Forging a Nickel Empire

When it comes to EVs, the use of nickel in their batteries is a crucial factor to consider.

We cannot overlook the dominant role of Lithium-ion and NMC (Nickel-Manganese-Cobalt) batteries as the primary energy sources.

These two battery technologies have emerged as the most widely used options, make them the go-to choices for meeting the energy demands of EVs.

In the realm of mineral resources, Indonesia stands out as a global powerhouse, and one particular industry has been gaining substantial momentum: nickel production.

At the forefront of this thriving sector is Trimegah Bangun Persada Tbk (NCKL), a pure play nickel company that has carved its name as a major player in Indonesia's nickel landscape.

The recently released report from our commodity analyst, Andre, highlights that NCKL is not an ordinary player in the nickel market.

Firstly, the company boasts promising growth prospects, with various downstream projects currently under consideration, positioning it for further success in the market.

With a vertically integrated structure, NCKL encompasses three crucial assets: nickel mines, an RKEF smelter, and an HPAL smelter, and over the past few years (2020-2022), the company has made substantial investments to establish and operate these assets.

Looking ahead, NCKL has exciting prospects to commence operations for another RKEF project in the 2Q23, followed by an HPAL project in the 1Q24.

NCKL's Phase I and Phase II HPAL projects, when combined, will yield an impressive annual capacity of 55k tonnes of Mixed Hydroxide Precipitate (MHP). In addition, their Phase I RKEF project boasts a capacity of 95k tonnes of Ferronickel (FeNi).

This capacity places NCKL at the forefront of the industry, ready to meet the increasing demand and contribute to the sustainable future of the nickel market.

Source: NCKL

Secondly, NCKL demonstrates robust and expanding free cash flow generation, reflecting its financial strength and potential for sustained growth.

Based on a conservative nickel price estimate of USD17,500/ton, Andre projects that NCKL will generate an average of IDR4.6tn in FCF over the next 20 years, primarily due to its efficient operations and low cash costs.

If the nickel price were to increase to USD26,000/ton (the average price in 2022), the average FCF could potentially reach up to IDR7.5tn.

Thirdly, NCKL's excellent cost structure enhances its competitiveness and profitability.

Andre indicates that class II nickel prices face minimal downside risk, as they are already in close proximity to the cash cost levels of major industry players, currently resting at USD15,000/ton and these prices have remained relatively stable over the past four months.

As the Chinese market reopens its doors and the winds of monetary policies shift, we anticipate a potential price recovery. Looking ahead, the revocation of the nickel class II tax holiday is expected to further contribute, offering stability by reducing competition and steadying prices.

Considering these factors, we are pleased to initiate a BUY recommendation for NCKL. With a TP of 1,250, it corresponds to a 12.4× 12-month forward PE, which remains below the average of 14.0× for its domestic peers.

We believe NCKL presents an attractive investment opportunity for investors seeking to capitalize on the growing market for electric vehicles and green energy.

With its abundant mineral resources, Indonesia is blessed with the natural wealth needed to support the transition towards sustainable energy solutions.

Whether it's lithium-ion, nickel-manganese-cobalt (NMC), or other battery technologies, we should be grateful for the role Indonesia plays in advancing greener technologies.