BNC has largely been on the receiving end, as investors mainly institutional continue to grossly discount the counter’s valuation on the local bourse, in turn deepening the bargain. Yes, discount is the correct term because the counter’s current market valuation does not take into account the recent surge in the underlying price of the nickel commodity on global markets neither does it consider 2 more key factors one which will be looked at more extensively in this piece, these being the emergency of EV whose battery technology is highly skewing towards nickel use and the present tightening in the nickel market globally. The increased use of nickel in battery production will no doubt increase its demand in the long term, and all else being equal, impact the long term price. The other pertinent factor is the de-dollarisation of the economy which brought with it changes in reporting currency precipitating to broad stock market valuations adjustments.
Bindura Nickel Corporation is a listed nickel miner in Zimbabwe operating the Trojan Mine in Bindura as well as Shangani and Hunters Road mines. The Trojan Mine is presently the only one among the 3 mines presently operational and has a total of 1.05 million tonnes of ore graded at 5.77%. From the ore reserve, a nickel tonnage of 32,448 would be achieved. Hunters Road has a total of 36.44 million tonnes of ore which would deduce to about 200,400 tonnes of nickel on a very low ore grade. Despite its vast resource, the Hunters Road mine is however still at pre developmental stage. The project would require a future funding commitment and study shows prices of at least $22000 would be required to justify new nickel mines development, a huge 38% variance to the present spot price of nickel. It may take BNC at least the next 5 years to achieve a targeted price which justifies the development of Hunters Road.
Shangani mine is however a different case as it is readily operable and has been under care and maintenance since 2008. Like Hunters Road, Shangani is equally a low ore grade mine and its restart would demand favourably higher prices upwards of $22,000 per tonne. It will however cost less to restart Shangani than to develop Hunters Road but for perspective on cost of restarting Shangani we look at how much it costed BNC to restart the Trojan Mine in 2012. The restart was at an estimated $21 million in costs and this grossly diluted the interests of present shareholders as it marked the entrance of Chinese investor, China International Mining Group as majority shareholder of BNC at 76%. Given the current BNC cashflow generation capacity, it follows that development of Hunters Road and Shangani would require significant outside cashflow, since BNC does not have capacity to presently meet the costs using own funds. The projects would largely require dilutive external funding, or some similar arrangement from the new acquirer, who is yet to be announced as well as higher nickel prices or debt capital which however less likely due to its overburdening effects.
In a tilting macroeconomic environment, it is a plus, that BNC is an export business, earning hard currency and largely hedged from Zimbabwe’s macro volatility. If BNC is an export business, it follows that its valuation should capture the intricate detail. If BNC was earning, for example, US$50 million per annum over the dollarization period and is assumed to maintain same, its converted revenue, in a de-dollarised mono-currency regime will be US$50 million multiply by the average exchange rate. Suppose the average exchange rate over the year is 1:10, BNC’s earnings would therefore convert to ZW$500 million. The implication is that it adjusts the earnings per share by the exchange rate factor therefore driving Price Earnings Ratio and the EV/EBITDA Ratio’s lower. Ratios are calculated on a like by like basis such that if the numerator changes (share price change from US5c to ZW5c due to change in currency) the denominator should also change as postulated earlier. Now assuming the price doesn’t move (stock market determined) as is the case in the example above, this should lead to a very undemanding valuation or steep discount for BNC. The market knows this simple simulation but has simply chose not to factor it in valuation of BNC, as its share has barely moved since the change in currency.
The third and most important aspect is the mid to long term spectrum on BNC which is largely premised on the revolution in electric vehicles and lithium-ion battery. Rapidly rising use of nickel in the batteries that power electric vehicles over coming years means higher prices are needed to incentivise the development of new projects to boost supplies of the metal. Demand for nickel is expected to soar as governments, companies and individual consumers aim to cut the noxious fumes emitted by fossil-fuelled vehicles. To compete with conventional cars powered by internal combustion engines (ICEs), electric vehicles must be able to go further on a single charge. That means more nickel, used to store energy in the cathode part of lithium-ion rechargeable batteries, is needed. From this reading it is apparent that existing mines will likely enjoy the run in nickel prices until a certain threshold is reached commensurate enough to encourage development of new mines, this price is estimated at $22000 a tonne. What this also mean is that supply will remain constrained until a time those mines begin to run and that is a period of at least between 5 to 7 years from now. While this is true for most western nickel mines, Indonesia is presently developing mines at the current not so firm prices and this could wipe out the deficits at least after the next 24 months.
Nickel has been dominated by the stainless steel industry, which uses the lowest-cost, low-grade material coming from Indonesia and the Philippines. Stainless accounts for about 70% of global nickel demand estimated at 2.4 million tonnes this year, while batteries’ share was about 4%. Consumption in stainless steel is growing about 5% per year, while use in batteries is surging between 30-40% a year. Demand will rely on the adoption of batteries containing higher levels of nickel. Originally, cathodes comprised, 1 part nickel, 1 part cobalt and 1 part manganese. That 1-1-1 ratio has largely given way to 5-2-3 and 6-2-2. Cathodes with 80% nickel are expected to dominate within years as technology advances to limit the use of cobalt, which stabilises and extends the life of batteries.
According to Red Door Research, depending on the adoption of 8-1-1 technology, the amount of nickel per car could on average go from 20 kg to between 40 and 50 kg by 2025. As electric vehicle sales climb, Roskill forecasts nickel demand from the battery sector to rise to 258,000 tonnes or nearly 10% of the total in 2022, when many expect parity between the costs of making battery- and ICE-powered cars. Roskill sees batteries’ share at 20% of global nickel demand totalling 3.69 million tonnes by 2030, while stainless steel mills will account for 60%.
In conclusion the fundamentals are largely in favour of firmer nickel prices on the global market both in the short run and the long term. Disruptions may however occur in the mid-term due to the Indonesia factor, resumption of Phillipines nickel mining operations after years of ban on most mines due to environmental concerns and the negative impact of the trade war between US and China on both economies’ consumption of nickel. For most investors however, a long term view should be held in coming up with a valuation of BNC. Investors should immediately factor the change in currency, which resulted in BNC undervaluation as a USD generating business given the suboptimal movement in price.
Broadly the ZSE, which went up by 40% in the first half period of the year, has been impacted by inflation and change in currency as stocks repriced in line with the changes. Through all this BNC has barely moved and had periodic bouts of fluctuations but largely recording marginal gains. The market has indeed punished BNC and it is likely so because of some legacy issues which are now largely forgone. Investors, mostly institutional jumped to finance BNC’s smelter, which has taken long to restart while there remains fears of default on the bond repayments. Considering that these institutions hold most of the freefloat in BNC, the impact has been such that their valuation of BNC has been obscured by this dark patch hence steeply but disproportionately discounted.
Another factor is the challenges at parent ASA which arose after it emerged there were malpractices and externalisation of funds by same, which affected operational viability at the key mines including BNC. Given the firming nickel prices, BNC is however not likely to default going forward, while investors will have to accordingly adjust on expectations given that the present prices are not justifying smelter completion. Regards the operational challenges, the times have moved and the situation had cleared by the end of the 2019 financial year. Investors could likewise cease the moment, after it was announced that ASA has secured a buyer for its 76% stake in BNC although the deal is yet to be fully publicised. For bargain hunters BNC is a perfect opportunity whose upside we estimate to be above 300% after factoring the above adjustments covered in this review.
*The writer hold shares in BNC in his personal capacity. The piece does not constitute a recommendation to buy shares in the counter.