Industry Trend Analysis - Nickel Miners: Challenges And Opportunities Ahead - DEC 2017


BMI View: Nickel miners will witness subdued output growth in the coming years as operational difficulties come to the fore and low prices reduce profit margins. Major nickel miners with a high degree of diversification will continue to improve balance sheets as they benefit from higher prices of other metals , while those that are more exposed to nickel stand to lose out. Cost -reduction and efficiency enhancements will remain a priority , although we expect investment into new nickel projects to increase in the expectation that nickel prices will pick up beyond our forecast period, due to rising long-term demand from the growing electric vehicle market.

Major nickel companies will continue to struggle in terms of production in the coming months as operational difficulties affect mining output. Glencore's nickel production fell by 2% y-o-y over the first three quarters of 2017 as maintenance work and higher third-party material at the company's Sudbury operations in Canada reduced output capacity. Similarly, over H117 Norilsk Nickel's nickel production decreased by 15% y-o-y while the company reconfigures downstream production facilities as part of its modernisation plan. Furthermore, Vale's New Caledonia operations remain plagued by technical difficulties and uncompetitive costs, negatively affecting overall nickel output so far this year. Vale SA, Glencore, Norilsk Nickel, and BHP Billiton will remain the largest nickel producers, accounting for up to 37% of global output as of 2016. Among these, only BHP Billiton has raised this year's annual nickel production guidance, from 85kt in 2016 to 93kt in 2017. On the other hand, Glencore retains annual guidance at 115kt while, Vale and Norilsk Nickel estimate that production will fall from 310kt to 295kt and 213kt to 211kt, respectively.

Norilsk In Trouble
Selected Nickel Miners - Nickel Production ('000 tonnes)
Source: Company Statements, BMI

Slim Profits As Prices On Downtrend

As an added headwind, our expectation that nickel prices will come down from current spot levels over our forecast period from 2017-2021 will mean major nickel operations will struggle to remain profitable in the coming years. Despite a more than 20% rise in nickel prices so far this year from USD10,000/tonne in January to USD11,604/tonne as of November 15, prices remain far off highs of above USD22,500/tonne witnessed in 2011, which allowed miners to produce nickel at a significant profit margin. As an example, Vale's New Caledonia operation's cost of production stands close to USD11,232/tonne, above nickel price ranges during the majority of 2017, leading Vale to announce earlier this year that it is putting this mining site on sale. Additionally, Eramet's Societe Le Nickel operation also sustained early year losses as a result of nickel prices dipping below USD9,000/tonne. We expect nickel miners to continue to struggle in this regard as the increasing substitution of refined nickel with cheaper alternative nickel pig iron pushes prices below the USD10,000/tonne mark by 2021 (See: ' Nickel: Low Demand To Shift Market Into Surplus ' , October 4).

Nickel Prices To Remain On Downtrend
Nickel Prices - Historic and Forecasted Averages (USD/t)
Source: BMI, Bloomberg

Portfolio Diversity To Mitigate Financial Losses

Major nickel miners will nevertheless continue to improve their financial positions in the coming months by virtue of their diversified portfolios, while undiversified nickel miners will struggle due to the aforementioned challenges. Large diversified nickel miners including Glencore, BHP or Vale will benefit from recent price rises in commodities including copper (over 20% increase), cobalt (over 100% increase), zinc (over 50% increase) or thermal coal (over 20% increase) which will translate into higher company earnings (see chart below). On the other hand, companies with larger exposure to nickel mining such as Norilsk Nickel, where nickel accounts for over 30% of overall metal sales, will witness weaker balance sheet improvements. So far in H117, Norilsk's EBITDA is down 3% y-o-y largely due to a 17% drop in lower nickel revenues as a result of lower sales. Other nickel miners including Eramet, Indonesia's PT Antam and Philippines miners Nickel Asia Corp and Global Ferronickel Holdings are likely to encounter a similarly challenging financial environment in the coming years due to their larger exposure to nickel mining.

Norilsk Nickel Missing Out On Improvements
Select Companies - Adjusted EBITDA (USDmn)
Source: Bloomberg, BMI

Cost Reduction To Remain Priority

Profitability among diversified nickel miners will be further aided by their continued focus on capital and operational cost-cutting initiatives in the coming quarters. As with the broader mining industry, cost reduction and efficiency improvement will drive stronger balance sheets, improved cash flows and an overall better performance ( See: ' Miners ' Strategy: Capital & Supply Discipline To Persist Despite Better Performance ' , June 13). Accordingly net debt to EBITDA among the four major nickel miners (BHP, Vale, Glencore and Norilsk Nickel) fell or remained stable over 2013-2017, with the exception of Vale. Furthermore, average cash costs for global nickel mines fell from highs of USD4.9/lb in 2012 down to USD1.7/lb in 2016 according to Bloomberg data, reflecting significant improvements in efficiency.

Capex To Remain Stringent
Select Miners - Capital Expenditure (USDmn)
Source: Bloomberg, BMI

EV Growth To Increase Greenfield Investments

Moving forward, we expect nickel miners to increase investment into greenfield projects in the expectation that nickel prices will rise on a longer term horizon due to increasing demand driven by the electric vehicle revolution. Nickel is used in lithium-ion batteries which are set to dominate the battery market in the coming years through use in various segments including utility-scale electricity storage and EV's ( See 'Battery Storage: Lithium-ion To Take Market Spotlight', August 4 2016) . The increasing use of nickel containing lithium-ion batteries by major EV manufacturers will therefore give nickel miners cause for optimism beyond our forecast period from 2017-2021 and they are already investing strategically in response. For example, in August BHP Billiton announced it will spend USD43mn on a new facility at the firm's Nickel West operation in Kalgoorie, Australia to begin producing over 100kt of nickel sulphate - used in lithium ion batteries - by April 2019. Within the next five years, BHP expects to sell 90% of nickel into the battery market, compared with just 10% today. Earlier in June 2017, the largest nickel producer in the world, Norilsk Nickel, announced an agreement with metal supplier BASF in order to supply raw material from its Harjavalta site for lithium-ion battery production in Europe. We expect investments of this type to become a growing trend among nickel miners looking to increase their profits on a longer-term horizon.

Nickel Miners - Key Financial Data
2009 2010 2011 2012 2013 2014 2015 2016
Source: Bloomberg, BMI
BHP
Revenue (USDmn) 50211.0 52798.0 71739.0 72226.0 65953.0 56762.0 44636.0 30912.0
% chg y-o-y -15.6 5.2 35.9 0.7 -8.7 -13.9 -21.4 -30.7
Net Income (USDmn) 5877.0 12722.0 23648.0 15417.0 11223.0 13832.0 1910.0 -6385.0
% chg y-o-y -61.8 116.5 85.9 -34.8 -27.2 23.2 -86.2 -434.3
Capital Expenditure (USDmn) 10735.0 10656.0 11406.0 19235.0 22547.0 15512.0 12763.0 7711.0
% chg y-o-y 20.5 -0.7 7.0 68.6 17.2 -31.2 -17.7 -39.6
Profit Margin (%) 11.7 24.1 33.0 21.3 17.0 24.4 4.3 -20.7
Net Debt to EBITDA 0.4 0.1 0.2 0.8 1.0 0.9 1.5 6.0
Vale
Revenue (USDmn) 23311.0 47364.1 61106.0 46856.4 47211.3 37608.4 23787.3 27316.7
% chg y-o-y -37.7 103.2 29.0 -23.3 0.8 -20.3 -36.7 14.8
Net Income (USDmn) 5349.0 17113.1 22649.2 5078.2 53.7 406.6 -13473.3 3842.5
% chg y-o-y -59.5 219.9 32.3 -77.6 -98.9 656.8 -3413.6 -128.5
Capital Expenditure (USDmn) 8096.0 13400.3 15759.7 15951.0 13280.1 11224.4 8207.1 5006.3
% chg y-o-y -9.8 65.5 17.6 1.2 -16.7 -15.5 -26.9 -39.0
Profit Margin (%) 22.9 36.1 37.1 10.8 0.1 1.1 -56.6 14.1
Net Debt to EBITDA 1.4 0.7 0.6 2.3 1.4 2.5 n/a 2.3
Glencore
Revenue (USDmn) 106364.0 144978.0 186152.0 214436.0 232694.0 221073.0 147351.0 152948.0
% chg y-o-y -30.1 36.3 28.4 15.2 8.5 -5.0 -33.3 3.8
Net Income (USDmn) 1633.0 3751.0 4048.0 1004.0 -8046.0 2308.0 -4964.0 1379.0
% chg y-o-y 56.4 129.7 7.9 -75.2 -901.4 -128.7 -315.1 -127.8
Capital Expenditure (USDmn) 1088.0 1657.0 2606.0 2970.0 9559.0 8815.0 5372.0 3048.0
% chg y-o-y -40.3 52.3 57.3 14.0 221.9 -7.8 -39.1 -43.3
Profit Margin (%) 1.5 2.6 2.2 0.5 -3.5 1.0 -3.4 0.9
Net Debt to EBITDA 7.5 6.4 6.0 7.3 6.2 4.6 5.5 4.0
Norilsk Nickel
Revenue (USDmn) 8542.0 12775.0 14122.0 12065.0 11499.0 11869.0 8542.0 8259.0
% chg y-o-y -38.9 49.6 10.5 -14.6 -4.7 3.2 -28.0 -3.3
Net Income (USDmn) 2600.0 3298.0 3604.0 2170.0 774.0 2003.0 1734.0 2536.0
% chg y-o-y -679.1 26.8 9.3 -39.8 -64.3 158.8 -13.4 46.3
Capital Expenditure (USDmn) 1061.0 1728.0 2201.0 2692.0 1970.0 1277.0 1626.0 1648.0
% chg y-o-y -55.0 62.9 27.4 22.3 -26.8 -35.2 27.3 1.4
Profit Margin (%) 30.4 25.8 25.5 18.0 6.7 16.9 20.3 30.7
Net Debt to EBITDA 0.0 -0.5 0.5 0.8 1.2 0.6 1.0 1.2