The nickel products trader is about to go public in Hong Kong on the back of fast profit growth as it expands across the nickel supply chain

Key Takeaways:

  • Lygend Resources has passed listing hearings at the Hong Kong Stock Exchange and is said to be looking to raise $1 billion
  • The company is on track for strong growth with the rapid uptake of high-nickel batteries for electric cars

By Ken Lo

The market for electric cars depends on battery power, generated using industrial metals such as nickel. With that in mind, a major Chinese nickel producer is about to press the start button on an IPO to boost its production of the new-energy material.

Lygend Resources & Technology Co. Ltd. has passed hearings at the Hong Kong Stock Exchange and is poised to launch a listing that could raise as much as $1 billion, giving the market the rare prospect a hefty IPO by the end of the year.

The company is looking to cash in on rising demand by expanding its production base and gaining greater traction over the entire nickel supply chain.

High-nickel ternary batteries have become the powerpack of choice for makers of electric vehicles (EV) in recent years, being cheaper to produce than traditional lithium iron phosphate batteries. The nickel-based cathodes have become a standard component of electric cars with ranges further than 600 km.

To understand the company’s strategy in the power battery sector, it’s worth looking at its biggest competitors, Tianqi Lithium (9696.HK; 002466.SZ) and Ganfeng Lithium (1772.HK; 002460.SZ). Lygend Resources and its two competitors are all active in mineral mining and trade, refining and production, equipment manufacturing and sales. But Lygend Resources goes further, operating across the nickel supply chain from raw materials through to nickel products.

As the battery market took off in recent years, global nickel demand has soared. Prices on the London Metal Exchange nearly doubled in five years, from $9,595 per ton in 2016 to $18,500 per ton last year. The Russian invasion of Ukraine earlier this year pushed the price past $100,000 per ton at one point. The average nickel price reached $28,700 per ton in the first half of this year and did not level off until the third quarter, at $24,000 per ton. With the market shooting upwards, the company’s decision to expand its nickel production base has paid off bigtime.

Soaring profits

According to the prospectus, Lygend Resources revenue rose from 9.35 billion yuan ($1.32 billion) in 2019 to 12.45 billion yuan last year, while net profit during the same period went from 567 million yuan to 1.26 billion yuan. In the first half of the year, its revenue more than doubled to 9.98 billion yuan and its net profit surged more than 25 times to 2.29 billion yuan. The financial uplift came after the company raised its stake in the Indonesian HPL trading project for nickel and cobalt compounds, extending its shareholding from 36.9% to 54.9% and counting the earnings towards overall revenue.

Despite the company’s supply-chain reach, its upstream operations remain relatively limited, and it has relied on nickel trade for 70% of its revenues in recent years. Last year it topped the global rankings for trading volume of nickel products with a market share of almost 27%. The controlling stake in the Indonesian project has shifted its revenue base, boosting the contribution from nickel production to 49.6% by the end of June, while nickel trade was squeezed to 42.1% of total revenues, making for a more balanced business structure.

Clearly the company’s fortunes hinges on the prospects for the EV market. And market research suggests the outlook for new-energy vehicles is bright. The consultancy company CIC predicts sales in China’s EV market will grow at a compound annual rate of around 25% between 2021 and 2026. The power battery sector is also set for rapid expansion, with a compound annual growth rate of nearly 32%. In this scenario, the compound annual growth rate of global nickel consumption would also come in around 32% during the period.

Nickel is a key ingredient in high-nickel ternary batteries used to power electric cars over long distances. Tesla’s (TSLA.US) 4680 super battery for long-range vehicles, launched in 2020, is nickel-based. In the same year, Lygend Resources founded a joint venture with Tesla’s power battery supplier, Contemporary Amperex Technology Co., Ltd. (300750.HK). The venture, Ningbo Contemporary Brunp Lygend, is 30% owned by Lygend Resources and aims to promote deep collaboration across the supply chain for new-energy batteries.

In need of cash

The high-nickel batteries have become the top choice for many new energy vehicle brands as manufacturing costs have fallen. Since switching to high-nickel materials for its 4680 super battery, Tesla has extended its vehicle range by 16% while cutting costs by 14% compared with the 21700 battery.

By integrating various parts of the nickel products supply chain, Lygend Resources stands to become less exposed to sudden shocks to its trade business, while benefiting from higher gross margins in its downstream business for nickel products and more stable supplies of raw materials.

But there is a catch. The business of producing nickel in the first phase of the supply chain is capital intensive, meaning the company will have to make large and repeated investments. But at the same time the company’s bank liabilities reached 6.72 billion yuan by the end of September. Operating revenue alone is unlikely to cover the capital it needs.

According to the prospectus, the company is going to invest in a project to develop a production line for nickel-cobalt compounds under the Indonesian HPL venture. The investment in question would be in phases one and two of a High Pressure Acid Leach (HPAL) project, using a process to extract metal from ores. In addition, it is also interested in investing in a plan to develop a nickel-iron production line at an Indonesian Rotary Kiln Electric Furnace (RKEF) project.  

To achieve its ambitions, the company will need $4.36 billion in capital spending, hence the pressing need for new financing.

To calculate a potential IPO valuation, we can use CMOC Group (3993.HK), Tianqi Lithium and Ganfeng Lithium as references, with an average price-to-earnings (P/E) ratio of 7.4 times. Extrapolating the first-half net profit out to the whole year, the annual earnings for Lygend Resources amount to 4.58 billion yuan. In that case, the company could expect a valuation of 33.9 billion yuan.

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