Fitch Revises Nickel Industries' Outlook to Stable, Affirms Rating at 'B+'

(Fitch Ratings - Sydney - 27 Mar 2023)--Fitch Ratings has revised the Outlook on Nickel Industries Limited (NIC) to Stable from Negative, and affirmed the Long-Term Issuer Default Rating at 'B+'. Fitch has also affirmed NIC's USD325 million senior unsecured notes at 'B+' with a Recovery Rating of 'RR4'.

The Outlook was revised due to the easing of liquidity risks following an average 12% increase in Fitch's nickel spot price forecast between 2023 and 2025 in March 2023. This reflects the structurally higher market prices and a rebound in stainless steel production on China's reopening.

The affirmation reflects our expectation that NIC will generate stronger operating cash flow, with operating margins of 27%-34%, between 2023 and 2026, than in 2022. We expect NIC to maintain its EBITDA leverage below 1.9x and EBITDA interest coverage above 4.4x through to 2026.

Key Rating Drivers

Alleviated Liquidity Risk: Fitch expects NIC to generate operating cash flow of around USD600 million per year in 2024 and 2025 on production increases at the Oracle Nickel Project (ONI) and stable margins, driven by strong nickel prices. This will more than cover the liquidity requirements for the USD325 million senior unsecured notes due 2024 and USD225 million senior secured debt, including scheduled amortisation, due 2025.

We expect a total funding gap of around USD800 million over 2024-2025 if NIC decides to exercise its option to embark on the Excelsior Nickel Cobalt Project (ENC), formerly known as the DAWN HPAL+ Project, in the absence of additional project funding. However, we believe the gap is manageable as NIC would only undertake the project if it has the appropriate funding. NIC is backed by a record of frequent equity raising, most recently raising over USD200 million since January 2023. Its rating also has leverage headroom should it decide to fund the project with debt.

Battery Supply-Chain Strategy: NIC signed an agreement with Shanghai Decent Investment (Group) Co., Ltd (SDI) in January 2023 to acquire a 10% stake in the Huayue Nickel Cobalt Project (HNC) for USD270 million from an SDI affiliate and another 10% in ONI for USD75 million. It also acquired options to collaborate with SDI on battery nickel - USD25 million to participate in the ENC and USD15 million in a high-grade nickel matte converter to convert low-grade nickel matte from ONI into high-grade nickel matte, with capacity of 50,000 tonnes per annum (tpa).

Product, Counterparty Diversification: The acquisitions will increase NIC's product diversification and exposure to higher-grade nickel, and reduce dependence on the Tsingshan group as its sole off-taker. NIC estimates its class 1 nickel output can rise to 50%-78% of total attributable production, with all of the metal sold to customers not affiliated with Tsingshan. NIC's operations and cash flow were stable in 2022 despite Tsingshan's significant loss on its nickel short position in March 2022. Tsingshan said it has secured facilities with its consortium banks and will exit its position in an orderly manner.

Rising Production: We estimate NIC's production will more than double to above 100,000 tonnes (t) of nickel metal by 2023 (2022: 70,000t). This is supported by subsidiary PT Angel Nickel Industry (ANI) operating at full capacity since 4Q22 and a ramp-up at ONI, which will reach full production in 3Q23 with all four lines to be fully commissioned by end-March 2023. The SDI agreement also provides more growth opportunities. NIC estimates combined attributable production of 156,000 tpa if the SDI options are exercised, making it one of the six-biggest producers worldwide.

Improving Asset Diversification: ANI's higher production helps NIC's asset diversification, as ANI is located in the Indonesia Weda Bay Industrial Park (IWIP). NIC's current assets, including ONI, are in the Indonesia Morowali Industrial Park (IMIP). ANI achieving full operation in 4Q22 increased NIC's production capacity to 66,000t per year, from 30,000t in 2021. ONI expects to progressively reach full production by end-2023, which will further raise NIC's capacity to 120,000tpa.

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 improve in 2023 to around 33% (2022: 27%), although this does not account for the effect of ONI operating at full capacity and the switching of two lines at ANI to produce higher-grade nickel matte. We expect an EBITDA margin of around 27%-34% over 2024-2026 under Fitch's nickel price assumptions.

NIC's margin will also be supported by ANI's and ONI's similar economic models. NIC's other rotary kiln electric furnace processing facilities - PT Hengjaya Nickel Industry (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 average EBITDA margin of above 30%, 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.

JSW Steel Limited (BB/Stable) has a stronger credit profile than NIC. JSW Steel, as the biggest steelmaker in India, has a larger operational scale, wider diversification and a greater proportion of higher-value-added products. It also has a robust financial profile with margins and EBITDA leverage that are largely similar to that of NIC.

Key Assumptions

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

- Nickel spot prices in line with the Fitch price deck as of March 2023

- Stable production at HNI, RNI and ANI in 2023-2026 and full production at ONI to commence in 3Q23

- EBITDA margin of between 27% and 34% in 2023-2026

- Around USD450 million to be paid in 2023 for new acquisitions, including USD270 million for the 10% stake in HNC

- Incremental capex of around USD1.4 billion in total over 2024 and 2025 for the ENC project

RATING SENSITIVITIES

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

- An increase in production scale while demonstrating improvement in customer diversification; and

- Sustained decrease in EBITDA leverage below 2.5x.

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

- Sustained increase in EBITDA leverage above 3.5x;

- Sustained decrease in EBITDA interest coverage below 4.0x;

- Weakening of funding access;

- Weakening of Tsingshan's ability to make timely payments to NIC.

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

Adequate Liquidity: NIC had USD144 million in cash as of end-December 2022. Its USD325 million senior unsecured notes will mature in 2024, and USD225 million senior secured debt, including scheduled amortisation, is due 2025. We believe NIC has the capacity to repay the notes from its strong cash generation over 2023-2025 and fund up to 40% of its share of the ENC, with the balance to be funded from external sources and most likely debt, if it decides to exercise the option.

The proposed acquisition of projects and options, if approved by shareholders, will be equity-funded via a recently completed institutional share placement and purchase plan, and a conditional placement that will also be subject to shareholder approval in April 2023.

Issuer Profile

NIC is a producer of NPI and nickel matte, with four smelter assets and one mining asset in Indonesia. NIC holds 80% of 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. NIC also holds an 80% share in PT Hengjaya Mineralindo, a nickel and cobalt deposit in the Morowali area.

Sources of Information

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

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)