Fitch Assigns Nickel Mines Limited and Notes First-Time 'B+'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-18 March 2021: Fitch Ratings has assigned a Long-Term Issuer Default Rating (IDR) of 'B+' to Nickel Mines Limited (NIC), a nickel pig iron (NPI) producer. The Outlook is Stable. At the same time, Fitch has also assigned a rating of 'B+' with Recovery Rating of 'RR4' to the company's proposed US dollar senior unsecured notes. The proposed notes will be issued by NIC. They are rated at the same level as the IDR as they constitute unconditional, unsecured and unsubordinated obligations of NIC. NIC's rating reflects its solid financial profile, with strong EBITDA margin above 35% and positive free cash flows. Both of the company's rotary kiln electric furnace (RKEF) processing facilities at PT Hengjaya Nickel Industry (HNI) and PT Ranger Nickel Industry (RNI) are in Indonesia, and they sit in the first quartile of the cost curve and drive strong profitability. Both assets have consistently exceeded their name plate capacities by 35%-45% since their commissioning in 2019. NIC's financial strength is weighed down by its asset concentration, with the two RKEFs in PT Indonesia Morowali Industrial Park (IMIP). NIC's asset diversification will improve with its investment in PT Angel Nickel Industry (ANI), another RKEF facility at PT Indonesia Weda Bay Industrial Park, which is being developed by Tsingshan Group and expected to start production in 2022. The Tsingshan Group, a China-based group focused on stainless steel production that owns 18% of NIC, has a record of delivering RKEF facilities on time and within budget. Key Rating Drivers Proven Commissioning and Production Record: NIC's credit profile is supported by its robust RKEF operations in Indonesia. It first produced NPI in January 2019, less than 12 months after breaking ground at HNI and RNI, and now has attributable nameplate capacity of 24,000 tonnes per annum (tpa). We expect these operations to account for more than 95% of NIC's EBITDA in 2021, and more than 80% in 2022 after ANI starts operation. NIC has transformed from being exclusively an upstream miner of nickel ore from its PT Hengjaya Mine (HM) operation, to a significant producer of NPI. Low-Cost Position: NIC's NPI production benefits from low-cash cost positions. HNI and RNI are strategically located in IMIP, the world's largest integrated stainless-steel production facility. Indonesia is the largest nickel producer globally and Morowali regency has some of the largest nickel ore deposits in the country. A ban on raw ore exports and close proximity to ore supply give NIC the advantages of cheaper raw material prices and lower logistic costs. Accordingly, the company's operations are located within the first quartile of global nickel producers' cost curves, based on data from Wood Mackenzie. NIC's actual cash costs were around USD7,300/tonne in 2020, against the average nickel price of USD13,200. In addition, the vertical integration of operations within the IMIP provides numerous cost and efficiency benefits to NIC. Improving Asset Diversification: NIC now operates only four RKEF lines at HNI and RNI with total nameplate capacity of 30,000 tpa. The start of production at ANI, due in late 2022, will add 38,000 tpa of nameplate capacity and improve asset diversification. ANI will also provide structural cost advantages, as it has a 380MW captive power plant that will reduce power costs relative to current operations and offer more margin advantage over other producers. Bonds to Finance Acquisition: NIC plans to issue USD300 million of bonds to fund part of its acquisition of 50% of ANI for USD350 million. NIC already owns 30% of ANI and the additional stake will give it 80% ownership for a total consideration of USD560 million. Minimal Risk of Overruns: Fitch views the risks of cost-overruns and delays from the ANI acquisition to be manageable for NIC. In accordance with the agreement between NIC and Shanghai Decent (a Tsinghan group company that owns 18% of NIC), the latter will be in charge in designing and constructing facilities at ANI. In addition, ANI will be indemnified for any construction cost exceeding USD700 million. Shanghai Decent has a record of building and ramping up NIC's RKEF lines at HNI and RNI on time and within budget. NIC's leverage profile will not be materially altered by any delay in the start of ANI's operations, as the additional debt of USD300 million is manageable relative to the company's annual EBITDA of around USD200 million from RKEF production. We also expect the free cash flow at HNI and RNI to provide an additional cash cushion. Positive Free Cash Flows: We estimate NIC's free cash flow will remain positive due to its solid cost position, assuming there are no major capex and significant increase in shareholder returns. NIC's EBITDA margin will remain solid above 35% in 2021 and 2022 under our assumptions of stable cash cost per tonne at around USD7,300. Positive free cash flow will be supported by minimal capex from its young-age RKEF lines. However, a material increase in dividends can reduce free cash flows and erode its current strong cash buffer. Solid Credit Metrics: NIC's leverage, as measured by funds from operations to gross leverage (FFO leverage), will remain strong below 2.0x in 2021-22, including debt funding of the ANI acquisition. Deleveraging from 2023 will be supported by the start of production at ANI. FFO interest coverage will also remain high at above 5.0x during those years. Derivation Summary We believe that NIC has a better credit profile than Guangyang Antai Holdings Limited (GYAT, B/Stable). The latter's larger operational scale and revenue generation, as the third-largest stainless-steel producer in China, is offset by NIC's solid cash cost position and credit metrics. GYAT's business profile and margin are weighed down by its increasing exposure towards the lower-margin trading business. NIC's cash flow generation is significantly better with EBITDA margin of above 35%, supported by its strong cash cost position. In comparison, GYAT's EBITDA margin is far thinner at less than 5%. We expect NIC's FFO leverage to remain conservative below 2.0x, lower than GYAT's above 2.0x. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - Stable production at HNI and RNI at a level similar to that in 2020. Production at ANI will commence in late 2022. - Nickel price of USD15,000/tonne in 2021 and USD14,000/tonne thereafter, in line with Fitch's price deck. - Stable cash cost at HNI and RNI of around USD7,300/tonne. Cash cost at HM to improve to USD26 per wet metric tonne from 2021 following the full mining at central pit. - Minimal capex at HNI, RNI and HM as major investment projects were recently completed. RECOVERY RATING ASSUMPTIONS The recovery analysis assumes that NIC would be reorganised as a going-concern in bankruptcy rather than liquidated We have assumed a 10% administrative claim. Going-Concern (GC) Approach The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the enterprise valuation. Our GC EBITDA estimate of USD170 million reflects the mid-cycle nickel price and stable RKEF operations at HNI and RNI. An enterprise value multiple of 5x EBITDA is applied to the GC EBITDA to calculate a post-reorganisation enterprise value. We use a multiple of 5x to estimate a value for NIC because of its asset concentration in Indonesia and its smaller operational scale compared to peers, despite its stronger growth prospects following the ANI acquisition. The going-concern enterprise value covers 100% of NIC's unsecured debt, corresponding to a 'RR1' Recovery Rating for the senior unsecured notes after adjusting for administrative claims. Nevertheless, Fitch has rated the senior unsecured bonds 'B+' and 'RR4' because NIC's operating assets are located in Indonesia. Under our Country-Specific Treatment of Recovery Ratings criteria, Indonesia is classified under the Group D of countries in terms of creditor friendliness and Recovery Ratings are subject to a cap at 'RR4'. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Successful ramp-up of ANI in line with our expectation, while maintaining FFO leverage below 2.0x Factors that could, individually or collectively, lead to negative rating action/downgrade: - Sustained increase in FFO leverage above 3.0x - Material disruption in its smelter operations at HNI and RNI Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Adequate Liquidity: NIC had USD351 million of cash at end December 2020 against USD45 million debt from related parties. We expect NIC to generate free cash flow of around USD70 million in 2021 and finance the USD524 million payment for ANI shares through bond issuance. We believe funding risk to be manageable given NIC's solid credit profile and relationship with Tsingshan Group. Date of Relevant Committee 03 March 2021 REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg Nickel Mines Limited; Long Term Issuer Default Rating; New Rating; B+; Rating Outlook Stable ----senior unsecured; Long Term Rating; New Rating; B+ Contacts: Primary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Olly Prayudi, Director +62 21 2988 6812 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1 (https://www.fitchratings.com/site/re/986772)) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10154697) Solicitation Status (https://www.fitchratings.com/site/pr/10154697#solicitation-status) Additional Disclosures For Unsolicited Credit Ratings (https://www.fitchratings.com/site/pr/10154697#unsolicited-credit-ratings-disclosures) Endorsement Status (https://www.fitchratings.com/site/pr/10154697#endorsement-status) Endorsement Policy (https://www.fitchratings.com/site/pr/10154697#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT (https://www.fitchratings.com/rating-definitions-document) DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY (https://www.fitchratings.com/site/regulatory). FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYST IS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE. Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.