Moody's changes Nickel Mines Limited's outlook to negative; B1 ratings affirmed

(Sydney, March 23, 2022) -- Moody's Investors Service has affirmed Nickel Mines Limited's ("NIC") B1 corporate family and senior unsecured notes ratings. At the same time, Moody's has revised the rating outlook to negative from stable.

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The rating action follows widely reported news that NIC's sole offtaker, Tsingshan group, is facing potential large losses on its short nickel position due to higher LME nickel prices over recent weeks. Tsingshan is also NIC's largest shareholder and owns a minority stake in each of NIC's rotary kiln electric furnaces (RKEF) assets.

RATINGS RATIONALE

The negative outlook reflects the increased risk and uncertainty for NIC's ongoing credit profile, given the recent issues facing its sole offtaker, Tsingshan. Moody's has limited visibility into Tsingshan's overall financial position given its status as a private company, however, the rating agency understands that the Chinese company has recently been dealing with potential material losses on large short nickel positions. This led to Tsingshan reaching a standstill agreement with a consortium of hedge bank creditors whereby the participating banks agree not to close out positions against Tsingshan or to make further margin calls in respect of existing positions. Moody's also understands that Tsingshan has been working with the participating banks to arrange a standby secured credit facility intended principally for Tsingshan's nickel margin and settlement requirements, and it has also agreed to reduce its existing hedge positions in a fair and orderly manner as abnormal market conditions subside.

NIC has publicly stated that, based on discussions with Tsingshan personnel, there is no current impact on its operations, and that Tsingshan has no intention to sell any shares in NIC and remains committed to take up a planned share placement to help fund NIC's recent acquisition. Further, over recent days nickel prices have materially reduced from the very high levels registered earlier in March 2022, which should help to reduce the overall impact on NIC's sole offtaker and minority owner.

However, Moody's understands the situation is still developing and dependent on Tsingshan's ability to avoid, or withstand, meaningful realized losses from its short position. The negative outlook reflects the increased uncertainty around NIC's ongoing credit profile from the current situation, given its reliance on a counterparty where risk management and governance factors are an increasing concern.

Currently, all of NIC's revenue comes from Tsingshan under a perpetual commitment to purchase all NPI produced by NIC's facilities. Tsingshan also has a 20% direct ownership in NIC's RKEF assets, operates the industrial parks where the assets are located and provides technical oversight to the operations as well as ancillary services such as electricity and logistics. Tsingshan is also responsible for developing and bringing into operation NIC's new RKEF assets, Angel Nickel Project (ANI) and Oracle Nickel Project (ONI). While we see Tsingshan's operational and development track record as supportive for NIC, a potential change in Tsingshan's ability to perform its normal activities could disrupt NIC's operations materially.

While the negative outlook reflects the increasing concerns around NIC's reliance on Tsingshan, the affirmation of NIC's ratings considers its steady operating profile, with strong margins and cashflow supported by its competitive cost position and elevated nickel pig iron prices. The affirmation also reflects NIC's conservative financial position, which has benefited from the company's willingness and use of equity funding for acquisitions and Moody's view that NIC's cashflow generation will provide adequate liquidity to fund its material acquisition payments over the next 12 months. Moody's also notes the development of ANI is progressing well and ahead of schedule, with 2 of its 4 lines having entered production after commissioning. As ANI ramps up production towards nameplate capacity over the next several months, this would further benefit NIC's credit profile by adding additional earnings and operational diversity.

NIC's rating remains constrained by its reliance on, and exposure to Tsingshan group. The rating is also constrained by the company's position as a single commodity producer highly exposed to Chinese nickel pig iron price movements. The company's currently limited scale, diversity and track record of its RKEF operations are further rating constraints, although scale and diversity would improve considerably upon ANI becoming fully operational.

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

Moody's could downgrade the ratings if signs of financial distress emerges at Tsingshan and which the rating agency views could lead to a disruption to NIC's operations and/or cashflow. The ratings could also be downgraded if NIC's liquidity position or credit metrics deteriorate meaningfully.

An upgrade is unlikely over the near term given the current negative outlook. However, the outlook could be revised to stable if: (1) there are clear signs that Tsingshan's current issues are unlikely to have any material impact on NIC's operations and cashflow generation; (2) Tsingshan successfully avoids realizing significant financial losses from its short nickel position, or experiencing other related negative developments to its operations; and (3) a material buildup in NIC's liquidity which would provide significant buffer against potential operational disruptions.

The principal methodology used in these ratings was Steel published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296098. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

PROFILE

Nickel Mines Limited ("NIC") is an ASX listed nickel pig iron producer with assets in Indonesia. NIC operates in partnership with the world's largest stainless-steel producer, Tsingshan, which is also the largest shareholder in NIC with currently an around 18% stake. (ends)