Nickel Industries' Share Placement Reduces Funding Risks

(Fitch Ratings-Sydney-13 June 2023)-- Nickel Industries Limited's (NIC, B+/Stable) equity placement secures funding for its share in the USD2.3 billion Excelsior Nickel Cobalt project (ENC) in Indonesia, while a new collaboration will strengthen its diversification efforts, says Fitch Ratings.

NIC said on 9 June 2023 that it has reached agreement on a USD628 million (AUD943 million) equity placement to PT Danusa Tambang Nusantara (DTN), a subsidiary of Indonesia-based PT United Tractors Tbk (UT).

The placement is conditional on NIC’s shareholders’ approval, which is expected in 3Q23, and NIC's successful placement of its shares to its partner in the ENC project, Shanghai Decent, in exchange for an indirect 10% equity interest in the PT Huayue Nickel Cobalt Project in Indonesia. NIC is scheduled to seek shareholder approval of this placement to Shanghai Decent on 5 July 2023. DTN will hold 19.99% of NIC’s total ordinary shares outstanding after the placement is completed.

Under NIC's collaboration agreement with UT, DTN will have the right to acquire a 20% equity interest in the ENC project – reducing NIC’s investment by the same amount to 55%. The collaboration agreement is subject to a feasibility study and NIC’s final investment decision to proceed with the ENC project, with both conditions needing to be satisfied by 29 September 2023.

As a result of DTN’s introduction as a major shareholder in the ENC project, NIC and Shanghai Decent are investigating an expansion of the project – to double expected production to 144,000 tonnes from 72,000 tonnes of contained nickel equivalent (Stage 2 expansion). Shanghai Decent has also confirmed NIC’s total construction and commissioning costs for Stage 1 of the project at USD2.3 billion, despite plans to increase the project’s nameplate capacity to 72,000 tonnes from 67,000 tonnes estimated earlier.

In our view, the improvements announced are largely reflected in NIC’s rating and outlook. We believe that the collaboration agreement underscores NIC’s commitment to improve diversification and increase the scale of its operations. The ENC project will improve NIC’s product mix by adding flexibility to produce hydroxide precipitate, nickel sulphate and nickel cathode. The Stage 2 expansion of the project would also allow NIC to increase its total attributable production to 196,000 tonnes from 83,000 tonnes, if approved. Stage 1 of the ENC project is expected to commence in 4Q23, and commissioning is expected to commence 24 months thereafter.

The conditional share subscription secures funding for Stage 1 of the ENC project. Fitch forecast that NIC would have to raise an additional USD300 million of capital if the company decided to exercise its option in 2024 to embark on the project. Further, if UT via DTN exercises its right to acquire an interest in the project, this liquidity gap will narrow further – with NIC’s capital commitment falling to USD1.3 billion from USD1.4 billion-1.6 billion. The announced share placement covers our forecast liquidity gap and will reduce NIC’s EBITDA leverage in the short term. However, if the Stage 2 expansion of ENC is approved, the additional capital outlay needed is likely to limit the medium-term impact from the capital raising on NIC’s leverage. The overall impact on NIC’s leverage is subject to the timing of the commencement of construction of the Stage 2 expansion. (ends)