Bindura Nickel Corporation – is there still more runway?

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MISSING a stock that grows at double digits in three months can be annoying. But snoozing while a company doubles in price can leave you distraught. Nothing, though, compares to Bindura Nickel Corporation’s 400 percent jump. Not in a year, but in only three months.
Before you cringe at this slip-up, we think the stock price run was just a nervous start; a long runaway still stretches ahead. BNC, we reckon, will soon be contending for a spot in the top five stocks by capitalisation.  It is already the largest mining counter by market capitalisation.
BNC has had a tough going in the last three years. Going by its numbers, the miner must have been worth $3 million on the stock market in 2012. Today, BNC’s capitalisation is $87 million and its stock price is at 7 cents.
Reading the news, it is not a difficult task telling why BNC has had the big jump, but understanding if this upward trend is sustainable is what most investors will be interested in.
BNC is the only fully integrated Nickel mining operation in Africa.
The miner owns the Shangani and Trojan nickel mines, as well as the Bindura smelter and refinery complex. BNC also owns the Hunters Road nickel deposit, which is currently in the pre-development stage.
Following four years of stalled operations while the mine was under care and maintenance, BNC started shipping concentrates to Glencore in 2013. In the last financial year BNC delivered a total of 7,1 tonnes of Nickel concentrate to Glencore at a price of $65 million. This year the company hopes to pump up that tonnage to something north of 9,000 tonnes.
So how does BNC fare against our three ponged stock assessment approach?
Growth Prospects
Revenue growth for commodity driven businesses is largely driven by prices. Higher international prices precede production ramp ups.
Until this year, Nickel has traded very weak with prices averaging $16,000 a tonne in three years. Last year was worse, with prices averaging $14,300 a tonne.
A slowly reviving global economy and, to a greater extent, moves by the Indonesian government to ban export of unprocessed Nickel have spiked the price to current levels of $18,500 a tonne.
Large investment banks including Goldman Sachs, Morgan Stanley and Citigroup have all revised their 12-month estimates to an average of $22,000 a metric ton.Advertisement

In any case, the long term London Metal Exchange price for Nickel has averaged $19,500 a tonne in the last five years. A reversion to mean suggests that in the long term, BNC’s revenue prospects will only get brighter.
That said, BNC made a net profit before tax of $16.4 million. All this happened on tepid Nickel prices averaging $14,300 last year. Now with prices up by 30 percent, it is not difficult to figure out why we are painting growth-prospects with bright colours.
In the last annual report, Mwana Africa, BNC’s holding company, committed to ramping up ore production from last year’s quarterly average of 149,000 tonnes to 195,000 tonnes a quarter this financial year. So far, its current first quarter’s output at 151,000 tonnes was 30 percent shy of the target. Management explains that refurbishment of underground mobile equipment was to blame.
From our analysis we estimate that total concentrate produced might not reach the originally envisaged target of 10,000 tonnes (195,000 tonnes of ore a quarter) instead we see annual total tonnage settling at 8,800 tonnes. A 23 percent jump from last year’s production.
At the estimated current price of concentrate of $11,000 a tonne, (20 percent increase from last year), revenue growth is estimated to be up by 49 percent this current financial year.
BNC’s steps to revive the smelter and refinery are turning the integrated miner into a more productive and quality oriented operation.
The operation’s chairman Kalaa Mpinga noted that BNC’s most significant cost was currently transport, stating that it cost the company about $1,2 million a month to truck concentrate from the mine as part of an offtake agreement.
With the smelter in operation, $14,5 million will be added straight to the bottom line each year.  At a cost of $26 million to refurbish the Smelter and refinery, BNC’s transport savings will pay back the project cost in two years.
BNC’s return to profitability has reinforced its balance sheet.  Return on invested capital is currently at 58 percent and operational margins at 27 percent, signifying a quality operation.
Management has set the current financial year to focus on enhancing efficiency of operations and optimising machinery. But it is unlikely that savings from efficiency gains will reflect on the company’s bottom line this financial year. Not after BNC has paid the consultants for trimming their operations.  At least BNC will eventually emerge leaner and more efficient.
As a result of employee and government stakes in the company, BNC’s chairman asserts that the operation is considered indigenised. Resolution of indigenisation concerns gives BNC a breather. More importantly, management can concentrate on creating value for shareholders.
In October 2013, a competent person review restated proven and probable reserves to 32,975 tonnes of contained nickel. Applying the Real options valuation method, we estimate the value of the reserves at $13 million – a very conservative estimate.
Last financial year revenue was $65 million and average concentrate price per tonne was $9,120. If the price of nickel concentrate has increased in tandem with the price of nickel alloy, the former’s price should currently be hovering at around $11,000 a 20 percent jump from last year’s price.
At $11,000 a tonne and producing an estimated 8,880 tonnes, revenue from concentrates is expected to reach $96.8 million this year. Our valuation base estimate suggests a valuation of 17 cents a share, which is a 145 percent upside to the current price. It is important to note that our valuation estimate excludes revenue and savings that will be earned from a resuscitation of the smelter.
Bottom line
Expectation of a revived smelter is perhaps BNC’s biggest attraction to many investors. Yet without factoring the smelter, the miner is still an attractive stock. It seems BNC has a lot of running before it is out of breath.
Ray Chipendo is Head of Research in Emergent Research’s Johannesburg office. Oswell Kapotsa is a Research Analyst in the Harare office. and