Moody's assigns first-time B1 CFR to Nickel Mines Limited; outlook stable

(Sydney, March 18, 2021) -- Moody's Investors Service has assigned a first-time B1 corporate family rating (CFR) to Nickel Mines Limited (NIC). At the same time, Moody's has assigned a B1 rating to NIC's proposed senior unsecured notes issuance. The rating outlook is stable.

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The proceeds from the proposed notes issuance will be used to finance the company's acquisition of an additional 50% equity interest in the Angel Nickel Project (ANI), taking its equity interest in ANI to 80%. Proceeds will also be used for general corporate purposes.

RATINGS RATIONALE

"NIC's rating benefits from the solid operating profile of its key assets, the Hengjaya (HNI) and Ranger (RNI) rotary kiln electric furnaces (RKEF) located in the integrated nickel and stainless-steel producing Indonesia Morowali Industrial Park (IMIP)", says Matthew Moore, a Moody's Vice President and Senior Credit Office. "Over its brief operating history, HNI and RNI have demonstrated consistently above nameplate production levels and very competitive unit costs amongst the lowest cost global producers," Moore adds.

The rating also recognises the company's relatively conservative financial position. Pro forma for the proposed notes issuance, Moody's estimates adjusted gross debt/EBITDA of around 1.5x. Also, Moody's expects NIC to generate solid cash flow before dividends under its base case assumptions, which is supported by NIC's low unit cost, minimal sustaining capex requirements, and tax concessions from the Indonesian Government. Moody's base case price sensitivity for Chinese nickel pig iron (NPI) is around $11,000-12,000 per tonne over the next 12-18 months, which is well below current spot levels.

"NIC's rating is constrained by the company's currently limited scale, diversity and track record of ownership and operation of its RKEF assets, which increases the company's exposure to any operational disruption at its key HNI and RNI operations" Moore adds.

The rating also reflects the company's position as a single commodity producer highly exposed to Chinese NPI price movements.

While scale and diversity are currently rating constraints, the soon to be majority owned ANI project, once complete, would approximately double NIC's current overall NPI output and improve the company's operating scale and diversity. ANI is currently estimated to be commissioned by October 2022.

Moody's expects that NIC's execution risks for the ANI project to be limited, as ANI's minority shareholder and NIC's key business partner, Shanghai Decent (part of the Tsingshan Group), is responsible for building the asset and has successfully developed 36 RKEF assets at IMIP, including NIC's HNI and RNI facilities. The Tsingshan Group has also provided NIC with a capex guarantee, which equates to no more than the acquisition cost.

While Moody's views Shanghai Decent and the broader Tsingshan Group's operational and development track record as supportive, another constraining factor on NIC's rating is the company's reliance and overall exposure to Tsingshan Group, which is a privately owned Chinese company with limited financial information available publicly. Moody's understands that Tsingshan is the world's largest stainless-steel producer, estimated to produce around 11 million tonnes per annum of stainless steel.

Currently, all NIC's revenue comes from Tsingshan under a perpetual commitment to purchase all of the NPI produced by NIC's facilities. Further increasing the linkage to Tsingshan is its ownership of a 20% stake in both HNI and RNI. Tsingshan will also retain a 20% stake in ANI once NIC completes its acquisition payment. Tsingshan also provides technical oversight to the operations of NIC's RKEF assets, and other RKEF assets within the IMIP, and is NIC's largest shareholder with a 18% stake.

The B1 senior unsecured notes rating, at the same level as the CFR, reflects Moody's expectation that the notes will continue to represent the vast majority of debt in the NIC's capital structure. The notes will be general senior unsecured obligations of NIC and do not benefit from subsidiary guarantees, however, the rating at the same level as the CFR reflects Moody's expectation that there will not be any material indebtedness at the subsidiary level.

RATIONALE FOR THE OUTLOOK

The stable outlook reflects Moody's expectation that NIC's ANI project faces minimal execution and budget risks and that its current operations have so far shown solid operating performance while maintaining low unit costs, which will allow the company to continue to generate solid earnings and margins even at lower NPI prices. The outlook also reflects the rating agency's expectation that NIC's credit metrics will remain consistent with the parameters expected for a B1 rating.

LIQUIDITY

Moody's expects NIC to maintain a good liquidity profile with internal sources more than sufficient to cover expected liquidity uses. Pro forma for the proposed note issuance and payment for the ANI acquisition, NIC is expected to have around $50-60 million of cash on hand and under Moody's base case assumptions, the rating agency expects NIC to generate funds from operations of around $120 million over the next 12 months. This compares to primary liquidity uses over the next 12 months largely reflecting Moody's expectations for dividend payments of around $75 million, and capital expenditures of around $20 million.

NIC's proposed notes issuance will have a bullet maturity with no maintenance financial covenants.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

NIC's rating also reflects its elevated exposure to environmental risk with its RKEF production process a carbon and energy intensive process that relies on thermal coal power stations. However, Moody's notes the benefits relative to other NPI producers from NIC's location, which is close to abundant nickel ore feedstock and the transportation and operating efficiencies from being located within an integrated stainless steel facility, including the ability to deliver molten ore to its key customers facilities.

The rating also reflects the potential impact on NIC's operations from the coronavirus outbreak, which Moody's regards as a social risk under its ESG framework, given the substantial implications for public health and safety. However, to date NIC has experienced limited impact from the pandemic on its operations, benefiting from strict prevention measures that itself and Tsingshan have implemented.

Governance considerations for the rating include the benefits from NIC's status as an ASX listed public company, which requires it to abide by Australia's prevailing laws and regulations. However, there is a degree of concentrated ownership with members of the Tsingshan Group as NIC's largest shareholder with an 18% stake and governance risk also reflects a somewhat complex organisational structure with Tsingshan having direct minority ownership of NIC's operations. This risk is exacerbated by the limited information publicly available on Tsingshan. NIC also has not publicly formalised its financial policies around dividends. The above governance risks are balanced by NIC's demonstrated conservative financial policies since the company's IPO in 2018, highlighted by low debt levels and funding key acquisitions largely with considerable equity raisings.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if NIC is able to achieve a longer track record of consistent operating performance and maintenance of its low-cost position across its key currently producing RKEF facilities. In addition, a potential upgrade would also be contingent on the improved scale and diversity from a successful completion and ramp up of ANI in line with management's current expectations. Moody's would also expect NIC to continue to maintain its strong financial profile with credit metrics consistent with the agency's current expectations.

The ratings could be downgraded if realised NPI prices fall well below Moody's base sensitivity assumptions on a sustained basis, and/or the company's cost and operating performance deteriorates meaningfully. Ratings could also be downgraded if the company embarked on large debt funded growth and/or shareholder friendly initiatives, which materially weakened credit metrics.

Specifically, financial metrics that Moody's would consider for a downgrade include EBIT/Interest expense below 3.0x and/or debt/EBITDA above 4.0x on a consistent basis. The rating could also be downgraded if NIC's free cash flow generation turns negative for a protracted period and/or liquidity deteriorates meaningfully.

Methodology

The principal methodology used in these ratings was Steel Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1074524. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Nickel Mines Limited (NIC) is an ASX listed nickel pig iron producer with assets in Indonesia. The company operates in partnership with the world's largest stainless-steel producer, Tsingshan, who is also the largest shareholder in NIC with an around 18% stake. NIC's primary assets are its 80% owned Hengjaya (HNI) and Ranger (RNI) rotary kiln electric furnaces (RKEF) located in the integrated Indonesia Morowali Industrial Park (IMIP). NIC has recently agreed to purchase an 80% stake in the Angel Nickel Project (ANI), an RKEF development project located in Indonesia Weda Bay Industrial Park (IWIP). In addition, NIC produces nickel ore from its 80% owned Hengjaya Mine which supplies feedstock to the IMIP. Moody's expects the mining operations to be a relatively small contributor to NIC's overall earnings and for the company to sell down to a minority stake by 2024, as required by Indonesian regulation.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com. (ends)