MMG Limited has agreed to acquire Nickel Brazil from Anglo American (AAL LN/NR) for a fixed consideration of US$350m plus contingent consideration up to US$150m. The deal will add nickel, another metal for green energy transition, to MMG’s product portfolio. While the short-term outlook of nickel price is not great given the increase in capacity in Indonesia, the long mine life and the low production cost of the target assets will help reduce risk. We have not factored in the earnings impact of this deal but it is unlikely to be significant anyway. We reiterate our BUY call with target price unchanged at HK$4.12.
　　Key Factors for Rating
　　MMG Limited will acquire 100% of Anglo American’s nickel assets in Brazil for a cash consideration of US$350m. On top of this, the company will have to pay the vendor 50% of the incremental post-tax revenue for the part of revenue generated at a realised nickel price above US$7.1/lb within four years after completion of the deal up to a maximum of US$100m. In addition, the company will have to pay the vendor US$10m if it makes the final investment decision (FID) to develop the Morro Sem Boné (MSB) greenfield project and US$40m if it does the same to develop the Jacaré greenfield project. The deal is subject to approvals from regulatory authorities and is expected to complete in 3Q25.
　　The two producing nickel mines in Nickel Brazil (namely Barro Alto and Codemin) produce about 40k tonnes nickel per year. As at end-2023, these two mines had 2P nickel reserves of 813k tonnes with average ore grade at 1.26% and measured and indicated (M&I) nickel resources of 310k tonnes with average ore grade at 1.18%. The Jacaré greenfield project had M&I nickel resources of 1,313k tonnes.
　　Nickel Brazil is a low cost producer with C1 cost at US$5.05/lb in 1H24, ranking within the first quartile in the global cost curve. While the price of nickel has dropped about 50% since May 2023 on the influx of new capacity in Indonesia, nickel price should bottom out in 2025/26. Its low cost and long mine life (18 years by end-2023) can ensure reasonable profit from Nickel Brazil over the longer term.
　　Key Risks for Rating
　　Further decline or lack of recovery in nickel price.
　　Unexpected operational problem at major mines.
　　Valuation
　　We keep our DCF-based target price unchanged at HK$4.12. While it is equal to 64.6x 2024E P/E, we expect the company’s earnings to triple YoY in 2025 and then grow 64% YoY in 2026.