Monsters of Rock: Green premium? Tell 'em they're dreamin' says Indonickel star Nickel Industries

Nickel Industries boss Justin Werner pours cold water on hopes for green nickel premium
South32 says zinc outlook is bright as it moves on from coal in uncertain battery and base metals environment
BDM, LOM, FEX and TER among the small miners reporting today

Australia’s most successful nickel producer – which mines and processes in the demonised jurisdiction of Indonesia – has laughed off suggestions carmakers will offer a ‘green premium’ for western nickel.

Nickel Industries (ASX:NIC) counts Chinese stainless steel giant Tsingshan as one of its largest shareholders and leveraged relationships with the nickel sector giant to grow a nickel pig iron, matte and HPAL portfolio which grew from virtually nothing a decade ago to 131,126t of nickel metal production in 2023.

NIC is now one of the world’s largest individual producers of nickel metal, delivering a record US$403.3 million in EBITDA in 2023, US$338m in gross profit and US$176.2m in profit after tax.

Powering a 2.5c per share final dividend and planned US$100m 12 month buyback, the result comes as Australian nickel sulphide producers flag plans to shut up shop, blaming a price collapse link to the rapid growth in supply from Indonesia.

Even BHP (ASX:BHP), owner of the 80,000tpa Nickel West business in WA, copped a US$200m loss in the first half of the financial year, something which prompted it to write down the value of its nickel business to -US$300m and flag its potential transition to care and maintenance.

Local miners have ramped up rhetoric in recent days and weeks on the need for bifurcated pricing which recognises the supposedly cleaner nature of Aussie sourced nickel, with miners also making an appeal to policymakers in Canberra for $1.7 billion in budget commitments on a 10% tax credit for battery metals refining.

But Justin Werner, the Australian boss of Indo-focused Nickel Industries, said those hoping for a green premium were engaging in wishful thinking.

He said the miner would ‘absolutely welcome a green premium’, claiming its Excelsior HPAL plant was targeting the lowest carbon intensity for nickel units worldwide. But he added customers were only fixated on cost.

“Will it come to fruition? I think not. We’ve been engaging with a number of EV and battery makers and they’re just interested in cost – that’s purely all they’re focused on,” he said.

“We’re seeing EV penetration rates stalling and these guys are under pressure to bring costs down. They’re comfortable with the ESG credentials of Indonesia.

“You only have to look at the names that are invested already in country. You’ve got Ford, you’ve got BASF, you’ve got Hyundai, you’ve got LG, Volkswagen.

“So I think this concept of a green premium, really there isn’t actually going to be any difference between nickel mined in Australia and nickel mined for HPALs in Indonesia, and so this whole concept of a green premium I think it’s not going to come to fruition.

“Importantly, it’s the end customer who is the one that’s saying they would be unwilling to pay it.”

READ: Ground Breakers: Miners want Canberra’s help to compete in critical minerals. Is it worth it?

READ: BHP joined the rout… so where are the green shoots for nickel now?

NIC targets ex-China market

At the same time, a number of RKEF lines which had been turned into nickel matte producers are shifting back to nickel pig iron as Tsingshan ramps up its market share in the stainless steel game, where NIC says its shareholder was the only profitable producer last year.

That means class 1 nickel out of Indonesia will come more and more from HPAL. Werner says this product, like that proposed to come out of its 72,000tpa Excelsior, will be marketed into the ex-China space.

“At the end of the day class 1 nickel from HPAL will always be cheaper than the nickel matte from RKEFs and have a significantly lower carbon intensity,” he said.

“So we’re targeting North American, European, Japanese, Korean customers – basically everything ex-China from our ENC products.”

Highlighting the challenges Australian miners have to compete on costs with Indonesian producers ENC, which could be doubled to 144,000tpa with NIC’s eventual share reaching 55%, won’t pay tax for 15 years after it begins operations.

Nickel Industries (ASX:NIC) share price today

South32 explains coal deal

South32 (ASX:S32) is stepping into the relative unknown, abandoning reliable cashflows from its Illawarra met coal operations in favour of funding a major base metals development in Arizona starting with the Taylor zinc mine.

The logic of its plan to sell the 5Mtpa+ Illawarra project to Golden Energy and Resources and M Resources for up to US$1.65 billion was drilled into by analysts on a call today.

Notably, Macquarie’s Rob Stein asked about the prospect of sliding dividends from the mining giant with the Illawarra sale carving out anywhere beteween “12-17% of NPAT over the next three years” on Stein’s numbers.

S32 CEO Graham Kerr said the miner does not see its base dividend ratio of 40% of underlying earnings shifting even as it moves to spend upwards of US$2 billion building Taylor by 2027.

That development hit FID despite concerns about an above spot price deck which still delivered internal rate of return of just 12%.

Kerr said the offer for Illawarra was attractive not just because of the sale price, but because it removed execution risk on future longwall moves, public profile risks around mining in the Sydney water catchment and future liabilities.

He added S32 would still get the benefit of current high met coal prices until the transaction clears in the September quarter and via contingent payments if prices remain high after the transaction.

As for Taylor, he says the permitting of the site will be important for further expansions into manganese and copper mining in Arizona, while Kerr holds a bullish view that zinc prices will move higher.

“There’s a bigger play here,” he said.

“If we sort of talk about the zinc price, interesting that people use the spot price to say how does that compare against our price, how does consensus price compare?

“But the reality is if you took last 10 year’ average for zinc, lead and silver and ran it through the model, you probably get an IPR which is much closer to 15%.

“If you look at some of the people on this call Barronjoey, Goldman, their zinc price is a lot closer to ours, you look at Teck, you look at WoodMac, there’s is a lot closer and you look at some of the people who basically market product in terms of the traders they would have a price above ours.”

LME zinc metal was fetching US$2422/t yesterday, while S32 had used a long term post 2031 assumption of US$3207/t in its DFS. Prices peaked at around US$4500/t in 2022.

South32 was among the top large cap performers along with gold miners as the materials sector added 0.26% to 3pm AEDT.

South32 (ASX:S32) share price today

A few tidbits

As reporting season winds up there’s a rush to get information out the door.

Among those on the bill today was John Welborn’s Fenix Resources (ASX:FEX) , which reported a 49% YoY in revenue to $126.9m and 102% rise in NPAT to $22.1m in the first half of FY24.

That came with iron ore shipments rising 119% to 1.4Mt and C1 cash costs falling 5% to $77.1/wmt (US$50/wmt) FOB against average prices of US$130/dmt CFR.

The small scale Mid West iron ore miner, which ships product from its Iron Ridge mine and third parties out of Geraldton, had $63.5m in the bank but will wait ’til the end of the financial year to reveal its dividend.

That result is somewhat protected by the company’s hedging scheme, which it has used to protect against volatility in the iron ore price, with 50,000t a month already committed to June at a price of $170.25/dmt.

FEX shares rose 4.1% as of 2.30pm AEDT.

A couple of diamond miners were up as well today, with Canadian diamond producer Burgundy Diamond Mines (ASX:BDM) reporing a $1.18m loss for the six months to December 31.

The Michael O’Keeffe backed stock took ownership of the Ekati mine in Canada’s Northwest Territories on July 1.

Its revenues rose almost 7400% on the deal to $257.5m, with profit before taxes up 162% from a $17.8m loss to an $11.1m gain compared to the full year to June 30, 2023.

African diamond miner Lucapa Diamond Company (ASX:LOM) also reported a loss after tax of US$9.1m, impacted by a US$13.4m impairment charge on its Mothae mine.

The Botswana mine’s dollar per carat outcomes were disappointing in the fourth quarter, according to the miner, with an investigation now under way into the quality issues which caused the writedown along with cost cutting exercises.

Lucapa produced 63,469 carats in 2023 compared to 66,138 in 2022, but sold them at an average price of US$1682/ct, compared to US$1576/ct a year earlier.

EBITDA of US$8.3m was down 23% on the US$10.7m generared a year earlier, despite rough diamond revenue rising 1% to US$102.1m ($154.3m).

LOM also received US$2.8m for polishing services and US$7.9m in dividend and loan repayments from partners in its Lulo mine in Angola. Shares in Lucapa tumbled 18.5% on the news, leaving the diamond producer capped at $26.4m.

Shares in coal junior TerraCom (ASX:TER) were also smashed, as lower prices led to a 67% fall in revenue for the half year to $141.26m and 82% drop in after tax profit to $31.72m.

The 2021-2022 boom in coal prices had turned the once debt-riddled Blair Athol mine owner into one of the highest yielding dividend payers on the ASX — returning $160m in H1 FY23. But those quarterly instalments have now dried up since a 3c per share final dividend announced in August, with no payouts offered with the half year results.