Oversupply And Regulatory Risks Will Curtail Future Margins

Key Takeaways

• Shifting battery technology and increased recycling threaten long-term demand for Nickel Industries' core products, putting pressure on revenue growth and production volumes.
  
• Heightened regulatory scrutiny and oversupply risks in key markets increase compliance costs, operational disruptions, and volatility, leading to lower margins and unpredictable profitability.
  
• Sustained profitability and growth are supported by strong mine operations, expanding capacity, resilient margins, cost control, and effective financing without risking shareholder dilution.

Catalysts

Engages in nickel ore mining, nickel pig iron, cobalt, and nickel matte production activities.

• The growing adoption of lower-nickel battery chemistries, such as lithium iron phosphate (LFP) in electric vehicles, is diminishing the long-term demand outlook for battery-grade nickel, which could restrict Nickel Industries' revenue growth prospects and impair pricing power over time.
  
• Intensifying global regulatory scrutiny and tightening ESG requirements, especially for mining operations in Indonesia, are likely to increase compliance costs, create barriers to market access, and expose the company to higher risk of production disruptions-directly impacting operating expenses and eroding net margins.
  
• Ongoing aggressive capacity expansions within Indonesia and other markets threaten to create long-term oversupply in the nickel industry, putting sustained downward pressure on nickel prices and leading to structurally lower margins and weaker earnings for Nickel Industries.
  
• A high dependence on Indonesian laterite ore exposes the company to escalating geopolitical risk and cost volatility; any shifts in government policy or export controls could substantially disrupt the supply chain, increase input costs, and result in unpredictable swings in profitability.
  
• Rapid advancements in nickel recycling technology and the substitution of scrap and secondary sources for primary nickel are likely to reduce future demand for newly mined nickel, undermining the company's ability to grow sales volume and maintain utilization rates, which would weigh on future revenue and EBITDA.

Nickel Industries Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nickel Industries compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nickel Industries's revenue will grow by 6.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -9.7% today to 21.4% in 3 years time.
• The bearish analysts expect earnings to reach $450.9 million (and earnings per share of $0.05) by about August 2028, up from $-168.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.1x on those 2028 earnings, up from -12.5x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 14.4x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Nickel Industries Future Earnings Per Share Growth

Risks

• Record ore sales from the Hengjaya Mine and rising EBITDA per tonne margins-supported by strong mine-level profitability and ongoing expansion approvals-indicate that revenue and operating income could continue to grow rather than decline over the long term.
  
• Expansion of production capacity and approvals in both the Hengjaya and Sampala projects, with aggressive resource growth and infrastructure readiness, are likely to drive sustained volume growth and higher future revenues, supporting top-line and earnings expansion.
  
• HPAL facilities continue to operate well above nameplate capacity while maintaining high EBITDA margins-over $6,000 per tonne-and recent market tightness driving MHP payability up to around 90 percent further supports robust gross and net margins.
  
• Integrated operations and the ability to shift margins across the value chain, as seen between mine and processing operations, provide resilience in maintaining profitability and adaptability in net earnings over time.
  
• Active cost controls, alignment with robust sustainability standards, and strong banking/debt relationships suggest that, despite high capital requirements and near-term working capital needs, the company is positioned to avoid equity dilution, preserve net earnings, and continue investing in margin-accretive growth.

Valuation

• The assumed bearish price target for Nickel Industries is A$0.65, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Nickel Industries's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.8, and the most bearish reporting a price target of just A$0.65.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $450.9 million, and it would be trading on a PE ratio of 5.1x, assuming you use a discount rate of 7.8%.
• Given the current share price of A$0.74, the bearish analyst price target of A$0.65 is 14.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.