Nickel Mines negotiates superior funding package
Pursuant to Nickel Mines Ltd’s (ASX:NIC) intention to increase its interest in the Ranger Nickel Project in Indonesia from 17% to 60%, the company has negotiated a funding package comprising a mix of debt and equity with Decent Investment International, an associate of the group’s operating partner Shanghai Decent Investment (SDI).
The proposed funding package totals US$150 million and comprises a debt facility with Decent of US$80 million and planned equity of US$70 million.
The equity component includes US$40 million of Nickel Mines shares to be issued as partial consideration for the 43% interest in the Ranger Nickel Project, which will lift NIC’s interest from 17% to 60%.
The remaining US$30 million is planned to be raised as fresh equity from current and/or new professional investors.
Nickel Mines has previously stated it is targeting the completion of the acquisition by June 2019.
Mates rates says Bell Potter
Bell Potter analyst, David Coates viewed the transaction positively, among other things noting that the total size of the package had been reduced from US$160 million to US$150 million, including reduction of the debt component from US$100 million to US$80 million.
Furthermore, the funding is now being provided by Decent, as opposed to Sprott Private Resource Lending.
On this note, Coates said, “Decent has offered a lower interest rate (LIBOR + 6%) vs Sprott (LIBOR + 7% + 2% fee + 45 million warrants), which, in our view, justifies the change.
“The trade-off has been a higher equity component, now US$70 million (vs US$60 million) and incrementally more dilution.
“On our assumptions, SDI’s shareholding in NIC would increase to circa 18% following the raise.”
(LIBOR stands for London Interbank Offered Rate, and it is a benchmark interest rate at which major global institutions lend to one another in the international interbank market for short-term loans.)
Share price upside of 115%
With Nickel Mines now having fewer stakeholders to satisfy, this represents not only a cheaper package, but an arrangement that is easier to manage.
The dilution to value through the issue of more shares has only had a nominal impact on the company’s metrics as indicated by Bell Potter’s projections.
Coates has maintained his buy recommendation, while marginally lowering his valuation from 95 cents to 93 cents per share.
The company is Bell Potter’s top pick in the sector, and Coates’ valuation implies share price upside of nearly 120%.
With robust returns on equity and the current share price implying a fiscal 2020 PE multiple of less than four, there only appears to be one direction for the company’s share price to head.