Interview with Silkroad Nickel
Silkroad Nickel: 'The course is set for dynamic profit growth.'
time to read: 10 minutes | The interview was conducted by Nico Popp on April 20th, 2021 in Singapore (SGP).
Corporate Development Executive | Silkroad Nickel
50 Armenian Street #03-04, 179938 Singapore (SGP)
+65 6327 8971
Table of contents:
Why the reference to the Silk Road?
news|financial: "The New Silk Road is a gigantic mega-project linking China with Central Europe. Why did you give yourself this name?"
"[...] China has become the manufacturing capital of the World, and because of its infrastructure, expertise and capabilities, Silkroad Nickel has strategically positioned itself to partner with Chinese companies in the Stainless Steel and EV industries [...]" Jerre Foo, Corporate Development Executive, Silkroad Nickel
The Global economy is becoming an increasingly connected place to live, trade and conduct business. The Silk Road was and still remains one of the oldest trade and commerce routes connecting the Eastern and Western World; through its strategic connectivity, many ideas, cultures, and innovations could spread and flourish across the World.
Silkroad Nickel Ltd. ("Silkroad Nickel") is the first and only nickel Company listed on the SGX and its name pays homage to the Silk Road route as the Group's vision is to be a Globally-recognized vertically-integrated nickel producer that serves the Stainless Steel and Electric Vehicles ("EVs") industry across the World. The New Silk Road is indeed a gigantic mega-project; China has become the manufacturing capital of the World, and because of its infrastructure, expertise and capabilities, Silkroad Nickel has strategically positioned itself to partner with Chinese companies in the Stainless Steel and EV industries to produce higher value-added nickel products in Indonesia for export markets.
The Group has announced several exciting plans to expand its downstream operations, such as investing, building and operating a Rotary Kiln Electric Furnace ("RKEF") smelter plant for the production of Nickel Pig Iron ("NPI"). The Group has also entered into an exclusive investment term sheet agreement with Ganfeng Lithium Co., Ltd. ("Ganfeng Lithium") who is the World's largest lithium producer and leader in the EV battery sector, with key customers such as Tesla and Volkswagen.
It's all in the mix
news|financial: "You are considered a nickel producer, but you also have by-products, such as cobalt. Why is Silkroad Nickel's mix of raw materials in such demand?"
"[...] The much-anticipated global economic recovery this year will also spur the demand for stainless steel as the pace of manufacturing and upgraded infrastructure activities pick up. [...]" Jerre Foo, Corporate Development Executive, Silkroad Nickel
Silkroad Nickel operates its laterite mine out of a hotspot for nickel mining, namely, Morowali, Central Sulawesi, Indonesia. The laterite ore found in Indonesia contains economically viable grades of nickel and cobalt within the ore for extraction and processing, which sets the foundation of growth to serve the industries that utilize nickel and cobalt.
One of the main drivers for the growth in demand for nickel and cobalt over the next decade is the expected enormous growth in global EV sales, projected to have a compounded annual growth rate of 24% by 2030. This is partly fueled by more EV-accommodative government policies in many countries, such as China and the European Union's subsidies for purchasing EVs. Growth in global EV sales is bullish for nickel and cobalt as both raw materials are used in the production of EV lithium-ion batteries.
Furthermore, Nickel Cobalt Manganese ("NCM") batteries are becoming more widely adopted for EV batteries as they have a higher power rating and energy density than Lithium Iron Phosphate ("LFP") batteries. The rate of adoption of NCM batteries is expected to continue growing, which would, in turn, boost the demand for both nickel and cobalt. Batteries' demand for nickel is expected to increase 24-folds by 2030, while that of cobalt is expected to increase fourfold by 2030, based on a 2019 report by the World Economic Forum.
The primary use of nickel in stainless steel production is beneficial to us and provides good long-term support for nickel prices. Based on a stainless steel report by MarketStudyReport LLC, the global market for stainless steel is projected to have a CAGR of 6.3% between 2020 and 2027 and is expected to reach USD 181 billion by 2027. The much-anticipated global economic recovery this year will also spur the demand for stainless steel as the pace of manufacturing and upgraded infrastructure activities pick up.
The role of the Chinese partners
news|financial: "You have already mentioned your Chinese partners. Tell us more about their background and what value these business relationships bring to Silkroad."
On our upstream mining operation, our longest and most important customer is the Tsingshan Group. Tsingshan is now the world's largest and lowest-cost stainless steel producer. In 2018, Tsingshan produced 9 million tons of crude steel and 260,000 tons of ferronickel equivalent, with sales revenue of USD 34 billion, ranking the world's leading position in the stainless steel industry. Tsingshan continues to expand and grow exponentially in Indonesia, which will increase their nickel ore demand needs.
Silkroad Nickel supplies Tsingshan nickel ore through offtake agreements, and the most recent offtake agreement signed in March 2021 is projected to generate USD 90 million in sales over the next 2 years. The Group will then utilize this cash flow to build up the capital needed to fund its downstream RKEF smelter plant.
The Group has originated several downstream operations to serve the Stainless steel and EV industries. For the Group's RKEF plans, Silkroad Nickel has signed a Heads Of Agreement with Shandong Xinhai ("SXH") and continues to push forward with the project. The Company is also actively raising capital to fund the estimated USD 400 million project valuation. Silkroad Nickel is also in exclusive discussions with Ganfeng Lithium as a strategic partner to explore and develop opportunities in the EV sector in Indonesia.
Overall, these business relationships will continue to drive Silkroad Nickel closer to its vision. By building the right relationships with best-in-class partners, the Group is poised to capitalize on the meteoric growth of the nickel industry in Indonesia.
Indonesia as a mining location
news|financial: "You operate in Indonesia. Tell us more about mining in Indonesia and why your nickel project scores with favorable costs."
"[...] Indonesia expects to see FDI in nickel processing and petrochemicals double to USD 35 billion by 2023. We are increasingly witnessing Western players like Tesla and Korea's LG Chem express investment interest in Indonesia. [...]" Jerre Foo, Corporate Development Executive, Silkroad Nickel
The Indonesian Government is very supportive of the nickel industry. As a result, the Government has introduced accommodative legislations to promote and expand its domestic nickel downstream industry by providing tax benefits through designations of Special Economic Zones ("SEZ") and a simplified licensing process to accelerate and support upcoming RKEF and HPAL projects.
The sheer volume of Foreign Direct Investment ("FDI") in Indonesia over the past five years demonstrates that this strategy is working. Nickel-related downstream investments are north of USD 20 billion in smelters, stainless steel plants and electric battery units in areas such as Sulawesi and Maluku. In addition, many Chinese companies such as Tsingshan and CATL, amongst others, are all already invested in Indonesia. Indonesia expects to see FDI in nickel processing and petrochemicals double to USD 35 billion by 2023. We are increasingly witnessing Western players like Tesla and Korea's LG Chem express investment interest in Indonesia.
Silkroad Nickel will continue to benefit significantly from these factors and sees many synergistic opportunities with its partners across the value chain. They have given the Company greater access to capital to develop its downstream efforts and promote organic growth while being a cost-efficient producer.
Refining as a profitable business
news|financial: "To export raw materials from Indonesia, you need to process them in the country. What capacity have you built for this and how does refining raw materials contribute to Silkroad's results?"
"[...] The net margin for such a RKEF project in Indonesia is approximately 30-35% of revenue, which means an expected annual net income of USD 200 million. This is expected to benefit our financials and cash flow significantly. [...]" Jerre Foo, Corporate Development Executive, Silkroad Nickel
We are in the process of developing our RKEF facility alongside our partner Shandong Xinhai which will take approximately 18-24 months. There will be 4x48,000 kV RKEF lines at the facility that are capable of producing over 350,000MT of NPI per annum. Based on our feasibility study, the total cost for capital expenditure is approximately USD 400 million.
Although a RKEF plant requires a considerable amount of investment, the project is very profitable in Indonesia because the cost to extract nickel ore here is much lower compared to other parts of the world. For example, the RKEF project will produce 350,000MT of NPI with an average Nickel grade of 12%, thus yielding 42,000MT of nickel-in-content. LME Nickel prices currently sit at approximately USD 16,000/MT; therefore, the project is expected to generate over USD 672 million in revenue in the first year of operation. The net margin for such a RKEF project in Indonesia is approximately 30-35% of revenue, which means an expected annual net income of USD 200 million. This is expected to benefit our financials and cash flow significantly.
Silkroad Nickel and Sustainability
news|financial: "You have metals on offer that are in demand around electromobility. Customers who buy electric cars today are looking for sustainable supply chains. Does Silkroad Nickel meet this demand?"
Silkroad Nickel is committed to ensuring that our operations are sustainable. The Group publishes an Annual Sustainability Report which follows strict SGX compliance and audit of key sustainability areas such as Economic, Environmental, Social and Governance matters.
For example, the Group consistently supports and empowers the local communities around the mine site by employing, training, and providing education and healthcare. The Group recognizes that it needs to give back to the community and all stakeholders for long-term sustainability. The big EV push to "Go Green" has further inspired the Group to explore ways it can help to improve the sustainability of its operations. The Group has discussed with its mining contractor PowerChina the possibility to engage in "Green Mining" methods for the extraction of limonite ore (key raw material for EV battery compounds). The Green Mining method would utilize solar-powered electric mining equipment and vehicles instead of diesel-powered ones. I think this is a very positive signal and showcases the Group's commitment towards carbon neutrality and sustainable operations.
The Management Team
news|financial: "You don't seem to leave anything to chance. Can you tell us more about your management team and its track record?"
"[...] The Silkroad Nickel's management team and the Board of Directors form a very dynamic and experienced group of individuals with distinguished professional careers ranging from mining, finance and accounting, and even to politics and economics. [...]" Jerre Foo, Corporate Development Executive, Silkroad Nickel
The Founders have been business partners for over 15 years, having had multiple commodity ventures in Indonesia. They bring substantial experience and management skills to the business in areas such as operations, fund-raising, M&A, and legal matters through originating, developing, and exiting multiple business ventures together. The Founders are pioneers in the nickel industry in Indonesia and were previously pioneers for sustainable forestry management, where they achieved the World Wildlife Fund ("WWF") Forest Certification and the Forest Stewardship Certification ("FSC") for their timber concession. The Silkroad Nickel's management team and the Board of Directors form a very dynamic and experienced group of individuals with distinguished professional careers ranging from mining, finance and accounting, and even to politics and economics.
Perspective for higher valuations
news|financial: "You describe your stock as undervalued. Can you provide some figures to support this thesis?"
"[...] The Group would be in a very strong position to see its profits increase exponentially in the next few years by combining both of its upstream and downstream operations into a vertically integrated business model. [...]" Jerre Foo, Corporate Development Executive, Silkroad Nickel
The current mining offtake contract with Tsingshan is expected to generate over USD 90 million in revenue over a 2 year period. This will significantly boost the Group's cash flow and value as net margins will be around 30-35% of revenue.
Once the RKEF project is completed and commissioned, net margins for the RKEF project will be approximately 30-35% of revenue, which amounts to over USD 200 million per annum at the project level. The Group would be in a very strong position to see its profits increase exponentially in the next few years by combining both of its upstream and downstream operations into a vertically integrated business model. The Company has approximately 261 million shares outstanding today and aims to ensure that shareholders gain accretive value through investing in Silkroad Nickel's stock.
news|financial: "Thank you very much for talking to us."