The rise of Nickel Industries: Harvesting profits and paying dividends in a tough market

The meteoric rise of Indonesia's nickel sector has transformed Western Australia's nickel scene into a graveyard of once-billion-dollar projects operated by names like BHP, IGO and Panoramic Resources.

Indonesia's vast reserves and favourable government policies have boosted its share of global nickel production from approximately 10% in 2016 to more than 50% in 2023. And expectations are for their dominance to tick even higher in the second half of this decade.

While Australia's long-running nickel sector has been decimated – there is a perspective that no one is talking about: Indonesian nickel producers are thriving.

A Big Structural Shift

Nickel Industries (ASX: NIC) Managing Director Justin Werner says there's always been an abundance of nickel in Indonesia but the technology to process it cost-effectively has only emerged in recent years.

"High-pressure acid leach has been around for about 50 years, tried in places like New Caledonia and Madagascar, but it had a long track record of not delivering and experiencing CAPEX blowouts," he said.

"That has now changed. The next generation of these high-pressure acid leach plants can produce nickel at a cost significantly lower than sulphide producers."

"To add some perspective, high-pressure acid leach costs can range from US$6,000 to US$8,000 a tonne while sulphide producers in Australia and the rest of the world can range from US$17,000 to US$22,000 a tonne."

Nickel prices are down around 25% in the past twelve months to US$16,000 a tonne. With this in mind, it's pretty understandable as to why ex-Indonesian producers are dropping left, right and centre.

Mr Werner said framed it this way "Indonesia is to nickel what Western Australia and the Pilbara are to iron ore, or what the Middle East is to oil and gas. Other parts of the world have iron ore and other parts that have oil and gas, but really, there's nowhere else that can produce nickel at the scale and cost that Indonesia can."

Where To From Here?

The consensus for the nickel is bearish, underpinned by themes such as more explosive supply, weak demand from China and underwhelming demand from renewable sectors.

Bu Mr Werner says there's reason for optimism.

"Our view isn't as bearish. The supply response has been quite swift, with about 450,000 tons of nickel coming out of the market or at risk. This includes closures by BHP and almost every Australian producer except for IGO, which only has two or three years left," he said.

For perspective, IGO has placed its Cosmos nickel project on care and maintenance. While its Nova Operation has a current mine life to 2026.

"It's not just Australia; we've seen closures in other parts of the world too. In terms of new capacity in Indonesia, there are only about 300,000 tons under construction and fully funded to replace that loss. Many announced projects aren't actually being built."

In the broader nickel market, demand remains sound, although not at levels some might have anticipated. A few key data points from the latest figures in the Department of Industry, Resources and Sciences quarterly include:

• Global stainless steel production – two-thirds of global nickel demand in 2023 – continues to be the primary driver of growth. China's stainless steel output rose 1.8% year-on-year in the March quarter (after 11% growth in 2023)

• Global EV sales rose 25% year-on-year in the March quarter of 2024, marking a robust but slowing rate of growth

"Overall, we believe we've seen the bottom of the market, and in the next two to three years, we expect strengthening nickel prices," says Werner.

An Indonesian Perspective

Nickel Industries is the largest pure-play nickel producer on the ASX. The company owns a portfolio of mining and downstream nickel processing assets in Indonesia. Despite a tough nickel price environment, the company has reported:

• December quarter 2023: Record Group EBITDA of US$135.4 million, a final dividend of 2.5 cents per share (up from 2 cents a year ago) and on-market buy-back program of up to US$100 million

  • The US$100 million share buyback was recently approved by Australia's Foreign Investment Review Board.

• March quarter 2024: Group EBITDA of US$70.3 million

• June quarter 2024: Group EBITDA of US$79.5 million

Mr Werner says the company has experienced rapid growth but they also raised a considerable amount ($670 million equity in January 2023) to fund it. "We are now in a harvesting period where we aim to return cash to shareholders. This includes defining our dividend policy and implementing a share buyback," he said.

From a fundamental perspective, he said "our margins are strong, and we're well-positioned to benefit from a recovery in nickel prices. We've demonstrated our ability to generate strong margins throughout the cycle. As the nickel price strengthens, we expect significant increases in our EBITDA."

Interestingly, Macquarie analysts project NIC's nickel output to grow 40% over the next three years, potentially boosting the company's net profit from US$121 million in 2023 to US$621 million by 2026. This assumption assumes a moderate recovery in nickel prices from an average of approximately US$17,500 in 2024 to US$21,000 in 2026.