Philippine nickel miner seeks Toronto listing

With the global nickel supply shortage to continue for another two years, Nickel Asia picks an opportune time to go public.
Investors looking to add to their commodities exposure in Asia will have a chance to do so when Nickel Asia brings the roadshow for its up to $180 million initial public offering to Asia today.

The company, which focuses solely on nickel, is a rare animal in the sense that it has all of its assets in the Philippines but will be listing on the Toronto stock exchange, which is already home to international peers like Inco and LionOre.

The timing of the listing is well chosen as it coincides with a global supply shortage of nickel, which has led to the spot price rising sharply above both historical levels and market projections. Nickel prices are typically among the most volatile in the commodity space, but with the current supply and demand imbalances expected to continue through 2008 and capital and cash costs on the rise, analysts have started to revise up their long-term price forecasts.

This should have a positive impact on both earnings and share prices for miners and producers of the metal, observers say.

In its listing document, Nickel Asia claims it is in a good position to benefit from the price increases as it plans to boost its annual production of contained nickel to 48,000 tonnes by the end of 2007 from 31,500 tonnes in 2005 û an improvement of 52%. Since 2003, the company has expanded its capacity from 17,600 tonnes, which will translate into an average annual increase of 40% between 2003 and 2007.

With IncoÆs board earlier this week recommending shareholders to accept a takeover bid from Brazilian miner Companhia Vale do Rio Doce and Falconbridge having been bought up by Xstrata earlier this year, Nickel Asia could become one of the largest listed pure nickel plays in the world, people close to the IPO say.

The C$180 million to C$210 million IPO comprises 15 million class-A non-voting shares, of which 12.2 million are new, plus a 15% greenshoe that could boost the total deal size to C$241.5 million ($207 million).

The shares are marketed to investors in a range between C$12 and C$14 apiece, which implies a forward PE ratio of about 11 times based on expectations that the company will post a profit of at least $40 million this year, according to one observer. That would suggest a discount versus other miners with a market cap below $2 billion, which tend to trade at about 13-14 times forward earnings, he says.

Other sources argue that the average PE for miners in developing countries, which are regarded as riskier investments, are typically no more than 10-12 times.

The shares on offer represent about 35.7% of the enlarged share capital and are non-voting to comply with regulations in the Philippines which state that at least 60% of any mining interest must be owned by Filipino nationals. While international investors can still vote on certain transformational issues, including proposals to wind up the company, this could act as a deterrent to some investors.

One commodity analyst notes that while the current Filipino government appears to be supportive of the mining industry, investors are still likely to be wary about the lack of stability in terms of regulations.

ôTransparency is still lagging that in the West and as a minority shareholder you can never quite be sure that your interests will be looked after,ö he says.

At the time of listing, about 61% of Nickel Asia will be controlled by its three founders and one other individual through the ownership of class-B voting shares. There will be a small amount of class-A non-voting shares left in the hands of Nonillion Holding which is also controlled by one of the founders. These shares will all be subject to a 12-month lockup.

One of the co-founders is also the chairman of CLSA Exchange, which is acting as a senior co-lead manager for the IPO alongside global coordinator CIBC World Markets. CLSA Exchange is CLSAÆs investment banking joint venture partner in the Philippines.

Nickel Asia has been operating since 1975, but was set up in its present holding company form early this year to acquire and hold the nickel mining and processing interests of members of the Zamora and Virata families.

It currently owns and operates six nickel laterite mines in the southern Philippines with proven and probable reserves of approximately 668,000 tonnes of contained nickel and measured and indicated resources of 1.57 million tonnes. Most of its nickel ore is sold to customers in Australia and Japan, although the company also started to export some of its contained nickel to China in 2005. While China still accounts for a modest portion of overall sales, it is expected to be an important growth driver in coming years.

Apart from a 60% interest in the Rio Tuba Mine, which accounted for about 27% of total deliveries in 2005, and a 65% stake in the Taganito mine, all the companyÆs mining assets are wholly-owned.

The company also holds an indirect 6% stake in a high-pressure acid leach (HPAL) nickel processing facility, which is buying all of its raw ore from one of Nickel AsiaÆs mines. This facility is planning to double its capacity within the next three years at a total cost of $285 million and Nickel Asia will use between $5 million and $29 million of the IPO proceeds to fund its portion of that expansion.

According to one source, Nickel Asia is aiming to increase its ownership in the HPAL facility, which it holds through its 60% stake in Rio Tuba. Rio Tuba is looking to double its investment to 20%, while Nickel Asia may also increase its stake in Rio Tuba above the current 60%, the source says.

According to the listing prospectus, the company is the largest nickel mining company in the Philippines, which has approximately 1.5% of the worldÆs known nickel reserves (the seventh largest) and 1.3% of the global production. Nickel Asia also claims to be one of the most profitable among Philippine mining companies in general, which stems from the fact that it has among the lowest cash costs in the industry.

In 2005, the company reported a cash cost of $2.84/lb of payable nickel in the ore it delivered, up from $2.56 and $1.79 in the previous two years. The cost has been edging higher as deliveries and average selling prices have risen resulting in slightly higher taxes but remains low on an absolute basis.

Average selling prices improved to $6.89/lb last year from $3.74/lb in 2004.

The company projects that the total cash cost per pound of payable nickel contained in its deliveries of ore will be between $2.90 and $3.30 in 2006 and fall to $2.80 to $3.20 in 2007.

The single most important driver of earnings growth for a nickel miner, however, is the price of the commodity itself, which is looking incredibly favourable at the moment. Having been below $5/lb early in the year, the price has soared and is now trading at around $13.60 after hitting a high of about $15/lb, according to analysts. The price has averaged $13.18/lb in the third quarter compared with $9.09 in the second quarter, fuelled primarily by stronger-than-anticipated demand in China where most of the metal goes into making stainless steel to support its infrastructure build-up as well as its rapidly growing industry.

Last year, China accounted for 95% of the total increase in world consumption of nickel and this year the countryÆs consumption is expected to grow by another 20% to 226,000 tonnes, according to AME Mineral Economics.

Analysts are projecting nickel prices to average about $7/lb for 2006, while the current trend points more towards $8 or $9/lb. AnalystsÆ average forecasts for long-term trend prices are still below $5.

One London-based analyst notes that because of the small size of the nickel market (relative to other commodities) it tends to be the most volatile with prices going through the roof every time there is a shortage.

ôThis is not an industry where you make super normal profits and nobody expects the price to be at $12 in five yearsÆ time,ö the analyst says. He adds, however, that people have been underestimating the growth in demand as well as the ability of the producers to add new capacity. This has resulted in a tighter-than-expected market.

ôWe believe the market to stay tight in the next two years and then become more balanced as new projects will come on board and add capacity,ö he says.

After two weeks on the road in Europe and the US, Nickel Asia will meet with investors in Hong Kong today (September 28) and tomorrow and will be in Singapore on Monday and Tuesday before closing the order books on October 4.

¬ Haymarket Media Limited. All rights reserved.
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