It was a wild day for the Nickel Mines Ltd (ASX: NIC) share price on Wednesday.
The nickel producer's shares were sold down by almost 23% amid concerns over one of its largest customers and shareholders, Xiang Guangda of steelmaker Tsingshan.
The worry was about Tsingshan getting caught up in a massive short squeeze after the nickel price rocketed to US$100,000 a tonne.
This sparked fears over the solvency of Tsingshan and the impact this could have on agreements and its shareholdings.
Nickel Mines came out with an announcement in the afternoon advising that the company had spoken to Tsingshan. It revealed that it was business as usual and its largest shareholder had no plans to sell shares.
This led to the Nickel Mines share price paring the majority of its decline. It ended the day 4.5% lower at $1.41.
Is the Nickel Mines share price chaos a buying opportunity?
According to a note out of Bell Potter, its analysts believe investors should use this recent volatility to their advantage.
This morning the broker has reiterated its buy rating and $1.76 price target on the company's shares.
Based on the current Nickel Mines share price, this implies a potential upside of almost 25% over the next 12 months. This increases to more than 29% if you include the 4.3% dividend yield.
What did the broker say?
Bell Potter gave its take on recent developments.
NIC entered and subsequently exited a Trading Halt on Wednesday 9 March, following a 23% drop in its share price in morning trade on the ASX. This resulted from speculation around the possible implications for Tsingshan Holding Group (a private company), the world's largest stainless steel producer and parent company of Shanghai Decent Investment (SDI).
SDI is NIC's largest shareholder (17.9%) and partner in the Indonesian Morowali Industrial Park (IMIP) and Indonesia Weda Bay Industrial Park (IWIP), where NIC's Nickel Pig Iron (NPI) operations are hosted.
According to reports, Tsingshan held a 200kt nickel short position, struck at US$21,000/t. Following the suspension and cancellation of LME nickel trades for Tuesday 8th March, the mark-to-market valuation of the position, calculated on Monday's cash closing price of US$48,200/t, was ~US$7.4 billion.
Market concerns related to the solvency of Tsingshan, the status of operations and development at the IWIP and IWIP and the potential forced sale of SDI's shareholding in NIC.
But Bell Potter isn't concerned by any of the above. It believes it is likely that "Tsingshan will close out its short position, supported by physical delivery, without compromising its long-term financial viability."
Tsingshan has annual revenue of US$56 billion. It is regarded as the world's lowest-cost stainless steel producer.
The broker believes this is an opportunity for investors to buy a nickel producer with strong near-term earnings growth potential.
It concludes: "We view NIC's steep price drop as an acquisition opportunity. We continue to forecast aggressive EPS growth of 82% and 85% for FY22 and FY23."
