Nickel market mayhem

NIC entered and subsequently exited a Trading Halt on Wednesday 9 March, following a 23% drop in its share price in morning trade on the ASX. This resulted from speculation around the possible implications for Tsingshan Holding Group (a private company), the world’s largest stainless steel producer and parent company of Shanghai Decent Investment (SDI). SDI is NIC’s largest shareholder (17.9%) and partner in the Indonesian Morowali Industrial Park (IMIP) and Indonesia Weda Bay Industrial Park (IWIP), where NIC’s Nickel Pig Iron (NPI) operations are hosted. According to reports, Tsingshan held a 200kt nickel short position, struck at US$21,000/t. Following the suspension and cancellation of LME nickel trades for Tuesday 8th March, the mark-to-market valuation of the position, calculated on Monday’s cash closing price of US$48,200/t, was ~US$7.4 billion. Market concerns related to the solvency of Tsingshan, the status of operations and development at the IWIP and IWIP and the potential forced sale of SDI’s shareholding in NIC.NIC entered and subsequently exited a Trading Halt on Wednesday 9 March, following a 23% drop in its share price in morning trade on the ASX. This resulted from speculation around the possible implications for Tsingshan Holding Group (a private company), the world’s largest stainless steel producer and parent company of Shanghai Decent Investment (SDI). SDI is NIC’s largest shareholder (17.9%) and partner in the Indonesian Morowali Industrial Park (IMIP) and Indonesia Weda Bay Industrial Park (IWIP), where NIC’s Nickel Pig Iron (NPI) operations are hosted. According to reports, Tsingshan held a 200kt nickel short position, struck at US$21,000/t. Following the suspension and cancellation of LME nickel trades for Tuesday 8th March, the mark-to-market valuation of the position, calculated on Monday’s cash closing price of US$48,200/t, was ~US$7.4 billion. Market concerns related to the solvency of Tsingshan, the status of operations and development at the IWIP and IWIP and the potential forced sale of SDI’s shareholding in NIC.

Business as usual for NIC

NIC has stated that production, commissioning and construction activities at the IMIP and IWIP are unaffected by these developments. Tsingshan has provided assurances it will not be selling any shares in NIC, it will continue to purchase all NPI produced by NIC at market prices and, as outlined in the terms for NIC’s acquisition of 70% of the Oracle Nickel Project, it will accept NIC shares as part consideration. In the meantime, we believe it is likely Tsingshan (annual revenues US$56 billion and regarded as the world’s lowest cost stainless steel producer) will close out its short position, supported by physical delivery, without compromising its long-term financial viability.

Investment thesis – Buy, TP$1.76/sh (unchanged)

We make no changes to our forecasts or valuation with this update. The underlying fundamentals of the business are unchanged, other than that we expect upward pressure to be applied to Nickel Pig Iron (NPI) prices. We view NIC’s steep price drop as an acquisition opportunity. We continue to forecast aggressive EPS growth of 82% and 85% for FY22 and FY23 and we retain our Buy recommendation.

To read the full report click the button below.

View Detailed Report
Authored by David Coates – Analyst – at Bell Potter Securities, 9 March 2022
Important Disclaimer—This may affect your legal rights: Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives, a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the proper authority of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be consulted before any investment decision is made. While this document is based on the information from sources which are considered reliable, Bell Potter Securities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. This is general investment advice only and does not constitute advice to any person.
Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. Bell Potter Securities and its associates may hold shares in the companies recommended.