Moody's affirms Nickel Industries' B1 CFR rating, outlook changed to stable

(Sydney, November 13, 2023)--Moody's Investors Service (Moody's)  has today affirmed the B1 corporate family rating (CFR) of Nickel Industries Limited (NIC) and changed the outlook to stable from negative. At the same time Moody's has affirmed B1 senior unsecured foreign currency rating of Nickel Industries Limited.

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RATINGS RATIONALE

The rating affirmation reflects the improvement in NIC's liquidity profile following the completion of the company's USD626 million placement of 19.99% of the company's ordinary shares to Danusa Tambang Nusantara (DTN), a wholly owned subsidiary of United Tractors Tbk (PT) (UT, Baa2 stable). Funding pressure surrounding the maturity of its April 2024 notes further reduced in light of recent bank financing initiatives and the affirmation also reflects the greater clarity on the capital requirements of the group for its Excelsior Nickel Cobalt (ENC) high-pressure acid leach (HPAL) project.

Moody's considers the company's staged approached to growth funding and recent financing activities to be supportive of the group's liquidity profile.

The company announced a positive final investment decision (FID) on its ENC HPAL project in October 2023 and NIC will make a USD1.265 billion investment for its 55% share in the project. The announcement of the project, which is subject to shareholder approval before the end of 2023, set out a staged 2-year funding schedule to October 2025. NIC's contribution is underpinned by a construction guarantee from Shanghai Decent that reduces the risk of cost blowouts on construction, the timing of commissioning as well as nameplate production capacity.

Together with the positive FID announcement, NIC also announced it has secured USD400 million of bank facilities from Bank Negara Indonesia (Persero) Tbk (P.T.) (BNI, Baa2 stable), to help fund its share of the project costs and bolster the company's liquidity profile in light of a subdued pricing environment for nickel pig iron (NPI).

Under Moody's base case which incorporates NIC realising a USD13,500/t NPI price, the agency expects NIC to generate sufficient cash flows from operations to meet its funding obligations over the next 2 years.

NIC's rating continues to reflect its steady operating profile and competitive cost position. The company's operating scale and diversity have improved following a successful ramp-up of production across its rotary kiln-electric furnace (RKEF) lines, further enhanced by the ramp-up of production at ONI. NIC's conversion of HNI to produce nickel matte from nickel pig iron, also provides the company with a degree of diversity in terms of product and pricing exposures. NIC's maintenance of low financial leverage, and its demonstrated willingness and successful track record of raising equity for growth initiatives further support its rating.

Constraints on the credit profile include (1) its reliance on and concentrated exposure to Tsingshan group; (2) exposure to commodity price fluctuations as a producer focused on nickel pig iron and nickel matte; and (3) ongoing focus on growth spending and acquisitions, which limit liquidity build-up despite solid free cash flow generation.

OUTLOOK

The outlook reflects the performance of NIC's RKEF facilities, which have so far shown solid operating performance while maintaining low unit costs. The consistent production levels and low unit costs of these assets will allow the company to continue to generate solid earnings and margins even at lower nickel pig iron (NPI) prices. The outlook also reflects the rating agency's expectation that NIC's credit metrics will remain consistent with the parameters Moody's expects for its B1 rating.

Further, the stable outlook reflects Moody's expectation that the company's upcoming debt repayment obligations are manageable over the next several quarters under the agency's base case.

LIQUIDITY

Today's rating action reflects an improvement in the NIC's liquidity profile following recent financing initiatives.

NIC exhibits good liquidity, reflecting cash and cash equivalents of USD827.6 million as of 30 September 2023.

Moody's expects the group to generate annualised operating cash flows of between USD350 million and USD400 million per annum, which the agency expects to be used in combination with recent financing facilities to fund the group's capital requirements for its ENC HPAL project over the next 2 years.

In October 2023, the group announced it had secured USD400 million of bank financing facilities, comprising USD350 million of 5-year term loans and a USD50 million revolving credit facility, which serve to further bolster liquidity.

The group has USD245 million of notes due 1 April 2024, which, in the absence of refinancing, Moody's expects the company to repay from available liquidity sources.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's may consider an upgrade to the credit ratings if the company diversifies its revenue base to other customers such that the concentration risk associated with Tsingshan is reduced.

The rating could also be upgraded if NIC maintains a track record of consistent operating performance and maintenance of its low-cost position across its key currently producing RKEF facilities. Further, the agency would expect NIC to maintain a strong financial profile with credit metrics consistent with a higher rating, and enhance its liquidity profile.

The ratings could be downgraded if realised NPI prices fall well below Moody's base sensitivity assumptions on a sustained basis and/or the company's cost and operating performance deteriorates meaningfully.

Moody's could also downgrade the ratings if the company embarked on large debt-funded growth and/or shareholder-friendly initiatives that materially weakened credit metrics.

Specifically, financial metrics that Moody's would consider for a downgrade include EBIT/interest expense below 3.0x and/or debt/EBITDA above 4.0x on a consistent basis. The rating could also be downgraded if NIC's free cash flow generation turns negative for a protracted period and/or liquidity deteriorates meaningfully.

PROFILE

Nickel Industries Limited (NIC) is an Australian Securities Exchange-listed company with assets in Indonesia, primarily producing nickel pig iron (NPI) but also nickel matte. NIC operates in partnership with the world's largest stainless-steel producer, Tsingshan, which is also the largest shareholder in NIC. (ends)