 60% for a consideration of 121.4 million US, which has been funded by a mix of debt and equity comprising a 80 million US debt facility that we have completed with Decent Investment International, a 55 million Aussie capital raise, which was again well supported and conversion of 40 million US of the consideration into Nickel Mines shares by Shanghai Decent at a slight premium to the equity raise price, taking their interest in Nickel Mines back up to 18.1%. They are our largest shareholders, so there's a good alignment of interests. The Vice Chairman of Tsingshan, who's the Chairman and oversaw the construction of the IMIP, is also on the Board of Nickel Mines, a very impressive gentleman. So what do we think are the advantages that we have? A, all of these plants were built with a CAPEX guarantee. So we took no risk on the construction. Tsingshan already has 20 of these RKEF lines operating in the park. So there was very little risk there, so no CAPEX risk. Then on the OPEX, we're sub 8,000 a ton, and the nickel pig iron that we produce typically tends to track very closely to the LME price. It generally trades within a band of premium to deficit to the LME nickel price, from 90% to 105%. However there has been, for the first time, a bifurcation in Nickel and NPI process, but we think this will return to its historical trading range, as the dust settles on some of the recent events in the Nickel market, such as the Indonesian Government re-implementing the full ore ban ahead of schedule at the end of this year. You compare that to sulfide or concentrate producers, they're getting paid 65 to 75% playability.
So we have guaranteed CAPEX and very low capital intensity.
Ranger Nickel
First quartile OPEX, superior pay-abilities and finally both Hengjaya and Ranger Nickel were issued with significant tax concessions from the Indonesian Government, where we pay no tax for 7 years and then 50% of the corporate tax rate (which is 25%) for a further 2 years. The nice thing about Nickel Mines is we have further growth optionality, which is already locked in. So in the case of Hengjaya and Ranger Nickel, we have the option to move to an 80% interest in those, for an agreed value. We will probably look to exercise that sometime in 2020 and if we exercise those options that will then take our attributable nickel production to over 25 to 26,000 nickel units per annum, and make us one of the largest pure play listed nickel producers on any exchange anywhere in the world. So if you want pure nickel exposure, we're one of the rare opportunities to get that. And also, leverage to Tsingshan and all of the significant infrastructure and expertise that they bring.
Dr. Allen Alper: That sounds excellent. That's really outstanding. You really have an excellent situation, a great property, a great resource, and a great partner there. So that's ideal.
Justin Werner: Yeah. I think it is a very compelling story.
Dr. Allen Alper: It is. Very unusual! Unique!
Justin Werner: Exactly. We're actually more of an industrial company than a mining company. The mine is completely decoupled from our RKEF lines. They're not relying on us supplying a certain amount of ore every year. We're one of many suppliers into the industrial park, which currently consumes 17 million tons of ore per annum. All of that ore comes in and is all blended to the same feed grade. So all 24 lines are basically getting the same feed grade and going through exactly the same process. In terms of where we sell the nickel pig iron, we actually have some flexibility there as well. We're not locked into any particular off-take with Tsingshan. We're free to actually turn it into nickel pig iron ingots if we wanted to and sell them outside the park which we have recently done.
Coming back to being more of an industrial, the beauty of that is that we don't have the headache that other miners have, in terms of having to increase the size of an ore body, or a finite mine life. We have very low sustaining CAPEX, only around 5 million US every five years. So we don't have all of those large numbers that you'd see in a typical mining company. All the pressures of worrying about if you go farther underground the grades might decline, or the costs go up. We should just operate at a steady stage for the next 20 plus years.
Ranger Nickel
Dr. Allen Alper: That's sounds excellent. Could you tell our readers/investors about your background and the team’s and the Board’s background?
Justin Werner:Nickel Mines was founded about 12 years ago by a gentleman called Norm Seckold. Norm had great success with a company called Bolnisi Gold. That was acquired by Coeur d'Alene for about 1.3 billion. Off the back of that success they then decided to start Nickel Mines, initially with a small group of shareholders. As for myself I have been in country for a long, long time. I first went to Indonesia in 1998, where I spent two years working for Freeport, with a consulting group at the giant Grasberg mine, following that I consulted for various mining operations globally and then returned to Indonesia full time in 2004. I have been involved in a number of projects and mines in Indonesia ever since then. I live in country, so feel I have a pretty good understanding of how things operate here.
Dr. Allen Alper: That's excellent. Could you tell us a bit more about the other members of the team?
Justin Werner: Mr. Huang Weifeng is a non-exec Director, the Vice Chairman of Tsingshan and Chairman of the IMIP Industrial Park. We are delighted to have him on our board. Rob Neale recently joined as Chairman, as Norm had to move to Vice Chairman for corporate governance reasons. Rob was previously CEO and Chairman of New Hope Coal, and was instrumental in taking that to over a billion dollar market cap. Peter Nightingale is the CFO and Peter and Norm have worked together for almost 20 years. Mark Lochtenberg is a non-executive Director, formerly with Glencore. Jim Crombie, also a non-exec Director who's based out of North America, brings a lot of operational mining experience. We also have our female non-executive Director Mrs. Xu, who represents our second largest shareholder, Shanghai Wanlu Investment Co. Ltd, who came into the Company as a significant cornerstone investor pre-IPO. It's a very, very good Board and Management, with a lot of years of experience among them.
Dr. Allen Alper: Sounds like you and your Board have excellent experience, excellent backgrounds. Could you tell our readers/investors a bit more about your share and capital structure?
Justin Werner: Through the completion of the Ranger Nickel acquisition we now have 1.6 billion shares on issue, with a market cap of over 1bn Aussie. In terms of the share register, it is a very good mix of global resources funds such as BlackRock, Investec, fidelity and Ballie Gifford. We have just completed our first road show in North America, with BMO and happy to see Oppenheimer funds join the register and hope to see more over the coming months and years. We also have a number of Australian domestic funds, such as Regal, Tribeca, IFM etc., who have been very strong supporters of the stock. We were just included in the ASX 300 in the last rebalance and are quietly confident of entering the 200 sometime next year.
Dr. Allen Alper: That sounds very good. Could you tell readers/investors the primary reasons they should consider investing in Nickel Mines Ltd?
Justin Werner: We think it's fairly simple but compelling. Basically if you want exposure to the lowest cost nickel units, anywhere in the market, with growth optionality, where the price is locked in on long life assets, where you shouldn't see too much fluctuation in costs, then we think we're the only a nickel story that offers that exposure. It's obviously anyone's guess where nickel might head, but certainly the fundamentals are that 300 series stainless growth, which is the most Nickel intensive, has been very robust, and that's forecast to continue.
LME stocks are still declining significantly, with currently less than four weeks coverage. When you overlay that with the electric vehicle thematic, which luckily our success isn't predicated on, but certainly the numbers seem to indicate that the take-up of electric vehicles will continue to grow rapidly, and the move to a nickel intensive 811 battery will create significant Nickel demand in the future.
Ranger Nickel
Dr. Allen Alper: Oh, that sounds excellent. Very strong reasons to consider investing in Nickel Mines. Is there anything else you'd like to add?
Justin Werner: I’d like to thank you for interviewing Nickel Mines Limited for Metals News. To move from 60% to 80%, we're basically just buying cashflow or nickel units. Being partnered with the world's largest stainless steel producer, is a significant plus. There are 20 other existing lines that could potentially find a home in Nickel Mines in the future, or other lines that may be built. So we've partnered with the industry leader, who has very ambitious growth plans.
Dr. Allen Alper: Oh, that sounds excellent. We’ll publish your press releases as they come out so our readers/investors can follow your progress.
https://www.nickelmines.com.au/
Justin Werner
Managing Director
jwerner@nickelmines.com.au
62 813 8191 2391
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