It's unusual for any company to forecast rising margins during this reporting season, particularly a miner, as rising power and labour costs are putting the squeeze on profits.
You only need to look at the commentary from our mining majors BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) to see evidence of rising cost inflation.
But this doesn't seem to be an issue with Independence Group NL (ASX: IGO) as it reported record revenue and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for the year ended June 30, 2018.
The stock initially surged 6% on the news but gave up most of the gains to trade 0.6% higher at $4.34 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index added 0.4%.
Some of the highlights from Independence Group's FY18 results include:
- An 85% jump in revenue to $781 million and a 125% increase in underlying EBITDA to $339 million.
- Net debt dropping to just $4 million from $164 million thanks to a big increase in underlying free cash flow.
- The strong result was largely driven by the commercial start of its Nova nickel mine, which has established itself as the lowest cost nickel producer in Australia.
- Its 30% joint-venture (JV) Tropicana gold mine is also enjoying strong margins. While the gold price in US dollars has been constrained, Independence Group benefitted from the waning Australian dollar as the average price of the precious metal increased $79 to $1,729 per ounce over the year.
- All-in Sustaining Cost (AISC) for Tropicana was $1,061 an ounce.
- The good performance from Nova and Tropicana offset losses at Jaguar and Long. Jaguar has been sold and Long has been put into care and maintenance.
Management has given an upbeat outlook as well on the production and cost front. Nova's FY19 nickel output is forecast to rise as much as 35% to between 27,000 to 30,000 tonnes, while Tropicana's gold production is tipped to increase by up to 18% to between 500,000 to 550,000 ounces.
What's more, Nova's cash cost is forecast to drop from $2.78 per pound of nickel to between $1.65 and $2.00 a pound and Tropicana's AISC is predicted to drop to between $890 and $980 per ounce of gold.
Investors may be disappointed by the lack of capital management initiatives on the back of such a good result and the doubling of its final dividend to 2 cents a share won't appease those hoping for a bigger capital handout.
However, I see further upside in the stock given the performance of Nova, my expectations for more gains in the nickel price, and the weak outlook for the Australian dollar, which will pad Independence Group's operating margin.
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