ASX small-cap stock Nickel Industries Ltd (ASX: NIC) is in focus today after a new report from Bell Potter has provided updated guidance on the company.
The broker has responded to potential supply constraints emerging due to the conflict in the Middle East.
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Nickel Industries overview
The company is a vertically integrated nickel producer. It has production assets spanning nickel ore mining, Nickel Pig Iron (NPI) production and nickel Mixed Hydroxide Precipitate (MHP) production.
This is via several Rotary Kiln Electric Furnace (RKEF) processing lines across two Industrial Parks in Indonesia.
Most of the global NPI consumption goes into stainless steel manufacturing, which is the largest end-market for nickel.
This ASX materials stock has had a solid 12 months.
Its share price has risen 15.8% in that period.
However, like many ASX materials companies, it has dipped significantly in March.
It is down almost 13% since 2 March.
This is largely in line with the S&P/ASX 200 Materials Index (ASX: XMJ) which is down 14.6% over the same period.
Bell Potter's updated outlook
Yesterday, Bell Potter released an updated report on the ASX small-cap.
The broker acknowledged reports of increased sulphur pricing and potential supply constraints emerging due to the conflict in the Middle East.
Bell Potter said primarily produced as a by-product of petroleum and natural gas refining, approximately 25% of global production is sourced from the region.
Production disruptions and shipping restrictions (much of exported supply is shipped through the Strait of Hormuz) have led to supply concerns and price spikes from ~US$250/t to US$500/t.
Sulphuric acid (produced from sulphur) is a substantial input into the High Pressure Acid Leach (HPAL) nickel production process, requiring ~8-10t of sulphur per tonne of nickel produced.
What does this all mean?
Essentially, the conflict in the Middle East is causing higher sulphur prices and possible supply shortages.
About 25% of global sulphur production comes from the Middle East, mostly as a by-product of oil and gas refining.
Shipping risks through the Strait of Hormuz and potential production disruptions have pushed sulphur prices from around US$250/t to about US$500/t.
Sulphur is used to produce sulphuric acid, a key input in the HPAL nickel production process, which requires roughly 8–10 tonnes of sulphur to produce one tonne of nickel.
Nickel Industries produces its own acid on site using elemental sulphur, with sulphur accounting for about 40% of HPAL production costs.
The company currently holds around 2–3 months of sulphur inventory at its HPAL operations.
Target price unchanged
Based on this guidance, Bell Potter has retained its buy recommendation on the ASX small-cap stock.
While the conflict in the Middle East is resulting in an immediate market impact to key input costs and the duration is uncertain, we form the view that while margins may be impacted, NIC is insulated due to its diversified nickel product suite. There is also a potential offset from higher nickel prices to which NIC has strong leverage.
The broker also retained its price target of $1.45.
From yesterday's closing price of $0.88, that indicates an upside of 64.8%.
