Fitch Affirms Nickel Industries Limited at 'B+'/Negative on Acquisition Announcement

(Fitch Ratings - Sydney - 27 Feb 2023)--Fitch Ratings has affirmed Nickel Industries Limited's (NIC) Long-Term Issuer Default Rating (IDR) at 'B+'. The Outlook is Negative. Fitch has also affirmed NIC's USD325 million senior unsecured notes at 'B+' with a Recovery Rating of 'RR4'.

The affirmation reflects our expectation that NIC will maintain its EBITDA net leverage below 1.2x through to 2024 - a comfortable level for its current rating - following its proposed acquisition of projects totalling USD345 million as well as USD40 million in options on battery nickel-related projects. The acquisitions are low risk and will be equity funded, and will allow the company to leverage its battery nickel strategy. The projects are currently in operation with a demonstrated track record.

The Negative Outlook continues to reflect NIC's liquidity risk. The company has USD325 million of maturing senior unsecured notes due April 2024 and amortisation payments on senior secured notes over 2024 - although it has partly addressed this in August 2022 through the issuance of USD225 million in senior secured term loans. However, NIC's liquidity position could come under pressure in 2024 if it decides to exercise the options without additional funding, including high-pressure acid leaching (HPAL), which is likely to require more capital from NIC of around USD500 million.

Key Rating Drivers

Battery Supply-Chain Strategy: NIC executed a strategic agreement with Shanghai Decent Investment (Group) Co., Ltd (SDI) to acquire 10% interest in the Huayue Nickel Cobalt Project for USD270 million from an affiliate of SDI and an additional 10% interest in the Oracle Nickel Project (ONI) for USD75 million. It has also acquired options to collaborate with SDI on battery nickel - USD25 million to participate in DAWN HPAL and USD15 million in a high-grade nickel matte converter that converts nickel pig iron (NPI) from ONI into high-grade nickel matte, with an annual capacity of 50ktpa.

Potential Product Diversification: The acquisitions give NIC an opportunity to increase product diversification and reduce dependence on a single customer. They may also increase NIC's exposure to higher-grade nickel. The company estimates its share of Class 1 Nickel has the potential to increase to 50%-60%, with all metal sold to customers not affiliated with the Tsingshan group.

Liquidity risk: NIC's USD325 million senior unsecured notes and scheduled amortisation on senior secured debt are due in the financial year ending December 2024 (FY24). Fitch forecasts the company will generate USD492 million from operations in FY24, driven by increasing production at ONI and stable margins, despite an expected fall in nickel prices based on Fitch's price deck. However, NIC could see a shortfall in liquidity if it decides to exercise the options and embark on the USD500 million HPAL investment in the absence of additional project funding.

We believe this creates refinancing execution risk, given the volatility in the offshore bond market and its limited record of accessing bank funding other than senior secured term loans. This will increase if NIC is not able to fully raise the remaining USD286 million through a conditional equity placement later this year. However, the risk is alleviated by growing cash flow as ONI commences operations and by NIC's track record of consistent equity issuance of over USD900 million since 2019.

Growing Production: Fitch estimates NIC's production scale will more than double to above 100,000 tonnes (t) of nickel metal by 2023 (2021: 40,000t). This is supported by PT Angel Nickel Industry (ANI) operating at full capacity since 4Q22 and a ramp-up in production at ONI, which will reach full production in 3Q23. NIC believes ONI can begin production on all four lines by end-March 2023. The SDI agreement also provides more growth options. NIC estimates combined attributable production of 156ktpa if the options are executed, lifting its market position to the top six worldwide.

Single Commodity, Counterparty Exposures: ANI and ONI will improve NIC's position as a significant global nickel producer. This is counterbalanced by NIC's single-commodity exposure to NPI and sole counterparty exposure to Tsingshan's related companies as its sole off-taker. However, Fitch views such exposure as commensurate with NIC's credit profile. NIC's operations and cash flow remained stable in 2022 despite Tsingshan's significant loss on its nickel short position in March 2022. Tsingshan has said it has secured facilities with its consortium banks and will exit its position in an orderly manner.

Improving Asset Diversification: Growing production at ANI helps NIC's asset diversification, as ANI is located in Indonesia Weda Bay Industrial Park (IWIP). NIC's current assets, including ONI, are at Indonesia Morowali Industrial Park (IMIP). ANI achieving full operation in 4Q22 increased NIC's production capacity to 66,000t per year, compared with 30,000t in 2021. ONI expects to reach full production by end-2023, which further advances NIC's capacity to 102,000t per annum.

Solid EBITDA Margin: NIC's solid cash cost position at its NPI facilities and construction of its own power stations at ANI and ONI should help it weather the impact of commodity price fluctuations on its selling prices and input costs. We estimate NIC's EBITDA margin will decline in 2022 to around 30% (2021: 38%), although this does not account for effects from ANI operating at full capacity and changes at PT Hengjaya Nickel Industry (HNI) to produce higher-grade nickel matte. We expect the EBITDA margin to be around 30%-33% through 2023 (2021: about 36%) under Fitch's nickel price assumptions.

NIC's margin will also be supported by ANI's and ONI's similar economic models. NIC's rotary kiln electric furnace processing facilities - HNI and PT Ranger Nickel Industry (RNI) - are strategically located at IMIP. Indonesia is one of the largest nickel producers globally and the Morowali regency has some of the country's largest nickel ore deposits. A ban on raw ore exports and close proximity to ore supply give NIC the advantages of cheaper raw material prices and low logistic costs.

Derivation Summary

We believe NIC has a better credit profile than Guangyang Antai Holdings Limited (B/Stable). Guangyang Antai's larger operational scale and revenue generation, as China's third-largest stainless-steel producer, are offset by NIC's solid cash cost position and credit metrics. Guangyang Antai's business profile and margin are weighed down by its increasing exposure to the lower-margin trading business.

NIC's cash flow generation is significantly better, with an EBITDA margin of above 35%, supported by a strong cash cost position. In comparison, Guangyang Antai's EBITDA margin is less than 5%. We expect NIC's EBITDA net leverage to be lower than Guangyang Antai's above 2.5x. However, NIC's Negative Outlook reflects its liquidity risk from the approaching maturity of its USD325 million senior unsecured notes.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Nickel price in line with the Fitch price deck

- Stable production at HNI, RNI and ANI in 2022-2025

- Full production at ONI to commence in 3Q23

- EBITDA margin of around 30%-33% in 2023-2025

- USD345 million to be paid in FY23 for new acquisitions

- Additional capex of USD1 billion during FY24-FY25 following the execution of acquired options to participate in constructing the DAWN HPAL plant

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- The Outlook may be revised to Stable if NIC demonstrates the ability to accumulate enough cash flow to repay the 2024 senior notes without the need to obtain a large amount of funding.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Deteriorating liquidity position

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Lumpy Debt Maturity: NIC had USD144.2 million in cash at end-December 2022. It faces the maturity of USD325 million senior unsecured notes in 2024, which is likely to coincide with significant capex commitment. Liquidity should be supported by positive free cash flow generation in 2022 and 2023. However, the company has a large acquisition payment over the next 12 months, which it plans to fund by raising equity.

Issuer Profile

NIC is a producer of NPI and nickel matte, with four smelter assets and one mining asset located in Indonesia. NIC holds 80% shares in HNI, RNI and ANI, with the remaining 20% owned by SDI, a Tsingshan group company. NIC also holds a 70% share in ONI, with the remaining 30% owned by SDI. HNI, RNI, and ONI are located in the IMIP area, while ANI is located in the IWIP area. NIC also holds an 80% share in PT Hengjaya Mineralindo, a nickel and cobalt deposit in the Morowali area.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)