We believe this is a great opportunity to pick up the Nickel Mines 6.5% 2024s at levels which don’t reflect the true risk associated with these securities.
The recent issues facing its sole offtaker Tsingshan are not ideal. However, we believe Tsingshan will be able to avoid meaningful realised losses on its short position and will not have any concerns over its solvency.
The bonds are currently pricing in an insolvency of its key counterparty Tsingshan, whereby a new counterparty for the vehicle would need to be sought. The normalisation of nickel prices in recent days will also further help the situation.
Nickel Mines’ balance sheet remains in pristine condition with net debt/EBITDA sitting below 1x’s. FY21 results were incredibly solid and Nickel Mines recently went into a trading halt to raise USD225m to go towards their previously announced expansion project – worth USD500m. This is a conservative action in our opinion, evidenced by the debt/equity mix.
We also note that Moody’s chose to place the rating on negative outlook and not downgrade the issuer following recent news. A negative outlook from Moody’s is not as severe as a credit watch negative, and again, just illustrates the risk may have been overstated by the market.
IAM Capital Markets View
We are aware that Tsingshan has reached an agreement with a consortium of hedge bank creditors whereby the participating banks agreed not to close out positions against Tsingshan or to make further margin calls in respect of these existing positions. Tsingshan has also been working with the participating banks to arrange a standby secured credit facility intended principally for Tsingshan’s nickel margin and settlement requirements and reduce its existing hedge positions as abnormal market conditions subside.
Nickel Mines has come out and publicly stated that there is no current impact on its operations and that Tsingshan has no intention to sell any shares in Nickel Mines and is committed to take up a planned share placement to help fund the company’s recent acquisition.
Furthermore, nickel prices have materially reduced from the very high levels noted in early March 2022, which will reduce the financial impact on Tsingshan. All of Nickel Mines’ revenue comes from Tsingshan under a perpetual commitment to purchase all nickel pig iron (NPI) produced from Nickel Mines facilities.
Recent News
Nickel Mines 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 Nickel Mines’ largest shareholder (c.20%) and owns a minority stake in each of Nickel Mines’ rotary kiln electric furnaces (RKEF) assets
Chart 1. Nickel Price and Inventory
Source: Bloomberg, CreditSights
Financials
| Key Financials | Actuals | Market Estimates | ||||
|---|---|---|---|---|---|---|
| 31/12/2019 | 31/12/2020 | 31/12/2021 | 31/12/2022 | 31/12/2023 | 31/12/2024 | |
| Income Statement | ||||||
| Total Revenue | 292.9 | 523.5 | 645.9 | 1,110.5 | 1,606.3 | 1,839.3 |
| Growth Over Prior Year | 2,061.3% | 78.7% | 23.4% | 71.9% | 44.6% | 14.5% |
| EBITDA | 115.9 | 194.5 | 230.0 | 381.8 | 627.8 | 755.0 |
| Margin % | 39.6% | 37.1% | 35.6% | 34.4% | 39.1% | 41.0% |
| Period on Period Change | (7,549.3%) | 67.8% | 18.3% | |||
| EBIT | 90.2 | 157.7 | 194.0 | 349.3 | 574.9 | 689.3 |
| Margin % | 30.8% | 30.1% | 30.0% | 31.5% | 35.8% | 37.5% |
| Pre tax Profit | 164.6 | 154.6 | 181.0 | 329.2 | 557.5 | 701.3 |
| Net Income | 124.0 | 110.6 | 137.9 | 244.8 | 390.1 | 492.0 |
| Cash Flows | ||||||
| EBITDA | 115.9 | 194.5 | 230.0 | 381.8 | 627.8 | 755.0 |
| Funds from Operations | 191.1 | 484.5 | 19.4 | |||
| Change in Working Capital | 147.9 | 334.5 | (169.6) | |||
| Cash Flow from Operations | 43.2 | 150.0 | 189.0 | 66.4 | 514.7 | 686.1 |
| Capex | (49.0) | (7.4) | (6.5) | (10.1) | (39.1) | (15.1) |
| Free Cash Flow | (5.8) | 142.6 | 182.5 | 56.3 | 475.6 | 671.0 |
| Dividends | 0 | 0 | 0 | |||
| Discretionary Free Cash Flow | (5.8) | 142.6 | 182.5 | |||
| Balance Sheet | ||||||
| Cash & Equivalents | 49.8 | 351.4 | 137.9 | |||
| Short term Investments | 0 | 0 | 0 | |||
| LT Debt | 60.7 | 32.1 | 318.3 | |||
| ST Debt | 4.3 | 12.9 | 9.3 | |||
| Total Debt | 65.0 | 45.0 | 327.6 | |||
| Net Debt | 15.2 | (306.4) | 189.7 | 261.2 | (79.7) | (589.0) |
| Credit Ratios | ||||||
| Net Debt/EBITDA | 0.1 x | -1.6 x | 0.8 x | 0.7 x | -0.1 x | -0.8 x |
| Total Debt/EBITDA | 0.6 x | 0.2 x | 1.4 x | |||
| EBITDA/Cash Interest | 57.9 x | 41.4 x | 18.1 x | |||
Relative Value
We believe this is a great opportunity to pick up the Nickel Mines 6.5% 2024s at levels which don’t reflect the true risk associated with these securities. The recent issues facing its sole offtaker Tsingshan are not ideal. However, the yield on offer of above 10% for a short-term opportunity is mispriced in our opinion.
Chart 2. Relative Value
Source: Bloomberg
