Risk of Price Volatility and Lower Margins Leads Us to Exit Nickel Industries

We’ve decided to take profits on Nickel Industries Ltd (ASX: NIC) despite a solid return of 6.5%. Several factors are driving this decision. Market conditions suggest the company might face some headwinds in the near term. The nickel market is expected to be oversupplied until 2025, which could put downward pressure on prices and affect profitability for Nickel Industries. Although earnings are forecasted to grow by 48% annually, the recent drop in EBITDA margins—from 29% to 21%—raises concerns about the company’s ability to meet these targets given the tough market conditions. Currently, the stock is trading at relatively low valuation multiples, with an EV/EBITDA of 5.2x for CY24 and 4.1x for CY25, which might suggest it’s undervalued. But if market conditions worsen or earnings don’t hit expectations, these multiples could shrink, leading to a possible decline in share price. Looking ahead, Nickel Industries faces a few risks that could weigh on its performance, mainly due to shifting supply and demand dynamics in the global nickel market. While global production is expected to increase modestly, demand—especially from the electric vehicle (EV) sector—has surged, which could cause price volatility. Nickel prices have already dropped sharply early in 2025. There’s also the potential for production cuts, particularly in Indonesia, which could tighten supply and push prices up. But this comes with its own uncertainty, as such cuts might not go as planned or could take time to show results. Moreover, as demand continues to rise, especially in the EV sector, Nickel Industries may struggle to meet it without significant new investments in mining infrastructure. The uncertain balance between supply and demand, combined with potential price volatility, creates a challenging environment for the company to navigate in the short term. Strategically, while the company’s focus on Class 1 nickel production for EV batteries looks promising long term, the transition is still in the works and could take time before it delivers substantial growth. In the short term, the announcement of increased dividends and share buybacks shows that management is rewarding shareholders but might not have found more attractive growth opportunities. Given all this, we think it’s wise to take profits now and reduce exposure to potential market volatility and the uncertainties around nickel pricing.