Executive Summary

1. An ASX200 listed (A$3.5B MCAP / A$5B EV) Indonesian based Nickel Producer inverting into a heavy positive cashflow phase, guiding at levels on the latest earnings call that the “JPM Head of Metals” couldn’t even follow.

2. On the frontier of Indonesian Nickel and in bed with the Chinese & Indonesians that helped build two Industrial Park’s that put almost every other Nickel mine on Care & Maintenance.

3. Market values this like a high debt miner, but it’s now a vertically integrated high grade Nickel producer, achieving spot LME grades and selling battery metal precursors.

4. Key plant ‘ENC’ in commissioning with first MHP out of the new ENC plant on 21 July. First nickel cathode on 11 August. Full nameplate in Early 2027.

5. Fairly obvious pathway to SP appreciation and multiple expansion via paying down the existing debt, cashflowing the assets and returning capital to shareholders.

6. Leverage ratio should drop dramatically, and fast.

7. The register looks bad, but advantageous for retail. Two Chinese/Indonesian giants own 42%, with L1 Capital in at 10%.

8. Checkered history having to re-invent itself to adapt to Nickel Concentrate shipping bans, multiple raises and multiple cap raises to adapt their business.

9. All yours for a mere ~3x EV/EBITDA with a 20 year mine life, massive earnings acceleration, a completely broken Nickel market, with poor sentiment. (What could be more Ironic?)

10. Potential for ASX100 inclusion post the earnings inflection, debt pay down, and small multiple improvement.

11. For the lazy NIC management there’s a section at the bottom called “Message to Management” you should read.

12. Long NIC.

Introduction

What, you thought I was going to pick something easy like the wreckage from the SaaSpocalypse1? As for another Oil E&P, not sure I’m the guy to pick an oil stock2 in peak Hormuz?

This time I’ve gone deep into Nickel Industries, a slightly off the radar quasi Australian/Indo/Chinese Nickel Miner turned downstream refiner. No one wants Nickel exposure, especially a foreign one, and that is part of what makes this one brilliant.

Bulk miners are typically below average quality businesses. Australia is blessed with bulk resources & miners that have nailed the economics which make our bulk miners above average quality businesses. The same thing has now happened in Indonesia, the new “Saudi Arabia of Nickel”.

Nickel Industries (ASX:NIC, $NIC) was originally a small bulk Nickel miner in Indonesia, shipping concentrate, until shipping raw ore got banned only refined products were allowed to be exported. The Indonesian government forced local refining/smelting of Nickel, and so NIC had to adapt and play downstream. This is where it got tangled up with Chinese funding/engineering and heavy Indonesian investment.

The current state of NIC is a smorgasbord of Nickel equity holdings that are initially quite confusing.

Background

Indonesia is blessed with nickel laterites, a form of weathered nickel ore in which nickel is concentrated in a limonite (oxide-rich) layer upon a saprolite (silicate-rich) layer3.

• These ores are generally low grade and require processing to produce a nickel product.

• The saprolite is processed through RKEF (Rotary Kiln Electric Furnace) to produce nickel pig iron (NPI) or ferronickel.

• Limonite is processed through HPAL (High Pressure Acid Leach) to produce an intermediate suitable for conversion into nickel sulphate.

By contrast, many of the world’s traditional nickel mines are nickel sulphide deposits, where nickel occurs primarily in sulphide minerals and can be concentrated through flotation before smelting and refining.

Indonesian nickel processing was initially centred on saprolite, the higher-grade ore found in the lower layers of nickel laterite deposits. It is processed through RKEF (Rotary Kiln Electric Furnace) to produce relatively low-margin NPI (Nickel Pig Iron; high in Nickel and Iron) used primarily in creating stainless steel.

More recently, Chinese-backed investment has enabled the large-scale processing of the lower-grade, shallower limonite portion of Indonesia’s laterite resources through HPAL (High Pressure Acid Leaching). HPAL itself was not a fundamental scientific breakthrough, the underlying technology has been tried across the western world since the late 90’s, with generally poor results and large cost blow outs.

In 2012, Rami “NiCO” 32ktpa HPAL in PNG was successfully built for ~$2B by a Chinese SOC (China Metallurgical), and seems to be the first large-scale successful HPAL. The supposed “breakthrough” isn’t clear, but it seems like large-scale Chinese engineering, management and construction was ready for prime time. The Chinese have recently built these plants in Indonesia with a construction price cap guarantee.

This new HPAL supply unlocked vast quantities of previously difficult-to-process limonite, dramatically expanded Indonesia’s economically recoverable nickel resource and, in doing so, fundamentally reshaped the global nickel market.

This revolution in Nickel processing and build out has also unsurprisingly affected the Nickel price, plunging the spot price into 5 year lows.

Not dissimilar to what’s happened with EV’s, Chinese enterprises all swarm and compete in the same market, a quasi survival of the fittest4, and the end result is an absolute revolution. The ‘Archepelago’ has two huge industrial parks, plus other satellites which house collectively hundreds of Nickel Smelters ranging in sizes, grouped largely into two processes: RKEF and HPAL.

The scale is comical. At IMIP alone there are 54 RKEF refineries, and IWIP is based on a mirror of IMIP.

The HPAL plants across IMIP and IWIP are more notable, they are larger and more consolidated. There are 9 in operation, 12 in Construction or Permitted with another 12 proposed for future builds.

The important distinction here is that the Indonesian government has stepped up to protect their Nickel industry and has dramatically slowed the roll out of new smelters via permits and production quantities via quotas.

There’s a large element where the President is controlling Nickel supply at a level economic to Indonesia, but enabling a cost structure that is lower than everywhere else in the world. It’s analogous to OPEC.

In addition to having extreme scale in resource, processing and low cost chinese capital, the cheap indonesian labour and local propensity for low cost coal power plants funds backs up the economics such that no other mine will globally come close to completing5. Not to mention the wider environmental impact.

Current generation HPAL wins on the higher sale price and the break-even processing cost is lower than other processing methods (inc RKEF).

The products NIC produce are:

• Nickel Pig Iron (NPI) is a mix of Nickel and Iron, ideal for Stainless Steel. Offtake is largely to Tsingshan, the world’s largest Stainless Steel Manufacturer.

• Nickel Matte, a semi-refined intermediate grade of Nickel, to Glencore.

• Nickel Mixed Hydroxide Precipitate (MHP), a battery precursor chemical consisting of ~40% Nickel and 4% Cobalt. Offtake is to ‘global customers’, presumably Chinese/Korean battery/chemical companies.

• Nickel Cathode, a very high grade plate of Nickel. Typically a 1m2 sheet out the back of electrowinning/electrorefining.

The politics are also pretty hairy:

• Indonesian:

  • Very large economic contributor, ca 11% of Indonesian GDP.

  • Large employer.

  • Production/Trade Dominance globally.

  • President continually changing terms of Nickel Production levels and influencing global pricing.

    • Restrictions by Ore quantity, product type, refinery type and count.

  • Country seen as a high risk Jurisdiction for Corruption.

• Chinese Side:

  • Huge capital, labour and technology flows from China.

  • Large equity ownership of large Chinese POE’s.

  • Implicit Chinese State backing and Funded.

  • Large Source of the demand for end products. (Steel / Batteries)

• Environmental

  • Mining Tails disposal has been contested, and artisanal miners have dumped into the Ocean6. Emissions are high, and this part of the world will be forever turned into the world’s Nickel factory.

  • Disposal of the HPAL circuit waste products is questionable. Heavy battery metal sludge.

The current state of Indonesian Nickel Production Controls are such that:

• Raw ore banned to export. Full ban on unprocessed nickel ore since Jan-2020.

• Price of Nickel Ore is set by the Indonesian Government, via the Mineral Benchmark Price (HPM)

• New RKEF banned. Explicit moratorium since Aug-2024 (ESDM), now codified in PP No. 28/2025 (risk-based licensing, Nov-25): no new permits for smelters producing only NPI, FeNi or nickel matte.

• New semi-refined banned. The same PP 28/2025 blocks “intermediate-only” plants.

• New HPAL’s are not receiving licences. (Nothing official in law?)

• Ore mining quota (RKAB). Annual ore-extraction caps per mine. 2025 approved ~379Mt; 2026 cut roughly a third to ~260–270Mt.

History

Firstly, a bit more about the history of NIC. Why is there an Australian company tangled in this sprawling mess of Indonesian Nickel? Let’s run through the key asset milestones of the company (not focusing on the financing just yet):

• 2012: Acquired 80% interest in the Hengjaya Mine in Central Sulawesi, Indonesia (20% with the local Wijoyo family).

• 2014: Indonesia banned ore exports. NIC was no longer able to ship concentrate, halted production, and negotiated local offtake.

• 2015: Production started again after NIC secured local ore sales to Tsingshan’s nearby IMIP operations.

• 2017: Collaboration & Subscription Agreement with Tsingshan (via Shanghai Decent). Committed to the first RKEF projects, HNI and RNI.

• 2018: IPO at $0.35 to raise $200M.

• 2019: HNI RKEF and RNI RKEF begin NPI production. Increased equity interest in RNI RKEF from 17% to 60%.

• 2020–21: Bought 80% of ANI RKEF and 80% of ONI RKEF.

• 2022: ONI RKEF online. ANI RKEF online.

• 2023: Acquired a 10% interest in the HNC HPAL project. FID on ENC HPAL ($2.3B).

• 2024: Acquired a 60% interest in the Sampala project.

• 2025: ENC HPAL under construction.

• 2026:

  • Sphere Korea (SNC) acquired a 10% equity interest in the ENC HPAL project from Decent Resource, with Nickel Industries holding a 46% interest.

  • Agreed to acquire a 36% interest in the CNE HPAL project by swapping an 18% interest in the Sampala project, which reduced its stake in Sampala from 60% to 42%.

  • Agreed to acquire a 17.5% interest in the TMI HPAL project,

  • ENC HPAL Commissioning.

To be blunt, the resultant assets held of all the above transactions are a complete mess.

NIC even does a full asset roll call at the start of each quarterly report in case you missed the last transaction or two. They even give them all little codes in earnings releases to understand7.

The regular word salad looks like this:

The Current Asset base is8:

A mess of 8 different Non-Operated Smelting/Refining operations. With Tsingshan as a partner, financier, builder and operator on all of them except for HNC means Tsingshan has enormous leverage over NIC. If Tsingshan needs something, there’s only going to be a single question from NIC: “How much do you need”?

Keep in mind this NIC is essentially only a financing shell with about 20 employees on Hunter St in Sydney.

This patchiness is both a weakness and a bit of a hidden strength. The complexity makes my eyes glaze, not to mention the lack of control over the operations. But on the other hand the operational history is smooth, the plants are presumably near identical within types and generations and the operating challenges don’t seem to be big enough to prompt much discussion in the earnings releases. The supply chains into the area for spare parts and labour would be excellent given the neighborhood.

Assets (in Detail)

NIC’s operational assets are all located in central Indonesia across two large islands; Sulawesi and North Maluku.

The Islands are formed from Volcanoes and are mostly steep, rugged rainforests and the climate is hot and humid.

Both islands sit in the “Pacific Ring of Fire” and are highly earthquake prone.

On Central Sulawesi there are the two mines plus 7 of 8 of their processing assets in the Indonesia Morowali Industrial Park (IMIP) near Morowali. Morowali is a coastal strip on the east coast of Sulawesi with hills rising immediately behind it. The hills are a natural catchment, feeding fresh water into IMIP, a flatter area on the coast.

IMIP itself is a monster of an industrial park ~20km2 and is completely focused on Nickel processing. The scale here is beyond words, it’s a continuous strip consisting of furnaces, refineries, power stations, ports and stockpiles where a fishing coastline used to be. IMIP contains ~53 RKEF lines, the HNC/ENC/QMB HPAL trio, stainless and carbon-steel mills, two dedicated ports, and nearly 100,000 employees.

Nickel arrives in via Barge, Pipeline and Haul Trucks. The park runs on huge quantities of imported coal and sulfur. IMIP is so hungry for ore, it’s even importing small quantities from The Philippines.

Power is largely all generated on site, as each asset has its own powerplant. No outside dependence on power. There is something like 15GW of generation across 72 Coal Units. Glorious Stuff. For the ESG boys, there’s 200MW of Solar capacity going in.

On North Maluku to the east, NIC owns a single RKEF Smelter at the Weda Bay Industrial Plant (IWIP). IWIP is adjacent the world’s largest Nickel Mine (Weda Bay9).

IWIP

IWIP is a sister plant to IMIP which is around 5 years behind in development and growing fast. IMIP appears much better planned, with a more logical layout, centralised power with more logical grouping of plants. IWIP is more focused on the battery metal market vs IMIP being primarily Stainless Steel precursor focused. IMIP employs 80,000 people. There’s even some solar in there somewhere. Again, great for demonstrating IWIPS commitment to the environment and investor presentations.

The best imagery I can find of IWIP is from the Sentinel-2 Satellite, north is up. The Only NIC Asset here is ANI RKEF, which I believe is the west most plant in the bottom row behind the coal plant. Closest to the waters edge10.

Bringing this all back together before I go further into each asset, let’s look at where NIC compares to global peers. NIC’s own investor materials are fairly good at demonstrating their size. NIC will imminently be the 5th largest player in Nickel.

They are among behemoths in the mining world and pretty much the only western name in that list with volume of any significance11. Not bad for essentially just a financing shell sitting in Sydney12.

Here’s a similar chart broken down by project with the NIC owned assets in Blue.

Hengjaya Mine

Hengjaya was the original asset of NIC13 and the reason the company exists at all. The deal was agreed in December 2009, completed March 2012, and the first ore left in 2013.

• Ownership: 80% (NIC), 20% Wijoyo family (via PT Hengjaya Sukses Pratama).

• Cost: Acquired for ca ~US$12M in 2009, Pre-IPO.

• Asset Book Value: US$202M (100% Basis, 2026 Value). Cost base + Capex.

• Operator: PAMA, (PT Pamapersada Nusantara) a wholly-owned subsidiary of PT United Tractors Tbk

• Location: -2.952, 122.289 (Morowali Regency, Central Sulawesi)
  ~20km SE of IMIP. Visible on Satellite Imagery.

• Resource / reserves: 285Mt at 1.17% nickel = 3.3Mt contained (JORC). Measured 121Mt, Indicated 75Mt, Inferred 88Mt.

• Production Rate (avg): ~4Mt/quarter (100% Basis) 3.2Mt/qtr Attributable.

• Sales Rate (avg): ~3Mt/quarter (100% Basis), 2.4Mt/qtr Attributable)

• Mine Life: ~25 years of feed at current rates.

• Mine Type: Open cut, free dig. No drill-and-blast. The laterite comes out of the ground with excavators and trucks, straight from the surface.

• Infrastructure: haul road, jetty, stockpiles, camp, mining fleet, workshops and a limonite wash/feed-preparation plant. The IMIP haul road was completed in August 2023. Ore was previously barged from the Hengjaya jetty up to IMIP.

• Pipeline to IMIP: a ~22km slurry pipeline carries the limonite from the mine into the HPAL autoclaves at IMIP. (Finished 2026).

Overall conditions are sloppy, busy, messy, many different workfronts and levels. But probably what you expect for a 2nd world open put load and haul operation.

I would love to see how much of a mess it is in the wet season. Conditions would be risky in heavy rain. Presumably they are very much used to the conditions and managing the risks. Mines look heavily prone to wall slips.

There’s an Official corporate Flyover video over Hengjaya from NIC, but it’s much more entertaining surveying the asset via images employees have uploaded onto Google Maps14.

Production Rates I have extracted from quarterlies and presented below.

Sales are much lower than Production and contrained against a state imposed “RKAB Quota”. RKAB is Rencana Kerja dan Anggaran Biaya, literally work plan and budget.

• It covers production and sales separately. NIC’s 2026 sales quota is 14.3Mt (9.0Mt the two prior years), with windows mid-year and end-year to apply for more.

• The government sets a national total and rations it across miners: 319Mt for 2024, 364Mt for 2025, about 260Mt for 2026, against smelter demand near 235Mt. The 2026 cut is deliberate supply discipline, stated goals being environmental outcomes and price stability.

• Allocation is political as much as technical. NIC got a 60% increase for 2026 on ESG credentials while peers received under 30% of what they asked for. That rationing is what squeezed ore supply in March and fed straight into the April HPM reset.

• There are no separate RKEF or HPAL quotas.

• After quarter-end NIC applied to lift its 2026 RKAB sales quota from the granted 14.3Mt to 19Mt, using one of the mid/end-year top-up windows, to cover ENC’s limonite ramp through H2.

The ore price was historically government set, these are now more transparently seen via the prices for 1.2% domestic (limonite) and the 1.6% domestic (saprolite) markers.

The prices got reworked by the Indonesian gov in April 2026 and significantly bumped up which now considers the contained cobalt in the ore. Incredibly the value of the cobalt in the ore was never recognised by the mines.

I am modelling the ore value vs the following Fastmarkets markers.

• Saprolite (NIC ships 1.48%): MB-NIO-0008, 1.6% Ni Indonesia domestic, $/t

• Limonite (NIC ships 1.12%): MB-NIO-0007, 1.2% Ni Indonesia domestic, $/t

• MHP: MB-NIO-0004 payable % of LME

Sampala Mine

Sampala is a direct analog to Hengjaya, but undeveloped. Call it circa 10 years behind in project maturity. Sampala is bigger in terms of resources, a little more remote being 37km West of IMIP.

It’s a “Tier 1” globally significant deposit, good grades and nice and close to a global Nickel hub hungry for ore. Being on the same Island as one of these Industrial plants is a genuine competitive advantage. The potential to pipeline slurry15 directly into a plant short Nickel is there and has genuine cost advantages beyond its size.

There’s next to no images of the Sampala site available, but there’s also not much to see yet. Only some early civil works whilst the equity ownership settles.

• Ownership: 60% NIC (licences ETL + MJN + GF). Acquired for US$144m final payment due April (from operating cash flows), plus US$30m of capex to first production.

• NIC is selling down 18% for their CNE HPAL Stake, so the future equity split is looking like: NIC 42%, JAYA 30%, Wijoyo/local partner 28%.

• Value: ca US$1.3B in 2026 (100% Basis). NIC swapped 18% of Sampala for 36% of CNE, booked at US$241.6m

• Operator: TBA

• Size: 187Mt at 1.2% nickel (2.3Mt contained), upgraded to over 1 billion wet metric tonnes at 1.24% in the Q2 announcement. 6,654ha, only ~20% of the laterite area drilled. (Large amount of inferred)

• Production Rate (avg): 6M wmt/yr start with ramp up to 20M wmt/yr

• Type: same laterite as Hengjaya. Free-dig, bulk load-and-haul, no strip. A second Hengjaya in ground terms, 36.9km from IMIP.

• Status: Advanced exploration moving to production in early 2027, per management on the 2026 Q2 call.

• Role: exclusive limonite supplier to CNE under a 15-year, up-to-14Mt/yr MOU at market-linked prices.

RKEF Smelters

Firstly, what’s RKEF? RKEF is Rotary Kiln Electric Furnace, a processing plant16 consisting of a rotary kiln (a long, rotating steel tube) which dries and pre-heats the ore which then feeds the ore to an electric furnace which smelts it.

Whilst traditional Nickel Sulphide ores are typically crushed, floated and upgraded before smelting; Saprolite can’t be concentrated. The nickel sits locked inside silicate clay at ~1.8% grade, so the only way to get it out is to melt the whole rock. RKEF is brute-force smelting of low-grade ore.

The Basic Chemistry & Process:

1. Dry: Saprolite arrives at ~30% moisture; rotary dryers drive the water off.

2. Roast: Straight in the kiln at (~900–1,000°C), the coal burns to Carbon Monoxide, reducing the Nickel Oxide to pure Nickel. The rest of the impurities stay in the oxide. NiO + C → Ni + CO.

3. Smelt: Calcine goes into the electric furnace (~1,500–1,600°C, submerged-arc electrodes). Everything melts. The metal phase (iron-nickel alloy) sinks; the waste phase (magnesia-silica slag) floats and gets tapped off separately.

4. Pour: The alloy is tapped and cast as nickel pig iron: ~10–12% nickel in iron, stainless feed, done.

The RKEF output is a large contributor to production volumes and were critical in enabling NIC to get to its current size, but their importance is now diminished with the HPAL ramping in the near future. RKEF is expected to transition from 100% of CY2217 production and 85% of CY22 EBITDA to 50% of Production and 20% of EBITDA in CY28.

NIC’s 4 RKEF facilities are split across 2 vintages and both industrial parks. HNI, RNI and ONI are at IMIP, ANI is at IWIP. All were built by Tsingshan, operated by Tsingshan and were new at the time NIC got involved.

The first Vintage was acquired in 2019 consists of HNI & RNI. These original RKEF plants were needed as the ore shipping ban was put in place. These was largely financed from IPO proceeds18. Later a further equity raise in 2020 topped up the equity share to 80%.

The later “2022” vintage consists of ANI and ONI are a newer generation RKEF with double the number of lines19, much larger throughput and self-contained power plants. These appear to be opportunistic purchases, acquired a bit too early for the maturity of NIC at the time. The financing of both ANI & ONI involved multiple additional capital raisings.

Note that ANI and ONI are on such a scale that they are important to the NIC business, whereas the older HNI & RNI are a rounding error and have outlived their purpose.

ANI (US$558M):

• Late 2020: the initial 30% of ANI was financed by a A$363M capital raise.

• In 2022 a further 20% of ANI was debt funded (US$137.6M).

• Late 2022: Purchased additional 30% for US$210M

ONI (US$600M):

• Early 2022: Initial 10% slice secured for US$53M cash outlay.

• May 2022: Took another 20% by issuing US$106M in equity, tied into the broader ~A$296M raise.

• 2022: Injected US$154M to fund their share of the captive 380MW power plant.

• Sep 2022: Added a further 40% chunk for US$212M, largely backstopped by a US$225M note facility.

• 2023: Bought another 10% for US$75M cash, funded from the US$471M (~A$673M) institutional raise (largely for HNC HPAL).

(are you noticing a key problem with NIC here? The number of raises is shocking).

Production

RKEF output has been steady since startup and above plate at every plant. All volumes below are stated at NIC’s 80% attributable share. Fleet nameplate is 81.6ktpa (20.4kt/qtr) and the fleet prints ~100ktpa, holding 110-130% of nameplate with no furnace failures in 26 quarters.

• ANI and ONI do ~36.8ktpa and ~36.5ktpa attributable (~46.1kt and ~45.7kt at 100%) against 28.8kt of attributable nameplate each (36kt at 100%).

• HNI and RNI do ~13.3ktpa each attributable (~16.6kt at 100%) against 12.0kt each (15kt at 100%).

Overall production rates are good but HNI and RNI are very clearly trending down as they age. This is within typical conditions for blast furnaces which generally run at stable rates with a soft decline until a furnace is taken down for repair/reline and output experiences a step-change down, then back up. We don’t have a lot of insight into the conditions of these plants.

HNI has just started a full reline20 so a ~50% dropoff in volumes will be evident from next quarter. It is typical to rebuild & reline any blast furnace every 7 years.

Overall I’m not worried here, there’s lots of independent systems here and a single outage21 only affects a single line in a single plant. Downturns in production numbers all came with basic explanations are outages are generally low single figure US$M outages or less, largely for major overhauls.

The vintage 2 (ANI and ONI) production rates are good and we are getting early signs of decline too. ANI output was lower in the previous quarter due to ongoing kiln reline. That drop will be temporary. ANI had a blip in late ‘24 due to import supply problems (ANI is at IWIP and not part of the NIC owned Mine/Ore supply chain and exposed to external supply). ONI seems to have had no issue disclosed to date. The larger ANI & ONI should only experience 25% drop in output during relines.

Economics

The two generations of RKEF have very different economics. I consider them in pairs below.

Vintage 1: (HNI + RNI)

These two plants barely break even at spot $17K/t Ni (CY25: HNI US$3.1m EBITDA, RNI negative US$0.3m).

I haven’t included maintenance downtime (which we have currently on HNI), trying to illustrate an average economic case. The spot/trough pricing economics. Note a small uptick in Nickel prices from here is very accretive to these smelters.

The return on assets at current prices show how poor of an asset this is at this point in the cycle. Sub 5% after adjusting out the current maintenance downtime. There’s a strong case to sell this pair of RKEF for any price22.

Why vintage 1 is so low:

• Smaller Capacity, lesser lines and older generation.

• Trough pricing + NPI discount: LME ~$17,000/t less ~$2.5k NPI discount = $14,522/t realized. Cash-cost operation has no headroom once royalties, selling and site G&A come off.

• No directly owned on-site power.

• Degraded furnaces pre-rebuild.

Vintage 2: (ANI + ONI)

Each of these plants has 4 lines, 8 in total. Lower Cash costs, higher margins and higher volume.

Call it “minimum” US$150M/yr EBITDA at current prices, and US$430M/yr at $20K/t Nickel. Returning 10% on Assets in a poor Nickel pricing environment is reasonable, and comparatively extremely good to the most of the Nickel Industry.

HPAL Refineries

HPAL (High Pressure Acid Leaching) is a completely different game than RKEF and it is where all of NIC’s incremental economics sit. Whilst the traditional RKEF process was built around the high-grade saprolite (~1.8% Ni), HPAL turns the formerly unused low-grade limonite ore (~1.0-1.4% Ni) into battery-grade nickel units. A notable turnaround as discussed earlier.

Basic Chemistry & Process:

1. Slurry: limonite arrives wet from the pit; crushed and mixed to a pumpable slurry at ~30% solids.

2. Leach: slurry plus concentrated sulphuric acid into the autoclave (~250-270°C, ~40-50 bar). Acid dissolves nickel and cobalt from the iron matrix; the iron then re-precipitates as hematite and drops out, regenerating acid as it goes. NiO + H2SO4 → NiSO4 + H2O.

3. Neutralise: discharge is still acidic; limestone neutralises the residual acid and drops the remaining iron and aluminium impurities. Nickel and cobalt stay in solution.

4. Precipitate: magnesia pulls nickel and cobalt out of solution as MHP23: mixed nickel-cobalt hydroxide at ~35-40% nickel, battery feed, done. NiSO4 + MgO + H2O → Ni(OH)2 + MgSO4.

HNC

HNC (Huayue Nickel Cobalt, at IMIP, 10% acquired Aug-23, US$270m) was NIC’s first HPAL exposure. The plant was built in ‘21-’22 by Zhejiang Huayou Cobalt Co., Ltd24 (Huayou25) and Huayou owns the majority of the plant. The plant is in IMIP with 60ktpa MHP nameplate.

Huayou is listed in Shanghai under ticker 603799 with an EV of ca US$15B. Huayou26 was originally focused on Cobalt in the DRC, pivoted into Indonesian Nickel and has successfully built and operated at least 4 HPAL plants in Indonesia. Huayou owns & operates the majority of all their plants and has a range of different strategic partners across their plants (Tsingshan/CMOC/CATL/Ford/Volkswagen/Vale/NIC/EV Energy/Antam).

When NIC bought into HNC they also bought Tsing Creation, an end products trading business out of Hong Kong. The model is simple buy-and-resell:

• Buys HNC’s MHP output (US$105.1m in CY25), resells to ~10 end customers: IXM, Jingmen GEM, XTC Recycling, Trafigura Asia, Itochu Singapore, Transamine, Minmetals North-Europe, Golden Harbour, China-Base, Hengjaya Holdings SG

• Keeps a spread of roughly US$1,400–2,100/t

• Earned US$11.5m (CY24) → US$16.3m (CY25)

Throughput has held at ~140% of nameplate for most of its history (21-21.6kt/qtr at 100%, ~2,100t attributable to NIC) with no autoclave availability events recorded. The earnings contributions from HNC are also excellent. Project debt has been fully repaid and has commenced paying dividends upstream to NIC.

NIC Attributable EBITDA from HNC are presented below. The asset has returned US$99M EBITDA to date, representing 40% of the original investment in just under 3 years.

On the audited numbers the HNC-only margin is 32.7% (CY24) and 31.9% (CY25). My quarterly estimates run 30-37% across the six quarters with disclosed HNC EBITDA, so call it low-30s through the cycle.

2026 YTD Figures have been even better than 2025 due to MHP prices. 2026 Q2 EBITDA deteriorated slightly due to Hormuz, where NIC disclosed on the Mar-22 call that Sulfur costs are up 22%.

There’s some concern on margin currently as Sulfur availability is hurting the industry due to the Hormuz Situation. I would bet the Chinese are able to source these at reasonable prices given the scale and relationships involved. HNC gets its sulfur through Tsingshan.

NIC has an inconsistent history on how they disclose the full HNC unit economics. I wish the intent looked like they ‘forgot’, but they have actively removed key lines in the standard front page table and removed the full detail breakdown table on HTAL in their routine quarterly reporting. This omission is repeated in the 2026 Half Year Report.

This is shameful stuff. Understanding the cash cost right now is especially important as it is skyrocketing. The overall margins still look good due to the trading profit and seemingly strong prices achieved for the MHP. This alone is a reason the stock doesn’t deserve to rally.

Let me present to you the problem. The 2026-06 Quarterly and Half Year Report disposed of the standard HPAL operations table. NIC, what are you doing here? This does not look innocent. This would be funnier if NIC wasn’t a ~$3B company.
A $13/month subscription to ChatGPT would do a better job than the NIC IR team.

ENC

ENC (Excelsior Nickel Cobalt, at IMIP, NIC 46%), is currently in late stage commissioning and is the flagship asset of NIC. The nameplate is 72ktpa MHP.

The plant build has progressed well, however commissioning hit a water availability issue in Q2 2026. Given the success of HNC, it’s implied that ENC should ramp up beyond nameplate.

ENC differs as it has a much more complicated flow sheet than earlier HPALs, such that it can produce four Class-1 Nickel products (MHP, nickel sulphate, cobalt sulphate, Nickel cathode). HPAL typically ends at MHP stage. The unit economics aren’t available yet, but will be interesting to follow. There’s a few more levers to pull in the product mix. The Cathode should get 100% of LME Nickel vs the MHP Product which is getting ca 85-90%.

Sphere (Korean) is a 10% partner of ENC. Sphere is a Korean high quality aerospace metals company, and is known for being an accredited special metal alloy provider to SpaceX. Sphere has a pretty promotional website and sales pitch, but they offtake Cathode from the project, lending credibility to the quality27.

Feed at nameplate is ~1Mt of limonite a month, staged from Hengjaya stockpiles first, then will get the supply from Sampala’s as mining gets underway.

Commissioning is ahead of the original CY27 schedule but throttled today by water availability due to drought conditions in Indonesia. The current drought is El Niño related, typically occurring every 3-7 years. This is likely to extend the dry season through January 2027.

• First MHP flowed 21-Jul-26

• First cathode 11-Aug-26

• Nameplate was guided for Oct-26 on the 2026-Q2 Earnings call

• The water delay news came out in Sept ‘26

The share price barely reacted to the news of the ~3 month delay to the commissioning to nameplate. There’s barely enough interest in the name for the stock to react much to the newsflow, but this showed how little the market is pricing in ENC.

TMI HPAL

TMI (PT Teluk Metal Industry, at IMIP) is a recent equity purchase agreement from 2026-06-24 with payment due late Nov 2026. The deal is US$169 million for 17.5% interest. Other equity partners are a JP/KR Consortium including Hanwa & Sumber out of SG has 10%. Interestingly, all non-Chinese and Indonesian (for a change). TMI was originally built and owned under Tsingshan.

TMI is an Extension to ENC (above) which will also produce MHP. The build cost and timeline is Guaranteed by the Chinese builder, is already under construction and should be at 38.6ktpa Nickel nameplate by September 2027.

The works will include a slurry pipeline from Sampala. NIC is expected to be the exclusive provider of ore to TMI from Sampala.

NIC hasn’t released any media of the plant and hasn’t described how the flow circuit works and the level of integration into ENC. We are missing a lot of information on TMI. I found a single image from Hanwa from the same announcement from their side. Can not see anything from IMIP or Tsingshan on the build.

Yes, Ironic Capital is providing more imagery of TMI than Nickel Industries. You’re Welcome.

CNE HPAL

CNE (Chengsheng New Energy, at IMIP) is another recent equity investment in HPAL. Announced the same day as TMI, 2026-06-24. NIC is purchasing 36% of CNE, financed through an asset swap of 18% of Sampala.

CNE is another extension of ENC and will also produce MHP. The nameplate is 28.3ktpa Nickel. Construction is already underway and commissioning due to start in mid 2027. Sampala also supplies CNE.

The CNE asset swap for the Sampala stake marks Sampala’s value at ~$1.3B, meaning NIC paid only $44M for the implied $241M value of NIC’s CNE Stake. Not bad.

That is literally all I can find out about from CNE online, including all IR releases from NIC. I can not even tell where the plant is or what it looks like. Lacking…

There’s one last nugget on TMI/CNE from the 2026-06 Quarterly call at 0:35:03, on the question from Cindy Huang:

Second question, at this stage, do you anticipate that you would increase investment or your interest in TMI and CNE going forward? Or any investment or working capital required to bring it up to nameplate towards the middle or second half of next year? Thank you.

…The 72.5% is held by the Korean and Japanese consortium, and obviously the 17.5% is Nickel Industries. That’s fixed. There’s no changes to TMI. We expect no further investment there. In the CNE HPAL, that’s an annual cash investment for us. We don’t expect any further investment.

I think when Justin did the presentation last month on the Sampala Project monetization, we believe we’re finished doing our investments into HPAL. Given that there are no further licenses being given out by the Indonesian government on HPAL. We’re very well and truly at the end of our investment cycle.

This last little nugget should be on the front of the IR deck. This will mean a little more once we go over the financing.

Ok, I think I’ve covered the operational assets enough… We will come back to the forward HPAL economics later.

Financing History and Capital Structure

NIC went public in 2018 with 1.4B shares at A$0.35/sh and now has 4.3B shares at $0.80; A near tripling of units outstanding.

Dilution is a term that NIC shareholders are probably more familiar with than the ~20 employees inside Nickel Industries.

There’s a huge disregard for the equity and a raise at any price attitude visible. Bad for past holders, opportunity for future holders.

Not only that, the market cap is essentially flat since 2021 with the units up 50%. The share price has been within the same range since 2021 too.

Market cap is ca A$3.5B, with A$1.4B Net Debt, so EV is A$4.9B.

I’ve only come across NIC recently, but the impression I get is that they needed to adapt downstream to survive, and they just kept on going hard as the local Industrial Plants grew and grew. The speed of these transactions might end up being a good thing in time, but these came at significant cost to equity holders.

That said, there was a certain survival necessity to some of these raises which I have some sympathy for. But the company has simply expanded faster than it has had appropriate financing for.

I’m guessing there’s a lot of burned former shareholders of this name. There has been a lot of mistrust for the company equity among a sea of better opportunities in the past 5 years. Cash sitting on the sidelines has drastically outperformed these boys playing around in 2nd world Nickel. Not going to be a name punters at the local pub are going to be talking about whilst their kids made money on literally everything else. Seriously, is there an equity class, theme, or collectable that has done this bad outside the renewables industry?

I’m getting ahead of myself here, but let’s be clear: The Dilution track record I’m about to go over is a disaster for anyone who holds this name, and for anyone wanting to get into this name. There are many reasons this stock trades cheaply, this is a key one, and presumably rightly so…

Capital Raises: A$2.3B Cash and A$600M Scrip

• Aug-18: 571.4m @ A$0.35 = ~A$200m - HNI RKEF stake (IPO).

• Jun-19: 137.5m @ A$0.40 = ~A$55m - RNI 60%.

• Aug-19: ~140m scrip @ ~A$0.41 = US$40m - RNI 60% (with US$80m Decent debt + US$1.4m cash).

• May-20: 462.6m @ A$0.50 = ~A$231m - HNI/RNI 60→80% (1-for-3.6 entitlement).

• Dec-20: 386.9m @ A$0.94 = ~A$364m - ANI initial 30% (2-for-11 entitlement).

• Feb-22: 108.1m @ A$1.37 = ~A$148m - institutional placement funding ONI initial 10% (cash).

• May-22: 108.1m scrip @ A$1.37 = ~A$148m/US$106m - ONI 10→30% (non-cash placement to Shanghai Decent).

• Jan-23: 259.1m @ A$1.02 = A$264.3m - institutional placement funding HNC, ONI and related options.

• Mar-23: 33.9m @ A$1.02 = A$34.6m - SPP (oversubscribed).

• Jul-23: 21.2m @ A$1.02 = ~A$21.6m/US$15m - Wanlu conditional placement.

• Aug-23: 383.4m @ A$1.02 - HNC 381.4m (US$270m scrip) + Lochtenberg 2.0m (US$1.4m cash).

• Sep-23: 857.0m @ A$1.10 = A$942.7m - United Tractors 19.99% strategic placement at a 27.2% premium.

• Jun-26: 18% effective Sampala interest exchanged for a 36% effective CNE interest, transaction value US$241.6m each way (non-cash asset swap; Sampala interest originally acquired for an implied US$44.7m).

Debt Raises:

• Aug-19: US$80m senior facility - RNI 60%.

• Mar-21: US$175m 6.5% notes due Apr-24 - ANI 80% second cheque.

• Sep-21: US$150m tap 6.5% - ANI.

• Aug-22: US$225m 10% secured notes due Aug-25 - ONI.

• May-23: US$400m 11.25% notes due Oct-28 - refi 2025 secured + 6.5s tender.

• Oct-23: US$400m BNI facility (US$350m term + US$50m RCF) - ENC.

• Mar-24: US$250m term loan - ENC.

• Sep-25: US$800m 9% notes due 2030 - tender 11.25s, repay bank loans.

• Apr-26: US$450m syndicate (US$350m term + US$100m revolver) - retires US$398m bank loans.

Or to summarise:

• ~A$2.9B of equity raised for a company trading at A$3.5B Market Cap. P/B around the 1.1-1.2x mark. A$1.4B of (net) debt outstanding. EV of A$4.9M.

• IPO/raise to avoid the raw ore export ban and initial move into Downstream via HNI RKEF.

• More RKEF, followed by a double down and a triple down on RKEF.

• Since 2023 all the money is HPAL related, with HNC equity financed, ENC & TMI debt financed and CNE swapped from Samapla equity.

• Meanwhile US$432M was paid out in dividends…

The ~US$2B of raises is carried on the books as share capital, and there’s just $16M of retained profits on the books. Shockingly low. (NIC currently trades at about 1.05x Book Value).

There’s been ~$432M of dividends paid out, which has been the primary mechanism of returns. All the cash got paid out as dividends right at the time they needed the capital. OK then. And we wonder why this trades cheaply?

Putting these together, we can see an average 21.8% cumulative return on equity since IPO. Not exactly a lot of return over 8 years for a globally significant Nickel producer. Oh that’s not a fair way to measure ROE? Take a look at the other mid and large cap miners on the ASX and let me know how many have book values so close to their market caps.

Again, this is a bad result for previous holders, but an opportunity for new holders. Let’s not do a Terry Smith and start using previous raises for a reason to sell the stock today. All these Indo’s, Chinese and Aussie’s have done all this work and the market is giving

For a more conventional measure of ROE, we can take the H1 2026 $52M NPAT over the $2B equity and get a 2.5% return for the half. Noting that of course Nickel prices played a huge part in this result and not just the dilution. That said, ROE’s in 2023 onwards would be much more reasonable (10%+) if the book didn’t double. C’mon boys. Better hope those HPAL bets pay off…

It has to be said that the company has shifted to fully debt financing in the past few years. Hopefully we have turned a corner in level of net raises. Current debt outstanding is US$1.2B and it isn’t due for refinancing until 2030.

Financing costs are significant, talking ca US$100M interest expense a year and another US$80M/yr in repayments. There will also be an additional US$169M for the TMI Equity payment in ca Nov-2026.

Working backwards, for a 10% ROE hurdle rate, we need to see US$210M NPAT annually. For NIC this is approximately $650M EBITDA assuming a 15% tax rate, or closer to $700M EBITDA at a 25% tax rate.

15% tax rate seems about right given the facilities currently have sweet-heart tax holidays from the indonesian government, the Pillar Two OECD 15% min global tax and the tax rates disclosed in recent reporting.

Sum of the Parts Earnings Expectations

Looking forward, the ENC ramp is central to the NIC earnings story and there is expectations of a huge uptick in earnings coming in the near future.

CY27 is a big year for NIC. We have ENC, Sampala, TMI and CNE all going into production. CY28 I model all these assets in steady state production and available the full year.

Short of some local disaster or large shock to the business, NIC is at an exciting point where all the build out is nearly done28 and the assets can be left to cashflow.

As always in commodities, you live and die with the commodity price. In the case of owning some of the best Tier-1 Nickel assets globally, any disaster/widespread problem that affects the area and causes production losses29 will have some shock-absorbing impact on the underlying commodity price.

ENC’s near the end of its commissioning period, and these plants are now nth of a kind and can ramp up fast. (There’s also the likely ability for it to ramp over nameplate which isn’t priced in anywhere). TMI and CNE I’d say the same thing for, just with lower equity shares. Sampala is free dig as soon as the pre-works are ready.

I have a one page map of all the asset’s earnings contributions and when they each turn on. CY27 incremental earnings in green and CY28 incremental earnings in yellow.

This cashflow profile illustrated on the below earnings forecast chart. I’m really going against my own principles here presenting a chart with such a strong hockey stick upwards, but I believe it.

Finally, my model30 obviously adjusts for depreciation and interest expenses, taxes and capex to get FCF. The near term FCF is significant, ca A$1.1B or A$0.25/sh through 2028. $0.07 in CY27 and $0.18 in CY28.

Given these assets should have long tails, 2029 onwards “should” look similar to 2028, and we should get half our cash back in under 3 years.

Here is what my model has and my waterfalls:

Bloomberg has similar figures, demonstrating the earnings uptick (whilst being more conservative on the EBITDA expectations). This brings us to valuation.

Valuation

NIC’s story and share price problem isn’t one where the valuation is opaque. NIC’s story is the lack of trust in the juristiction, lack of interest in owning Nickel assets, and lack of trust in the managment for stewarding the equity responsively.

The consensus numbers above are already extremely attractive and I think they under model CY28 somewhat.

I have this on about ~3 EV/EBITDA for CY28 following all the assets being ramped.

Risks

NIC’s operations and management are fraut with risks. Here are the key problems I see:

1. Nickel Price, obviously the #1 concern.

   1. Sub $13K/ton Nickel will decimate the ecnomics. Obviously playing the tier-1 side of things we would eventually get a supply response.

   2. $15K/t+ Nickel is fundamental to the investment case.

2. NIC management’s preference to play Nickel building games as opposed to making decisions in the best interest of the equity holder. There’s a propensity to think in the ‘long term’ interest of the shareholder, but when you are priced at only 3x forward, and with min 10% cost of capital, what happens 10 years out is a rounding error.

   1. When’s the next raise boys? What you buying this time?

3. Indonesian Government changing the rules. They are essentially playing god of the global nickel market. Indo is absolutely the global swing producer and too much power in the Nickel Market. So far they have been very supportive of the industry to fuel its growth and to also keep it profitable. This isn’t only a one way risk. NIC’s stake is in the ground (and diversified) across the value stream. So a change that hurts the processing rules can help the mining terms and vice versa.
   To date, the Indonesian government has been way more supportive than a hindrance. There are large gov vested interests in maintaining a ‘somewhat’ profitable industry to fuel the local economy via capital and labour.

   1. Change is bound to happen, but what knob is going to be turned and when?

   2. Quote changes, new plant approvals, new royalties, tax holiday changes, permitting hold up. The potential list is endless.

4. Large significant holder sell down.

   1. L1 has long suffered in this name and may be wanting to sell this down if the shareprice reaches closer to their breakeven, I’d expect $0.90-$1.00. They have been in it for 5 years, and this sort of earnings inversion might get them finally paid, get them out of the red and get the capital to their new ideas.

   2. There are large Indo/Chinese holdings in NIC. There’s a large element of control in a few hands. Are the owners more interested in Socialising the value creation ahead of taking the profits?

5. Operational issue. Much less worried as there is so many independent processes here, the Chinese plants seem to be the most reliable part of the company. Welcome to the new China. How Ironic.

   1. ENC ramp risk is there, but they have the key circuits working and producing MHP, so I am not worried. Also highly doubt the current El Nino will last longer than the typical El Niño and hope to see the rain come back in Jan.
      Their local weather report is here and there’s also a visualisation of rainfall across Sulawei too.

6. Natural Disaster / Wider global economic downturn.

   1. Will leave this to your own risk departments.

Investment Case

Whilst there’s always risk in the Nickel price going forward, the current pricing environment and sentiment is super low.

The name is at this point in its life where its essentially blocked from spending much more, has an imminent earnings inflection, lowering its leverage ratio and in turn slightly lowering its loan interest rate. The revenue/earnings/profit increases should eventually make good headlines. There’s a good story here. It trades closer to a bulk miner multiple and yet is fairly vertical.

We also that that nugget from the CFO on the 2026-06 Quarterly call: “We’re very well and truly at the end of our investment cycle”. Cap raises are seemingly out of the question in the medium term.

The current share price has come off recent highs. Post April 2026 it was closer to A$1.10 on the back of the (positive) Ore re-pricing, only to be brought back down presumably by Sulfur prices.

It’s dangerous to say, but we are probably closer to a bottom in the price than a top. Further drops in the Nickel price will have further supply side responses, which in turn should improve the Nickel price outlook. The Indo Tier-1’s will continue on.

The structure of the Nickel market have been forever altered by the competitiveness of the wider Indonesian operations. Huge spikes aren’t going to be likely with all this Indo processing online.

The earnings are inflecting from ca $100M/quarter now to ~$200M/quarter in CY27 and ~$250M/quarter in CY28. The HPAL margins should similar to what we see at ENC, but I believe the market is waiting to see the earnings before they are priced into the equity price. There’s huge opportunity at the current point in time.

There’s further operational upside with the propensity for HPAL to produce above nameplate and Nickel prices may increase.

There’s large economic incentives to the host nation to keep Indonesian Nickel profitable. The analogy of ‘The Saudi Arabia of Nickel’ is fair. They also hold the supply lever, so there’s a put under the Nickel price somewhere.

Given the low multiple only the very near term is important to at least get my money back within a few years. The assets seem of good quality, at current spot prices the economics work well and the revenue will generate enough earnings to cover the debt, taxation and adequate returns on equity.

I provided the bridge from a 10% ROE to a ‘minimum’ required EBITDA earlier, and I believe the ca US$650M-US$700M EBITDA required is very achievable. The underlying units have very good standalone ROA’s and we can buy the stock for close to its book value.

I believe the downside is fairly taken care of31 and there is lots of upside potential. The stock barely reacted on the recent ENC commisioning delay news implying little downside. A delay to such a key asset should move the stock. I find it unlikely that the market is fully expecting this name to sit at 3x EV/EBITDA with all these assets online. This is a niche name, has little focus on it outside a few dozen Aussie’s and is fairly under the radar.
If you don’t believe me, take a look at the 2026H1 call where the JP Morgan head of metals doesn’t seem to get where the US$1B EBITDA potential is and the NIC MD had to run him through all the unit economics of the operations one by one.

The nature of the assets are all very long lived too. There’s no part of the company that won’t be good for another 20 years. The company is somewhat reminsicent to me of the West African goldies. Simple high returning assets with long lives, priced as if they will only exist for the next 3-4 years at current rates, a dictatorial style government where the main concerns are juristicion risk and tax/royalty increases. A game of chicken of how much the asset makes vs how quickly it can be ‘Nationalised’.32 Gotta hedge your dictators.

In the case of NIC, there’s also large Indo/Chinese aligment on the register, so its not all ‘westerners’ on the equity side and ‘locals’ on the operating company and taxation side. Simply hurting the equity doesn’t tip the scales towards the locals (like in West Africa).

The impression I have is that an investment here at ~$0.80 receives a farily quick (few year) payback via earnings yield once all the assets are commissioned and turned on. Pathway for the assets to delever is clear and the assets can run for decades. The company is no stranger to paying dividends so money can flow out of the entity too.

The company isn’t too far from ASX100 inclusion if the next couple years go well. Then we can leave this to your mum to be the marginal buyer of this name in her superfund.

If the Indonesian Gov start talking about ‘super-profits’ or ‘fairness’ like the Aussie’s do this investment case can blow up spectacularly. NIC is a sitting duck.

Message to Management

Apologies in advance, but I’m working on the assumption that you are interested in improving your share price performance. If this is not the case just skip to the bottom point.

• Stop issuing new equity.

  • There is no need. I do not care if the opportunity to buy all of Weda Bay comes up.

  • Cashflow the assets and build trust with your shareholders.

• Be Disciplined.

  • Show consideration for Metrics per Share. Don’t just report EBITDA or Earnings, report EBITDA/share or EPS. You fell into this trap on the most recent AGM on slide 7 where you talk about how good your earnings and production are despite the Nickel price dropping, yet completely disregard the 72% increase in shares outstanding.

  • The business looks in good shape, the equity does not.

  • Your previous raise history has damaged company trust. 2023 was a disaster, the market cut you to sub 0.8 P/B and instead of investing in your company below book you invested above it… Might want to get an equity guy in your head count to sit around all day and help you avoid major fuck ups like this one in future.

  • There is no point investing in anything significant with an current EV/EBITDA of ~3 on likely near term revenue. Learn to Invest in your own stock.

  • You have run this thing for a decade and the Book is ca 1.1x-1.2x. The market is laughing at you.

  • Maybe don’t issue record dividends when your growth capex is sky high?

• Get the debt payments under control.

  • Appreciate there’s been a large build out, but slow down and get net debt down. The assets will naturally do this for you, stop fighting it.

  • The debt rolling off will also naturally help your EV and the market will reward the equity instead of the debtholders.

• Focus on FCF.

  • Get your cash going out to shareholders.

  • Make people want to own this. Let your profit from ENC do the talking.

  • You have had the FCF tropes in investor comms, but you don’t use FCF as a metric. The market is tired of and sees through tropes such as “Compelling Financials”, “Strong FCF Generation”,

• Run a Buyback constantly, adjusting it for available FCF.

  • There’s such little interest in this name it trades poorly on bad days and bad macro. Just soak up a small amount of the excess volume each day. Get your mates at Bell to do it for you. Even a few $M a year will help.

  • When there’s more surplus cash, run the buyback hard. Your stock is so cheap and fundamentally so close in value to the underlying assets you invested in, you should be buying back hard. It shouldn’t be hard to get the current EV/EBITDA up closer to 4.0 (a + ~30% for your long suffering shareholders who backed you on the HPAL move), and a 5x EV/EBITDA in CY28 is probably not out of the question. A 5x multiple would be closer to a 70% SP appreciation from today’s $0.80.

  • Note that if the buyback works, it will do almost as much heavy lifting as you have in 8 years getting the SP from $0.35 to only $0.80 (lol).

  • If you don’t see the buyback doing anything it means you haven’t done enough.

  • If you do it right, this weird mathematical effect might even help you have a LOWER share count in future.

  • All of the above will help get the equity into the ASX100. Your eligibility isn’t far off now if the current debt was converted directly into equity. With a bit of help with the multiple

• Get a stable dividend out to shareholders.

  • I get it’s not perfectly efficient, but do it. People need to see cash coming out of other jurisdictions and into ours. It will help with your multiple too.

• Look at selling the 2019 Vintage RKEF plants.

  • They got you where you are now, and you no longer need them.

  • Their returns are low and don’t stack up.

  • They will be the first to shut in in a lower Nickel price environment, further reducing their value.

  • They add unnecessary complexity and risk to your operation.

  • It almost doesn’t matter what you get for them. Cash into buybacks.

• Spend more effort on Story Telling of your company.

  • Quit with the fake looking renders of plants and EV’s. Look at the large Aussie miners in how they demonstrate their businesses and their brand.

  • The best videos of your assets are all uploaded on Google Maps by Indo locals, walking around your assets. There’s even a guy smoking in a truck cabin in one of the RKEF facilities. Might be time to fix this and get some better material out there. They also have more views than your videos on your own youtube channel.

  • There’s barely a high res photo of any of these assets. The best we have is some dated drone flyby videos and some photos with “Send from Whatsapp” in the filename.

• Where are all the details on TMI and CNE?

  • NIC has agreed to $400M of commitments into these and hasn’t even released a flashy rendering of either?

• Bit too much “Adjusted EBITDA” in the reporting.

  • As NIC moves out of the build phase and into the cashflow phase we need to see real profit metrics and FCF.

• HNC HPAL Cost reporting is poor.

  • Why did you not report the Detailed HNC Sales & Production costs in the 2026-06 quarterly? This is critical fine-grain detail at an asset hurt by Sulfur prices.

  • Why did you remove the Cash costs line from the 2026-06 Quarterly report?

  • Please upgrade your Appendix A in earning statements to disclose HPAL Unit Costs and get your team to be consistent across quarters. There is some sloppy inconsistent template work in the IR disclosures.

  • Might want to fix this up before HPAL becomes literally half your multi billion dollar company.

• What is the point of NIC?

  • Are NIC holders better off having these assets sold into Tsingshan where they are a natural fit?

  • What value does NIC add to these assets?

Summary

Let’s finish on a softer win. Despite the concern’s of environmentalists, there is a hugely positive economic story going on in Indonesia around the Nickel industry. Literally hundreds of new large processing facilities employing nearly 200K people, attracting global capital and trade flows is a huge win for the Indonesian people who are going to live better and longer lives through their additional wealth.

The millions who will escape poverty due to this Industry is not a headline we will read in our local papers. But alike what happened in wider Asia, is one of the most important factors in the world over the past 50 years.

I heed little worry about environmental impact in a tiny part of the world, with such density & efficiency and its global importance. High density is a good thing, as it means we are affecting the least amount of land required.33 You think your local economy didn’t need large scale land clearing and resource use to support improved human lives?

It’s amazing a developing nation can create such value at such a speed. It’s something we can all learn from.

Long Nickel Industries from $0.80.

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Notes

These pieces take me way to long to research and write. They is no ongoing coverage.

I admit I tried to write this with an LLM and it was beyond terrible. Unfortunately I had to painstakingly write it the old fashioned way. I did liberally use an LLM for the planning, charts/imagery, core model, financing history/lists and QC. All sources are referenced and apologies for my grammar.

Shout out to the boys that helped me on this. JG, JoG, AGdR.

I’m also on twitter in a more casual form. There may be some intermittent coverage of NIC there.

Disclaimer

The preceding is for informational purposes only and presented “as is” with no warranty of any kind, express or implied. Under no circumstances should this report or any information herein be construed as investment advice, or as an offer to sell or the solicitation of an offer to buy any securities or other financial instruments. The information herein is for discussion purposes only and is not a trading recommendation or endorsement. Investors are encouraged to do their own work before transacting in any securities mentioned. Investing in the stock market includes risk, including the risk of loss. Investing in securities mentioned involves significant additional risk beyond the average stock and may not be suitable for most investors. Please consult a financial advisor before making any investment decision.

Note I do not take money for this research. It’s literally not possible to support me financially.

• Long Santos.

• There is no green energy transition. Hydrocarbons are under-rated, under appreciated and the critical lynchpin of the Australian Economy. Gas will always be needed.

• Santos is a reasonably priced basket of good assets, with significant importance to the country, with 5 Catalysts towards price appreciation.

• I don’t believe the XRG/ADNOC takeover occurs due to FIRB. There is a pathway where PNGLNG is divested to XRG/ADNOC, leaving a very interesting stub.

• The management is so burned through government processes that the company has simply pivoted hard towards maximising shareholder returns and investing more selectively.

• 2026 FCF looks excellent and significantly above prior years. Due to Pikka & Barossa coming online and lower CAPEX commitments.

• Attractive development opportunities via Narrabri (key for Domestic Gas) and Pikka Stage 2.

Santos was always going to be my second write up following $KAR. In the context of the recent XRG takeover offer I have accelerated the write up and reduced the depth I would like to have provided. Thank you for the feedback on $KAR.
(Note I consult full time in engineering and have 2 young kids. I also have a data startup I’m trying to get off the ground; time is short 🙂 ).

PS: I am hoping to pivot my employment from engineering into an investment analyst role in Aus. I have built some fairly unique Australian real estate datasets and a bunch of interesting Japanese and European equities beyond energy. Happy for anyone on the institutional side to reach out.

PPS: Energy and Policy/Politics are deeply entwined. My research and understanding drives my politics, not the other way around. Politics makes my brain hurt, I avoid it wherever necessary.

Company Summary

Santos Limited (ASX: STO) is a major Australian oil and gas exploration and production company, with significant operations across Australia, Papua New Guinea and North America. The company is a key supplier of natural gas to the Australian domestic market and a major liquefied natural gas (LNG) exporter to Asia. As of June 2025, Santos Limited has a market capitalization of approximately A$25.2 billion.

Energy Background

Energy is needed to sustain life. The developed world is built on the back of cheap energy, delivering the standard of living we are used to.

There are 5 key pillars of modern energy systems in our society: Affordability, Reliability, Scalability, Energy Density, and Environmental Friendliness. (Vacliv Smil). Woodside popularised “Energy Security” as another element post the 2022 Russian invasion of Ukraine.

Harnessing energy is a trade off. There is no single right solution, every generation form has positives and negatives. People are generally complacent over where energy comes from and generally concern themselves with more useful and important endeavours.

Hydrocarbons (Gas/Oil/Coal) are all very cheap and efficient forms of energy, related to their energy density, ability to store/transport and their development costs. More notably our industrial base is designed for hydrocarbons.

Modern Politics being heavily focused on climate has driven left leaning populations and their leaders wildy against hydrocarbons, demonising them due to their byproducts of combustion, whilst being utterly reliant on them and not recognising their importance. Most climate “solutions” are deeply hypocritical.

Australian Policy Backdrop & Renewables

Santos and Woodside are the two Aussie majors that receive most of the backlash, a big part of this is because they are public with a lot of information available about them and have large marketing wings to compete for capital. The products sell themselves, the marketing is purely for brand and reputation reasons1.

Governments, representing these populations, are deep in creating policies attempting to reduce hydrocarbon reliance and use.

Most of the discussion & hype around reducing hydrocarbon’s use is around only Transportation and Electricity generation.

• There are 4 key pillars of civilisation each built with hydrocarbons: Ammonia/Fertilisers for food; Plastics, Steel and Cement.

• Good luck running something as heavy as a plane with enough Ammonia or Batteries to cover the energy requirements. The physics simply doesn’t work2.

The hypocrisy (or cognitive dissonance) of the Australian Government is world class in that:

• Hydrocarbons are the #2 export of the country, mostly into Asia.

• The government has committed to significant emissions reduction targets. Discouraging their use. Whilst backing mostly Solar and Wind; two technologies we do not produce indigenously, mostly from Asia.

• These renewables have added significant cost and complexity into the country’s electricity grid, whilst not replacing any previous component of the grid3.

• Recognises emissions from Australia should be reduced, whereas does not comment on overseas markets emitting over 50x the CO₂ emissions into the same atmosphere and growing. “We need to do our bit for the climate despite others’ actions…”

• Recognises importing CO₂ from overseas and sequestering locally in Australia is eligible for tax incentives4, whereas exporting coal overseas receives no penalty.

• The main punching bag for climate targets is the electricity grid, fueled by coal power plants and gas plants. There is minimal discussion among fertilisers, steel and air transport as there is no simple product to sell.

Parliament, Government bodies (AER, AEMC, CER, ARENA) and Quasi government bodies (such as AEMO, Transgrid and State Energy Companies) have been completely corrupted by the idea of renewables being able to widely replace Hydrocarbons in our Electrical Energy system. (Namely Coal/Gas).

• Each body, no matter its makeup, is generally captured by the targets in key AEMO documents (ISP/Gencost), and the idea of “Net Zero”.

• These targets are junk and have been completely discredited by a small, intelligent community of energy commentators, namely Aiden Morrison and Ben Beattie.

• There is a large amount of public support for these policies (however unrealistic), so I am not merely blaming Canberra.

• To make things worse, the Australian Government and ALP has also demonised Nuclear Power. This is largely unique among centre-left governments, of which global peers are typically pro Nuclear.
  

Renewables5 are overrated, and should only make up a small part of our Energy Systems. They are a distraction.

• The power density is simply too small, the source too unreliable and quite simply cost in-efficient.

• There is a place in the mix, a small place. They need so much backing up, such that it's much more effective to simply run the backup facility at high utilisations.

• There is no country that has a high mix of solar and wind and cheap power.

• There are huge diminishing returns where renewables can reliably offset baseload electricity generation. I theorise only around 5-10% of a grid can only be renewables.

All of the above has affected the Australian grid management and policy:

• No new Coal plant has been built since 2007.

• There's a general view that gas is mostly used for Electricity Generation. The use of gas as an irreplaceable chemical feedstock is overlooked (collateral damage). More importantly, the feedstock is the most efficient way to heat a blast furnace; a plant that can not survive without a constant flow of gas.

• Oil/Gas/Mining projects experience significant delays, taking 5+ years to get all required approvals. (WHC Narrabri Stage III, WDS North West Shelf Extension, STO Narrabri)

• Electricity prices are comparatively high, in a country blessed in resources typically used in power generation (uranium, gas, coal).

• Consumer Gas prices on the eastern seaboard are undeniably high.

• Electricity and gas pricing mechanisms in Australia are so broken the market based pricing system is not longer a real market.

  • The Australian Energy Market Operator (AEMO) frequently intervenes to ensure system security, often issuing directions to generators to switch on or off, irrespective of price signals. In 2022 AEMO issued more than 6,000 directions6.

  • The suspension of the entire NEM in June 2022, when market pricing failed to keep supply and demand aligned7.

  • The Federal Government imposed a temporary $12/GJ cap on domestic gas prices in December 2022 under the Gas Market Emergency Price Order, following prices spiking to over $30/GJ8.

  • AEMO Reports constantly (prematurely) warn around upcoming gas shortages.

• Australia has large LNG exports (including Santos at GLNG), exporting the product in long term contracts that are often more economically attractive to the contract party than local consumers. This has further fueled voter’s opinions against the large gas producers/exporters.

• The electricity generation types in the country are politicised. MP’s constantly refer to certain energy mixes at certain times to meet their agenda9.

• There is a general hesitancy for governments/regulators to approve new gas projects/pipelines as there’s a perception where gas can just be taken away from the LNG exporters (constitutional issues), or redirected from WA down to Victoria (magically, where no pipeline even exists).

• Victoria is the ‘leader’ in this area whereby their main supply source being the Gippsland basin has been declining for decades and is now near end of life; yet no new supply is being brought on. Many successive governments have fell into the same Green trap, and it's gotten so bad that:

• Victoria is planning to build LNG import terminals to import LNG10.

• Recent reports of Victoria using 13% of their yearly gas allocation within 3 cold days in winter. This just smells of misallocation of resources11.

My somewhat informed view is that Australia (Eastern) is too complacent over the energy reliability situation; government leaders are more driven through political promises than any sense of reality (whilst of course having fantastic advisors screaming at them to build more gas). We have become a fairly energy illiterate nation, whilst having some of the most globally significant resources still in the ground.

Australia is the Eskimo that buys Ice.

I do not believe that Australia is able to easily course correct and are more likely to respond to an acute crisis, than pragmatically respond in advance to reduce the problem. This is partially due to policy and the people running the country; but also the fact that energy projects take a long time to build.

I think that Australia is completely unable to meet the 2030 82% Renewable target and the 2050 Net Zero target. These targets are more akin to economic repression than helping the climate12. Having a lack of Nuclear generation is a big factor in my thinking, reality is another factor. If Australia (or NGO’s) truly cared about having a low carbon grid, they would not oppose Nuclear.

The Solution is Gas

What does a capitalist do in this situation? Own the solution13.

The current Labor majority Australian Government has the pleasure of being the recipient of their own current energy policies and targets. Their 2025 federal election win was so large and decisive, they are speculated to be in government for multiple future terms.

Meaning they will likely be in charge from 2022 through 2031; a timeline that includes their own 2030 renewable targets, which they will miss by a huge margin14. This I attribute to their anti-nuclear stance, the only real pathway to meet their 82% renewable goal.

Current policy is unlikely to change direction, yet we are faced with an energy problem where four of the five available energy system types aren’t appropriate:

• Solar: Doesn’t work at scale; low density; batteries too expensive to compete.

• Wind: Too irregular and low density.

• Nuclear: Politically untenable.

• Coal: Politically untenable.

• Gas: The only remaining option.

I theorise the Australian business & political elite are running the figures behind the scenes and struggling to come up with anything else. Yet I also see a lot of political posturing unable to clearly define whether to Ban, Tax or Expropriate gas.

To be clear, gas is a much cleaner burning fuel than coal. It has similar energy density and costs, Australia has thousands of gas industry professionals who have created some of the best gas handling & compression facilities in the world. The country should be working overtime to switch as much of the existing coal (and renewable) generation over to high utilisation gas plants.

Finally, post the 2025 election we seen a grab bag of events, all tip-toeing back into hydrocarbon reality:

• AustralianSuper are back as a significant holder of Whitehaven Coal equity; after a very loud exit campaign in 2022, they are now a 7.3%+ shareholder.

• Macquarie opening up to Coal investing.

• Westpac opening back up to Gas Lending.

• Federal Government shuffling Environment Ministers.

• Federal Government approved extension for Woodside’s North West Shelf to continue to produce gas to 2070.

• The Victorian Government approved the concept for an LNG import terminal.

Looking to Markets now, what Australian Gas Assets are listed for private ownership:

• Power Generation & Retailers: Origin, AGL.

• Oil/Gas Producers: Woodside, Santos.

  • Smaller caps: Beach, Amplitude (formerly Cooper), Tamboran. Strike.

• Australian refiners: Viva and Ampol; I can not take seriously vs global peers and are glorified Kwik-E-Marts.

• Pipeline Infrastructure: APA.
  

These sectors are fairly unpopular, industrial, under-owned, low multiple, high capex, high emissions, poor brand marketers and protest targets. What could be more ironic to own?

Let's get back to Santos…

Santos’ Assets

I see Santos as a bit of a hodge podge of assets from opportunistic acquisitions all over Aus with PNG and Alaska in the mix. Their assets are globally significant, just geographically and operationally disparate.

The core of Santos was historically the Moomba/QLD onshore assets; whereas now LNG takes centre stage.

PNGLNG is the crowning asset, and was from an opportune purchase of Oil Search (ASX:OSH) in the depths of Covid with Oil Search suffering extreme share price declines related to large debt obligations with impaired short term cash flow15. PNGLNG is non operated, partnered with ExxonMobil, world class operators of large scale assets.

The Head Office is still in Adelaide, largely administrative and midstream/downstream focused Moomba support. Most of the upstream engineering is done out of the Brisbane Office.

LNG Assets

• PNG LNG (Papua New Guinea)

  • Operated by ExxonMobil; Santos holds ~42.5% via Oil Search merger

  • Producing: ~8.5 Mtpa

  • Fields: Hides, Angore, Juha, Kutubu (upstream)

  • Infrastructure: Hides Gas Conditioning Plant, LNG plant near Port Moresby

• GLNG (Queensland)

  • Operated by Santos (~30% stake); partners include Petronas, Total, KOGAS

  • Producing: ~6–7 Mtpa

  • Based on CSG (coal seam gas) fields around Roma, Fairview, Arcadia

  • LNG Plant: Curtis Island, Gladstone

• Barossa to Darwin LNG (Northern Territory)

  • Barossa gas field (offshore NT) to backfill Darwin LNG.

  • Santos is operator and ~62.5% owner.

  • Construction of FPSO complete (and on location), 5 wells drilled and ready to go; subsea infrastructure hookup ongoing.

  • Darwin LNG plant originally supplied by Bayu-Undan (now depleted).

Oil Assets

• Dorado (WA offshore)

  • Large undeveloped oil field in the Bedout Basin.

  • Discovered in 2018 via Quadrant Energy.

  • Santos: Operator, ~80% stake.

  • In FEED; oil-focused Phase 1, gas optional.

• Cooper Basin (SA/QLD)

  • Historically oil-rich (Jackson, Tirrawarra fields).

  • Still produces light crude oil; declining volumes.

• Pikka (Alaska)

  • Onshore oil project on North Slope, Alaska

  • Acquired via Oil Search merger

  • Santos holds ~51%; operator

  • Target: ~80,000 bbl/d at full production (Stage 1 under development)

WA Assets (Gas-focused)

• Offshore Gas Fields (Carnavon Basin) (Ex-Quadrant Energy assets)

  • Reindeer field – feeds Devil Creek

  • John Brookes / Spar / Harriet – feed Varanus Island

  • Varanus Island Hub – gas processing and export

  • Devil Creek Gas Plant – onshore gas processing near Karratha

  • Santos markets domestic gas into the WA gas grid

Midstream & Infrastructure

• Moomba (SA)

  • Central hub for Cooper Basin

  • Moomba Gas Plant: major compression, processing, liquids separation

  • Moomba CCS Project

• Darwin LNG / Bayu-Undan

  • LNG plant in Darwin (1-train, ~3.7 Mtpa)

  • Previously fed by Bayu-Undan (Timor Sea, now depleted)

  • Barossa field now under development to supply it.

The Santos Investment Case

My case for Santos is simple; a good set of assets at a good price, exposed to highly valuable commodities. Oil, LNG and Aussie domestic gas. PNGLNG the standout which will last for 30+ years, with the asset hidden away from most of the world, whilst ExxonMobil run the show behind large walls like a micronation; and Santos busy adding new PNG wells for their feedstock. Pikka and Barossa are both near complete and about to turn around and provide significant cash flow. FCF has been marginal the past few years due to heavy investment, it is due to inflect to ~US$1.1B in CY2026 and stay around that level for the near future. The portfolio is largely low decline LNG assets.

Santos even has a legitimate carbon sequestration project in Moomba, sequestering appprox 10% of South Australia’s emissions into a single well. The system is already fully built and operating away. This half the company should receive the latest round of tax credits too. Santos is uniquely set up to store CO₂ inside old depleted reservoirs; having proved the concept, creating the tax break and marketing potential to actually meet the ‘net’ part of net zero; a concept most seem to miss.

I am highly skeptical of any company (especially energy companies) talking about reducing emissions and carbon footprint, yet even I can acknowledge this strategy has legs.The CO₂ stream is directly from the Moomba plant, with the appropriate expertise already in house to not only dry and compress the CO₂ but to also understand the regional geology where to store the CO₂ and to also develop the injection well is, unfortunately legitimate carbon sequestration. Santos can use this to offset a lot of their carbon liability. Onshore injection wells close to existing plant/well infrastructure would be very cost effective.
Probably won’t see this mentioned in the next Extinction Rebellion protest.

The company’s management has pivoted the last couple years inline with US producers; who have now truly focused on shareholder returns being more important than growing the company. Good oil company management suites are responding by reducing CAPEX, increasing buybacks and prioritising return of FCF/Net Income. This is evident across the majors, the mid tier, and specifically Santos in AU16.

The CEO Kevin Gallager is obviously fairly sick and tired of Australian bureaucrats and lengthy approval processes and has pivoted towards prioritising shareholder returns. He has been verbally hostile towards Victoria; literally comparing their energy regulator to North Korea17.

At the Investor Day in late 2024, Santos upped their shareholder returns criteria from “>40% of FCF” to at least 60%. Santos management has absolutely got the message around prioritising shareholder returns. This looks excellent.

Equity and Valuation

The market priced $STO equity as low as ~$5.21 on April 7th 2025 during the US Tariff shock. This seemed very low given the historical levels18 of the Share price and the value of PNGLNG alone. The equity is currently around $7.70 (with a 2025 high of $7.83).

A deterministic valuation on any Oil/Gas company will yield predictable results of low EV/EBITDA’s etc, but the story with Santos is the 2026 FCF.

With 2026 Production expected up closer to 120kbd (vs the current 99kbd), at stable unit costs we have an EBITDA setup up from the previous US$3.5B level to ~US$4.5B (A$7B), or a Net Income that is moving from US$1.0B to US$1.7B.

FCF goes from ~US$200m in 2024 & ~US$0M in 2025 to US$1.1B+ in 2026 onwards.
Thats A$1.7B/year on a Market Cap of $20-$25B for a ~10% FCF yield whilst still investing into other assets with Narrabri up the sleeve. Adding to the free cashflow seems very reasonable in a world hungry for more LNG.

Outlook

Santos has a happy coincidence/plan in 2026 whereby their development assets pipeline reduces and their cash flowing portfolio increases; FCF turning on a dime thanks to Barossa and Pikka.

The Development Portfolio has two standouts, one is Pikka Stage II, the other is Narrabri.

Narrabri is an onshore gas field in NSW, approximately located just outside of the Australian east coast population centres of Sydney/Melbourne and of appropriate size to contribute in size to that market. Having this field sitting waiting on regulator approvals, whilst gas prices rise as Australia; whilst having no obvious value of this field in the current share price is just beautiful. FID for the field is expected late 2025; it will be a no brainer.

Pikka Stage II is pre-FID, but a wider development of the existing Pikka Stage I development. Potential to take an 80kbd field up closer to 150kbd. Just more cost efficient barrels in a good jurisdiction.

The other elephant in the room is the XRG (ADNOC) Offer. We have $8.89/sh currently offered for all of the Santos Equity (~AU$29B for the equity, with ~$6B debt)19.

• The stated strategy of XRG/ADNOC is to have 20-25 Mtpa of LNG production. They have the deep pockets to take over Santos and the basic trust for the commodities that built the UAE.

• The share price trades at $7.70 whilst I write this. The market doubts the ability for this takeover to happen, centered around FIRB review.

• This is a major conundrum for the current centre-left Australian Government. A government that has been openly hostile to gas and Santos, is now tasked in defending Santos against the Emirates. The typical regard for jobs and maintaining the HQ is expected and cliche. The regard for the equity is more of an unknown. The key consideration is the ownership of east coast gas reserves. Assets worth only a few billion, critical to a $1.7T GDP economy.
  

Santos is sitting with 5 catalysts:

• Whole company takeover offer at $8.89+ by XRG/ADNOC. Whilst I assume this will be blocked by FIRB, Santos will be higher on the radar inside the Federal Gov, the media and Institutional investors.

• Narrabri FID and all approvals completed, leading to a new key source of gas for the domestic market; more FCF. Selling gas into $10+/GJ with onshore development costs has no outcome but being wildly profitable. The eskimos are running short of ice.

• PNGLNG alone being taken over by XRG and the Australian assets + Pikka remain as “Santos”. The leftover “Santos StubCo” becomes mostly Australian Gas; will continue to power Australia and will continue to be the target of protests and the butt-end of government policy. The StubCo assets would all be in the early or mid life, with significant lives left, could then immediately develop Narrabri assuming some good will from the Government that has presumably just blocked their takeover. Management continue their shareholder returns.
  Optionality around selling Pikka to an American producer.

• 2026 FCF improvements following Barossa and Pikka coming online.

• Typical oil price Geopolitical price movements. I commonly tune this out as the upsides in pricing (Middle East) typically are mirrored in equivalent downside risks (US/China Tariff War), which seem to end up averaging each other out.

My take

• The ASX doesn’t deserve Santos. The Emirates are solving a problem that Australia has no interest in fixing.

• I think FIRB block the take-over on “National Interest” grounds and the premium vs undisturbed mostly remains embedded in the Santos share price20. However the discussions are fruitful in that the Australian Government recognises the importance of Santos providing onshore gas to the Eastern Seaboard. The discussions help accelerate Narrabri behind the scenes.
  There is a massive irony here as the media speculates on this takeover; what I read is that regulators are worried about Emirati influence on the Australian domestic gas supply; whilst it is literally the Australian government holding back and slow-balling project & environment approvals (and legal challenges) against new projects21. The XRG offer somewhat forces the hand of reality.

• I think XRG/ADNOC take PNGLNG off Santos’s hands, at a solid premium. I am guessing ~AU$4.0/sh22. PNGLNG has little strategic national importance to Australia. The contract customers are all Asian (China. Japan, Taiwan). PNGLNG has a little bit of spot capacity23.

• If the above doesn’t happen, PNGLNG would work better as a standalone equity, not mixed into the Australian asset base. PNGLNG cash flow has significantly contributed towards building Pikka and Barossa, however that is now no longer needed.
  A split of PNGLNG from Santos would help Australian resident dividend focused investors collect high franking on StubCo, whilst the rest of us holding the equity for the actual underlying assets would appreciate the pureplay LNG exposure in close vicinity to key customers.

• The Santos StubCo would likely be very interesting. Say it trades at half of the current Santos equity, its cashflow profile would be excellent and well worth owning, would be able to return significant cash, be able to take a lot of depreciation and be large enough for institutional investors.

• Similar equities in the US get valued at better multiples. Pretty much any Aussie listed oil/gas/energy company is better off in private hands or merged into something that can be listed on US markets to support S&P500 Index inclusion. Sorry juniors.

• In the business as usual scenario, 2026 looks excellent for Santos. I’m genuinely looking forward to their results.

• Aussie super funds should be buying Santos hand over fist. The equity is fairly well priced, has significant near term catalysts with long life high return assets and can meanwhile feign success in saving the Australian East Coast Gas supply.
  In all scenarios above there is an equity return available via a transaction and a more concentrated portfolio of assets that all pull their weight.
  
  There is significant room for further Institutional ownership, current ownership is surprisingly fragmented. There seems to be no significant holders other than two index funds, which themselves only represent ~12% percent of the equity. (State Street at 6%, Vanguard at 6%).

  
  The whole idea of Aussie Superannuation funds should be to own assets like this. Key of importance to the nation, good value, reasonable yields and of long term nature. Australian Superannuation funds are generally farsical capital behemoths working just 9-5 and mostly buying overpriced Banks, BHP, Index Funds, Table Salt mines, Profitless Landlease communities and high multiple toaster manufacturers.
  I am personally shocked there is such low institutional ownership here and none of the bigger Australian Super names are near this thing in size. (The highest seems to be REST with 1%).

  ---

Disclosure

• This information is for general knowledge and informational purposes only and does not constitute financial, investment, or other professional advice.

• I have a reasonable long position established many years ago. I also had OilSearch following their 2020 falls, I recently added in April 2025.

• I have no association with the company other than the equity holding.

• No Assistive Technologies were used in the creation of this material. I didn’t even run a grammar check sorry :).

• This article is a little rougher than I would have liked, I wrote it in a couple late nights, I’m still up at 2am getting it ready for Monday morning.

Executive Summary

• Karoon Energy is a small (~AU$1B) Australian Oil and Gas E&P, fairly new to owning producing assets, has recently expanded its footprint a little faster than it can handle and has been severely punished by the market for doing so.

• Getting strung along by LLOG on a very expensive capex campaign on Who Dat, whilst their core Baúna business experiences significant operational issues and downtime. The Who Dat asset has disappointed in its first 12M of ownership, dramatically diluting EPS and destroying FCF, whilst the opposite was promised.

• The company needs to focus on equity economics and not simply empire building. The organisation has grown though equity issuance, and not equity growth. Focus on building per share returns.

• Company has been uncharacteristically unlucky. The core assets are reasonable.

• At ~$1.30, significant opportunity beckons. Market has punished the equity.

Introduction & Background

Karoon Energy is an ASX listed E&P company. They own 2 producing fields, Baúna1 in the Santos Basin (Brazil) and Who Dat in the Gulf of Mexico (GOM) (USA)2.

Karoon Energy was historically an ASX listed explorer, however in late 2020 they opportunistically purchased the Baúna field (in Brazil) from Petrobras.

The company was a single asset company for 2 years until the acquisition of the Who Dat field in late 2023.

Baúna has worked out well. The asset was bought at a good time and at a reasonable price. Value was added to the field immediately through successful workovers and 2 new wells, lifting field production from ~15kbd to ~35+ kbd. (The share price moved commensurately). The asset has strong free cash flow, the reservoir & oil quality are very good, the asset quality is high, production rates are reasonable for the size of the investment and the field is declining around ~15%/year.

The Baúna field is nearby two other undeveloped Karoon fields, Neon and Goia. These fields have been studied one way or another since 20133.

KAR presented a “Strategic Refresh”4 in 2021 where they reframed the business around also being a hydrocarbon Producer, outlining their new base business (operating Baúna) and their growth opportunities. They are focused on four key aspects:

• “Operational Excellence”

• Intervention & Patola Development

• Neon Area Development

• Brazil M&A

Then in late 2023 Karoon surprised the market with a very large M&A deal, purchasing the Who Dat5 field offshore Louisiana (Mississippi Canyon block) in the Gulf of Mexico USA.

Not only had Karoon strongly deviated from its stated M&A direction of specifically looking at mid-life ex-Petrobras assets in Brazil (and Neon/Goia), they moved into a completely new country, jurisdiction and Basin.

Karoon raised a significant amount of debt & equity to finance this acquisition (US$720M debt & equity) to pay for the new GOM field. This cap raise top ticked the share price, which it has never gotten back to.

The equity component of the raise was very large. My initial thoughts were that there was a lot of slack in this newly issued float that the market wasn’t very interested in. Oil Companies equities are not high on the radar of investors, especially small Australian listed producers with a hodgepodge of tier-2 assets.

Karoon also took on significant debt (including issuing a $350M bond) to finance this purchase, levering up the organisation.

Notably, Karoon became a minority partner not only on Who Dat, but also a large component of their asset base. Karoon are now essentially held hostage with a partner who is spending a lot of Capex sustaining and growing Who Dat6. The Who Dat field operator and majority owner LLOG has 2 active drillships, which of course brings opportunity and a large bill7. These ships have contributed two ‘successful’8 near-field discoveries, which the market seemed to have absolutely no interest in.

Problematically, the Who Dat field went offline almost immediately, and has since been plagued with operational issues and has had two hurricane path preventative shutdown related since it showed up on the books.

This capital spend has become the largest issue that Karoon currently faces, on top of adding an asset that was dilutive to EPS. The current amount of capital spend completely changed the company, dramatically changed the return profile of the organisation and has been poorly received by the market9.

Meanwhile, Baúna has also struggled operationally, having significant and serious downtime, both on topsides and downhole.

Administratively, Karoon leadership has been under significant pressure from activist investors10 encouraging the company to reduce capital spending and focus on shareholder returns. This is the general narrative across the largest and most professional oil companies in the world who are firmly focused on providing more return on capital11.

The 2024 Karoon AGM also had some fireworks whereby the Management team had a 26% vote against executive pay levels given the performance of the company12.

The activist case can quite simply be summed up by the following quote:

“Samuel Terry argues if the company changed its strategy, it could pay an annual dividend of 40¢ to 50¢ – equivalent to about a 20 per cent yield at current prices.”13

This pressure continues into 2025, with KAR still heavily investing new capital into Who Dat.

To the board's credit, they have listened and have met some basics such as announcing a small maiden dividend (~4c) and starting a small amount of buybacks.

Looking holistically, given the dual Baúna and Who Dat outages during 2024, it seems we have an organisation that is spread too thin and its focus has been lost and needs to get back to basics.

Sitting here in late 2024, Karoon is in the current State:

• Baúna field:

  • Topsides plagued by Gas compression issues, a major well down due to a blockage,

  • The entire field just restarted after being offline due to a mooring system failure and emergency situation.

  • B-88 Well still Offline (~2kbd), awaiting LWIV to correct.

• Who Dat Field:

  • Topsides having Gas Compression issues, with associated downtime.

  • 2 Shutdowns due to hurricane path proximity.

  • 2 Recent nearfield discoveries.

  • New drill well (WDS) expected to spud shortly in 2025-Q1

  • Extremely high spending at Who Dat, where KAR are not in control.

• Neon/Goia:

  • Continuing to appraise the fields, and managing significant subsurface risk.

• Management:

  • 4 production downgrades in 2024.

  • Under pressure from local Activists owning a significant chunk of the company.

• Market:

  • A share price down 42% since the WhoDat Acquisition.14

  • A share price down 54% peak-to-trough in just over a year.15

  • An oil price which has not cooperated, generally stuck in the $70-$75 range.16

The question remains: how much worse can it get?

Asset Analysis

I am looking at Karoon by breaking it down into its constituent assets. This is of course from the outside looking in. I’m fairly new to the name and have only been following the company since 2023.

I leave any analysis of the wider macro or oil price environment to the reader. My analysis considers a neutral oil price at its current level (Brent at ca $72).

Neon / Goiá

The current organisation makes more sense after first looking at the Neon and Goiá fields. These are both discoveries from the earlier explorer days of Karoon, well before Baúna arrived on the scene.

Neon was discovered by Karoon in 2015, appraised further in early 2023 and has had a total of 3 well drilled to date17. The field resource size is: 1C of 30 MMbbl and 2C of 55 MMbbl in 2018, increased slightly in 2023 to 1C of 38 MMbbl and 2C of 60 MMbbl18.

Goiá was discovered in 2013 and has had 2 wells drilled to date19. 2C Contingent Resource of 27 MMbbl booked in 2018.

Without delving too far into resources/reserves, the upside scenario at both fields are roughly comparable to the existing Baúna field with ~55 MMbbl 2P Proved+Probable. Whilst this comparison seems appealing, it is too optimistic. The size of the prize is reasonable, but significant geological concerns exist. Discussions of the field continually reference subsurface risk (geological containment/extent presumably). There is very little information available to the exploration geologists, and the geological size of the fields is not large.

Secondly, for this development to be successful with ‘borderline economics’20 it requires:

• Geological and operational success in upside scenario at Goiá

• Geological and operational success in upside scenario at Neon

• Large Capital outlay, Presumably ~US$1B for field development and other ~US$1B for some sort of cut price FPU21

Further, developing these fields would be extremely expensive22 as it would almost certainly require another FPSO/FPU for these fields. The distance from Goiá to Baúna is 50km and the distance from Neon to Goiá is 10km. This distance back to Baúna is likely too long for a subsea tieback and would push the technical/operational limits of the local oilfield.

Usefully (and hilariously) on a recent Neon/Goiá area slide23, Karoon state they have “Strict capital discipline for investments - minimum mid-teens IRR", suggesting a hurdle rate of 16%. With a cost of capital of easily 10%, a 6% margin for development risk is tiny and not worthwhile.

The company flatly states that Neon/Goiá is a “...robust project at 2C level, but sub-commercial at current 1C Resource”, meaning a disastrous outcome in a non-ideal situation, in an endeavour with low base rate success rates.

Lastly, the company has very little field development experience. Every single producing well this company owns has been discovered and developed by other parties. KAR have purely just been the financier and custodian, raising capital, running into purchases and continuing existing drilling plans24.

The maximum operational extent Karoon has undertaken is the management of a drillship adding 2 new wells to Baúna via a tieback and a new flowline into the FPSO. These are standard greenfield subsea operations and routinely performed by consultants or new hires. This is a world away from developing a new field.

Neon/Goiá are best thought of as long term pet projects. The resources are not large, but not nothing. They have been discussed and part of Karoon for nearly 10 years. The 2016-2020 Baúna acquisition idea was presumably highly influenced by the proximity to Neon/Goiá.

The assets surely do not stack up to the board, especially in late 2024 with a lot of other issues. I understand the need to string along the market and local regulator to maintain the sunk cost into the field and to maintain the leases, but the Neon/Goiá endeavour should be put on pause25. The market takes this development like it's going ahead and has priced the capital destruction into the share price26.

There is potential here, but the spending at Neon/Goiá must be evaluated vs other available options. There is a hypothetical long term potential that Neon/Goiá inherit the Baúna FPSO following the end of the Baúna fields life, however the timing here is unlikely to line up.

Baúna Field

The Baúna field is in the Brazilian Santos basin, block BM-S-40 and is 100% owned by Karoon. It is a conventional oil field 210 km from the mainland, in water depth of 275m27 with good oil quality28 and reservoir quality. Petrobras discovered the Baúna and Piracaba fields in 2008 and put it into production in 2013. Production plateau was 70 kbod. This is the core asset of the organisation.

All wells are subsea, tied back to an FPSO29 named Cidade de Itajaí. There are 8 Oil Producers, 2 Water Injectors and 1 Gas Injector.

Publicised negotiations with Petrobras go back as early as 2016 as part of a large Petrobras multi asset sale to reduce debt. This was later cancelled in March 2017. In 2019 the field was re-tendered and Karoon signed the binding offer. The transaction was completed in late 2020.

Geology/Reservoir

The Baúna area consists of 3 oil charged Oligocene turbidite sandstone reservoirs, Baúna, Piracaba and Patola. There is a strong water drive aquifer. Baúna and Piracaba are regional stratigraphic traps. A strong fault separates the Piracaba and Patola reservoirs.

The reservoir quality is extremely high. The available petrophysics data released discusses 30% porosity, 2-6 Darcy permeability, and horizontally homogeneous sands that are 10-40m above water contacts at depths around 2000m TVDmSS.30 Reservoir Drive mechanism is a water drive. These are ideal parameters, able to sustain very good economics and are generally analogous to prolific parts of the North Sea.

Looking at available well logs, the quality of the sands is unquestionably very high. We have two logs from an early Baúna presentation whereby multiple large 10m+ TVD sand packages are evident across the Baúna and Piracaba reservoirs. These logs are beautiful.
On the micro level, this is about the best quality sandstone reservoir you can hope for, especially in combination with a strong water drive. About the only step up from here is a Saudi Style vuggy carbonate.
The sand quality alone alone does not determine much, the reservoir sands still needs to be large, the standoff from the water contact needs to be significant and you have to drill it correctly. These sands have extremely high potential for spectacularly economic drill wells, especially in the long tail of production. I assume this sand quality is representative of the area3132.

Wells

Some information on the well design is available through the disclosures. The well design is presumably similar across the field, and consisting of:

• 30” Conductor

• 13-⅜” Surface Casing around 1200m

• 9-⅝” Production Casing into top reservoir. ~2000m TVDss

• 5-½” Tubing (assumed, Unknown, but common with 9-⅝”)

• Open hole cemented and perforated. No obvious sand control (or issues)

• Upper Completions with:

  • DHSV’s

  • Artificial Lift: ESPs or Gas lift (some tubing strings originally installed with no artificial lift)

  • Downhole Gauge

Artificial lift is necessary on this field at current pressures/water cut %’s. Wells without artificial lift no longer flow (SPS-88 shut in due to GLV blockage). This means ESP’s or completions with Gas lIft are critical. This also means gas compression, liquid handing and power supply are also critical.

This logically flows onto topsides water handling capacity. Karoon has seldom mentioned anything along the lines of water handing capacity being maxed out, the only mention is on the startup of the Patola wells in 2023. When Patola production rates moderated, headroom for added water production was made available. This would be an interesting constraint for the operation of the FPSO and we don’t get any info on this. Doesn’t seem like the current limiting factor, but does have implications for any Neon tieback or potential new wells into the FPSO. I would assume the FPSO is processing significant amounts of water, easily over 50 kbwd, perhaps 60 kbwd with a total topside capacity of 80 kbd.

Data for the list of Active wells is as follows. I have collected this from historical ASX disclosures. An interesting element of Karoon is they have been very transparent on much of the Baúna well data.

The Baúna Reservoir Oil Producers33 were the most prolific on field startup, however following the 2022 drilling campaign at Patola, the Patola wells are currently the best producers. There is some history on specific well performance available online, mostly snapshots here and there.

SPS-88 is currently inactive due to the gas lift system not being available. The well needs a ~US$10M LVIV vessel workover to change over the gas lift valve. This is a very common and straight-forward operation with a high chance of success.

It’s expensive as it takes a specialised vessel to access the well securely (remember it is 225m underwater). The actual gas lift valve itself is probably worth ~US$20K. The planned date of this work has drifted from Q4 2024 to “mid 2025”.

Production & Modelling

I built a basic Baúna field oil production model to gauge the size of each well and get more of a feel for the field. It showed me the relative importance of the Patola wells but also the old Baúna reservoir wells are still very significant to the platform. I took the Brazilian government oil production data available, graphed it and started curve fitting the known Baúna well data from disclosures.

Fairly quickly I was able to match many key characteristics in their production curve history. The history is dominated by stable decline, a workover campaign in 2022 which bumped production up to ~25kbd, drill wells which bumped the FPSO up to near capacity (40kbd oil, plus associated water from other wells), then a slow decline.

The shape of the averaged production monthly data is a bit spiky, however each spike correlates well to known downtime issues or production improvement.

Assumptions/Inputs:

• Assumed 2020-01-01 rates of 2kbd per online well, adjusted later to curve fit and end at known prod rates for workovers.

• PAT-1/PAT-2 Drill well initial rates.

• Workover data as per below.

  

• SPS-88 known blocked in late 2023.

• Whole field shutdown in 2024-12-15.

• 2024-Q3 is 44% higher than 2024-Q2.

• Production currently around 25kbd (2024-12).

I modeled Production rates per well as follows:

I don’t have any individual well data prior to Karoon’s ownership so I can not estimate total production per well. However I estimate the 2 Patola wells that are approximately half of the fields production, 5 are reasonable contributors and 2 wells in late life34.

Whilst not immediately useful, this can help gauge the impact of future production events. It's likely the Patola wells need minimal gas lift and have low water cut.

The latest published Production Summary is as per the below:

Baúna Topsides and Downtime

The largest problem with the Baúna field is the uptime of the FPSO, notably the Gas Compression System. There have been many downtime periods within the previous couple years.

The FPSO has had very large outages in both 2023 and 2024, and also whilst I write this the entire field is again offline for unplanned emergency repairs (Mooring chain failure).

Roughly adding them up from my well model Baúna produced 2.3M less barrels of oil due to unplanned maintenance. This is highly significant and at $70/bbl equates to around US$162M or ~AU$231M.

The FPSO has mostly fixed costs, producing 5 MMbbl oil costs roughly the same as producing 7.3 MMbbl oil.

This downtime is unacceptable by anyone’s measure.

Whilst downtime is part of running an oilfield, this much downtime stands out like a sore thumb. The Baúna FPSO is only around ~12 years old of a presumed 25-30 year design life, the age of the FPSO isn’t an issue, but it seems like the integrity around the gas compression/distribution system and subsea mooring systems are more problematic than they should be. Even more concerning is that the mooring chain failed in summer time, not the heavier waves of winter.

Losing gas compression is operationally critical for mid-late life offshore wells, but this only shuts in wells. Losing an anchor line or two in bad weather can be a death knell for an FPSO. The ship needs to be anchored securely to Safely hold the riser the wells in-situ to produce hydrocarbons through. The Santos Basin wave energy is not as high as the North Sea, where FPSO’s are also built to beam (pivot) around a core (turret) to align with the direction of the harsh weather35.

The general sense I get is that the FPSO has been lacking maintenance. This is not atypical for assets which become part of transactions36.

Why is this occurring?

There is very little detailed disclosure around the gas compressors and especially the problems.

The 2024-10-28 “Brazil Field Trip” presentation is one of the latest presentations on Baúna, and has an added focus on the downtime issue. Worryingly we see this line … “lower FPSO reliability stemming from maintenance backlog”. No more detail is provided.

For a mid-life FPSO this doesn’t seem great, especially given the downtime. Obviously this is now being prioritised. The ship has been in the same position for roughly 12 years in a corrosive environment offshore so integrity issues are part of the deal. But they need to be managed.

Importantly, the field production is reliant on “2 out of 3” gas compression stations working, which is shown on the below chart does not bode well for optimal production. Seeing this chart is wildly disappointing.

Conversely, there has only been 3 months out of the past 9 where the required amount of gas compression to optimally produce the wells was available. Baúna gas compression is running on the edge. This is with the SPS-88 well offline, which would normally be sucking a lot of the available gas-lift system. This uptime should be better than typical without SPS-88 online.

Recently Karoon have upped their disclosures around the Gas Compression System. I can’t find any discussion on the FPSO’s Gas Compression system pre 2024. It’s a new hot topic.

Karoon has defined “Compressing System Operating Performance [Availability?]”, in terms of hours running on hours available. This seems a little conflated, as I’d use “hours available” as the numerator and total hours as a denominator. Their use of English seems poor too. This work may be translated from its original Brazilian author. Regardless, I will interpret it as an availability measure37.

Karoon has set a goal of 90-95% efficiency, which seems good and needs to be a key focus for the business. To be clear, some downtime should always be acceptable. (If uptime is 100%, the operators may be spending too much).

The good news is gas processing topsides is a common and well known technology. The modules are all above sea level and easily observable. This issue shall pass.

Finally, in the 2024-10-28 “Brazil Field Trip” presentation seems to say “2nd Gas compressor back online in August” on page 15, but on the following page it says September. Tiny discrepancy, but again, details around key disclosures are important. These compressors have cost Karoon hundreds of millions in deferred oil (losses).

Baúna field Acquisition cost

The terms of the Baúna field acquisition was US$380M upfront, with US$285M of contingent payments. The contingent payments are Brent oil price linked, as the contract was negotiated during 2020 with historically low oil prices. I assume the full contingent payment will be incurred38.

Funded with AU$284M Equity Raise and available cash.

The timing of the contingent payments are:

FPSO Cidade de Itajaí

Lets touch briefly on the FPSO costs. These are important to understand the unit economics.

The 2024 Bond issue supplementary data is the best source for looking at the operational/leasing costs.

FPSO Cidade de Itajai disclosed costs are made up of operating costs and the Charter lease costs

• The operating contract is with OOG-TKP, an affiliate of Teekay.

  • This covers crewing the vessel, managing the handling, processing and storage of crude oil, water injection, gas lift, gas export and transferring crude oil to shuttle tankers.

  • Operating costs are direct operating expenses.

  • TY23 costs were US$30.2M in 6M, or a day rate of US$165k/day, or approx US$60M/year.

• The charter lease is with Altera & Ocyan.

  • This covers maintenance of the Cidade de Itajaí facility.

  • Altera & Ocyan are responsible for any replacement costs or costs associated with repairs.

  • This lease is capitalised.

  • TY23 capitalised lease D&A costs were US$30.4M, or a day rate of US$167K/day, or approx US$61M/year.

The above day rates are back calculated and assumed to be close enough. Ship contracts are presumably day rate + consumables + indexed.

Baúna Unit Costs

Karoon calculate their Unit production cost in the following way: Dividing the total operating costs, plus the costs associated with the Floating Production, Storage and Offloading (FPSO) facility charter, by the reported production volume.

The operating cost component is easy to find, however the costs associated with the charter are not as they are considered CAPEX and depreciated. The bond issue disclosures step through the calculation process (and an adjustment for AASB 1639). Given we know the contracted costs are fairly stable for the FPSO, this assumption will work for future years. Further we can use the depreciation figure for the ‘Right of Use Assets’ (FPSO Charter CAPEX) from the Annual Report, which was -$33.4M for TY23 (6 month period) (matching the bond issue data) and $57.5M for FY23 (12 month period).

The Baúna unit costs can be simplified to be around US$120M divided by the number of produced barrels over a year. The depreciation figures are given halfly, so a unit cost can be calculated accurately each half. The important input is the number of barrels produced (or really how much downtime during the month is incurred and how much decline Baúna experienced).

These unit prices are fine and ballpark for this basin.

Taxes & Royalties

The Brazilian royalty rate is 10% paid on gross production revenues.

In Oct 2022, Karoon negotiated a reduced rate of 7.5% on some of its recent production growth (Patola & Workovers). Production greater than 50% above the original base production profile is rewarded with a 5% royalty. Assuming an ~9.5% royalty rate is appropriate.

There is also a “Special participation tax” (SPT) when quarterly production exceeds 1.9MM bbls (21kbd).

Baúna is in tier 2, giving a 10% SPT rate, this is from the table shown below. This applies only on production above 21kbd40. I.e. in TY23 where ~5.07MMbbl per produced, th

There is also a 1% R&D levy applicable in the quarters where the above SPT is paid.

In TY23, Karoon incurred $8.7M of SPT and $4.3M of R&D Levies on top of the $32M of Royalties, so the SPT+R&D for Baúna is currently around 40% the size of the normal royalty.

With the expected decline rate of Baúna (and patchy uptime), this SPT shouldn’t apply longer than another quarter or two.

Brazilian Corporate tax rate is 34%41.

In 2023 Brazil added a temporary crude oil export tax, which levied a 9.2% tax on all sales volumes (March 1 2023 through June 30, 2023). This tax seems to no longer be in place.

Overall Field Economics for Baúna

Disclaimer: the finances are not my day job (as you could perhaps tell from the detail above).

Below is my attempt at gauging a potential calendar year of earnings from Baúna. Note that the production should decrease each year, so taking this and assigning an earnings multiple is not really valid, but this is somewhat relevant still as only a very small multiple needs to be assigned.

I have focused on FCF unit economics too, as that is what can be paid out. The scenarios I have chosen TY23 for a very good half, CY25 estimates representing an average quarter (with a prod shutdown, without contingency payment) and CY25 with a HY contingency payment included.

NET PROFIT ESTIMATE

FCF ECONOMICS (AND PER SHARE)

Where to from here with Baúna?

The next logical question is where does Baúna go from here? There are a few obvious improvements, but I don’t see any significant issue that isn’t fixable. Having lived working managing assets like these, I do get a sense of a bit of bad luck too. There are obvious maintenance issues but they have had a bad run.

Here is my list of suggested areas of near-term focus

• Fix the Baúna Gas Compression issues and associated maintenance backlog.

• Improve Maintenance planning.

• Fix the mooring chains, examine all mooring chains and system components.

• Proactively scour the platform for weaknesses in the gas lift and ESP electrical system.

• Execute LWIV Vessel campaign to replace gas lift valve in SPS-88.

• Just flow and liquidate the asset.

The workover of the SPS-88 well has been delayed at least three times from its initial planned date in the fourth quarter of 2024 to mid-2025.

Once the Vessel is set up and connected to the well, this is a very standard operation. It should only take a couple days. Unfortunately getting a LWIV is fairly hard and there is likely a need to procure a local vessel and team, limiting LWIV availability. It should restore around 2kbd of production to the platform.

The chance of success for a GLV changeout is in the 80-100% range42.

Managing an asset well enables the ‘luck’ which creates a good half. Just looking at Baúna 2023-2024 they have had an unlucky run. Three out of four halves have been plagued by an issue. There’s a good chance that Baúna simply doesn’t have an operational problem for a 6M period.

There is a low bar here and a low valuation. Upside is very simply achieved by just flowing the asset and having a period without a major downtime event. There is also significant upside available with a slightly higher oil price43.

I haven’t seen any discussion on further well plans for Baúna. The little provided geologic topology doesn’t show any nearby structures of interest.

The known reservoirs seem to be well covered in terms of well drainage and it may be a case of just producing the wells through their economic life. This should require very little capex. In my production model I estimate the field is roughly economic until ~2030 using an arbitrary 5 kbd oil cut off level. Karoon’s reserves are based upon Baúna running through 2032 so there is some error in the tail of my model here44. This is especially so given the solid unit economics of the field. When you can make a 20%-30% return by simply maintaining the status quo, it's logical to do so. This is not the time to do anything fancy with the asset.

More clarity on potential future plans would be nice to see. The FPSO could in theory become a donor to Neon/Goia (or another nearby discovery) in the early 2030’s. These ships can last a very long time, especially with a little dry dock between fields.

Who Dat

I will keep my Who Dat discussion a little briefer. There is also a lot less data available on Who Dat and the asset is quite similar to Baúna.

The important points to note are:

• The field is operated by LLOG in the Gulf of Mexico (GOM) and Karoon owns a minority share of the field (~30%). meaning they are not in control of decisions but merely have 30% influence45.

• The field is much more gassy. Baúna is a purely oil operation (the produced gas is re-injected), here we have available gas and oil export pipelines (reducing transport costs too). The value of Gas in the GOM is very low, export prices to Henry Hub are around $2/mmbtu. Who Dat production is quoted in terms of boepd, however this is on an energy content equivalence which is approximately 6:1. A better ratio for an economic equivalence would be around 35. Gas is fundamentally very cheap and can be nearly completely discounted from the production figures.

• Who Dat makes a lot less money. CY24H1 net profit was just US$15M following spending $720M on the asset. Costs are not as transparent due to limited history of disclosures on the asset.

• Some reservoirs hold condensate, which is a highly valuable liquid form chemically similar to gas. Condensate is a very clean hydrocarbon which is a precursor to jet fuel or otherwise used in blending. Its value is approximately the same as oil per bbl.

• The host unit has pipelines directly into other fixed assets, so there is no offtake need46.

• The field is much more scattered and complex in terms of reservoirs, field size and potential. However the reservoir properties and geology are very similar.

Acquisition

As previously discussed, Who Dat was purchased in late 2023 for US$720M. Adding an additional material asset was a core management goal for the reporting period, that plus the decline of Baúna creates pressure to purchase new assets to survive. Karoon also had significant net cash at the time (ca US$152M), burning a hole in their pockets.

The Acquisition of Who Dat in light of the 2024 operational performance and figures vs the initially disclosed presentation is nothing short of disastrous.

In case the above statement is in doubt:

• The capital losses in Karoon market cap since the acquisition have exceeded the cost of the asset.

• Production Guidance was revised down 3 times in 2024, including in the very first quarterly (March 2024), around 100 days after investment.

• Who Dat contributed US$16.9M of net profit for 1H24 on US$94.4M of Revenue. This is ca 2% return in 6 months on a “High Margin Production” Asset. (to be fair, in my theoretical longer term case this should be closer to US$39M).

  

• Presentation discussed a 42 kboe/d as the current gross production rate, however this instantaneous rate has hardly ever been achieved at the asset. This is best seen with a chart released in late 2024 (almost 12 months following the acquisition).
  The first quarterly had Who Dat gross production of 34,962 boe/d, 16% less than communicated.

  

• Presentation is highly focused on adding reserves, but so much of these reserves are gas they have gone from a near fully oil based book to a very gassy book.
  

Lets quickly summarise some of the key comments from the initial Investor Presentation on Who Dat:

1. “Mid teens cash flow per share accretion and EPS accretive”

2. “Low cost barrels to deliver long term cash operating margin of 67%

3. “Expected to be earnings and free cash flow per share accretive from CY24”

Geology

There is little discussion by Karoon about the Who Dat Geology. The wider Mississippi Canyon Block in the GOM is large and well studied. I’m personally unfamiliar with the area, however it looks well picked over and highly complex.

The Mississippi Canyon (MC) block sits at the mouth of the Mississippi and is defined by sedimentary deposition down the continental slope for millions of years, with many channels, faults, traps and salt domes47.

Below is a nearby seismic cross section with interpreted faults, the multiple layers of sand and salt domes, roughly reflecting the type of geology likely at Who Dat48.

The Who Dat field is characterised by many (11+) stacked Pliocene and Upper Miocene reservoir sands situated around a salt dome, at around 10,000-18000 ft in . Disclosures note the reservoirs are ‘high quality’ turbidites, with high porosity and permeability. This is generalised, but very similar to what exists at Baúna. Reservoirs are all different pressures and hydrocarbon types.

This field geology is best seen in the exploration communications, displayed below:

Field Development & Wells

The field was developed by LLOG around an Owned “FPU” called “Opti-EX” produced by Exmar in 2010, with capacity of 40 MBOPD49 and 150 MMSCFD. The FPU is tied into a 10” gas export line and a 14” Oil export line.

Each manifold has dual 6” flowlines, which are approx 5km in length. The Dome Patrol well is a step out, on its own ~5km flowline to the A-Manifold.

The Production system is likely completely from TechnipFMC.

Wells

I have collated the well data from disclosures. Data quality is lacking due to the nature of the scattered sources I have collected these from.

The field is often talked about as having 14 or 15 wells with one of them not producing50. There are a couple new drill wells G2 and G4. Another had an ESP installation.

There are 3 subsea manifolds51 (A,E,G) that the wells flow to.

• Manifold E is across the middle of the field, is the prolific and most valuable.

• G-Manifold is out west and accesses Abilene, a large gas reservoir. This manifold is the most gassy.

• A-Template is North. Dome Patrol is far out east with a subsea pump into a slot of the A-Manifold.

Production

We have a few charts on the field's production, note one is Oil only and others are BOEPD. Note the large gas cut (%) of the BOEPD production rate. This large gas component makes the asset production figures almost twice what the core value really is.

Modelling the asset at around 20 kbd oil is reasonable.

Near Field Exploration Wells

The Who Data licence has a 3 well active exploration campaign ongoing. LLOG have active rigs in the GOM which are shared across leases.

LLOG seems like a reasonable developer with good turn around times from exploration to production, just they are taking Karoon in a whole new Capex heavy direction. The three drill wells are all within tieback distance to Who Dat (just) and are follows:

WDE - Who Dat East

WDS - Who Dat South

WDW - Who Dat West

Downtime Events

The Who Dat downtime has been mostly linked to planned shutdowns and preventive downtime due to hurricanes. Following the new wells at the G-Manifold, gas production levels were creating higher wellhead pressures, limiting oil production. Wells were cut back to prioritise oil cuts during a time of low gas prices.

• 2024-Q1 High Back pressure in G-Manifold, cut back high rate gas wells.

• 2024-11 (10-14d) Planned Maintenance Shutdown turned into 18D

• 2024-09-10 Shutdown due to Hurricane Francine. 3d shut in. Reopened on 12th

• 2024-09-25 Shutdown due to Hurricane Helene. 3d shut in. Reopened on 27th

Taxes & Royalties

The royalty is 12.5%, US Corporate tax is 21%. Assume no state charges as the sales transaction occurs offshore and not within a state boundary.

Costs

There is a challenge in the Who Dat data, such that not only do we not have a full annual report available for the asset, the Sales are communicated in NRI which is already adjusted for royalties.

However when we get into the 1H24 Financials, the Cost of Sales number is dramatically high and theres no visibility on why.

• In the Supplemental bond issue docs the costs were communicated at $7.88/boe for 12 months, but that only accounts for -$13.4M of the 61.9M.

• The depreciation step up from TY23 to 1H24 was -60.8M to -82.3M, so I can assume an additional $21.5M of halfy depreciation at WhoDat

I am in the dark on whats going on here and I hope this largely consists of some sort of once off charge. Point is, we know the NPAT for the asset is extremely low: $16.9M.

Where to from here for Who Dat?

• This asset is a poor fit within the organisation due to its capital needs and current ROE vs the companies profile before this asset. If a reasonable offer was made on purchasing KAR’s Who Dat stake it should be strongly considered (despite the sunken costs).

• Mitigate CAPEX. Stop spending, it has destroyed KAR’s free cash flow which was the one thing going for the company.

• Further discussion on discretion of the full CY2024 results. More visiblity in Cost of Sales is needed.

• WDE and WDS drill wells seem reasonable. Complete these and tie them into the asset.

• STOP further development of this asset and let the cashflow come through. (It seems ridiculus, the Net Profit is about the size of their corporate costs).

Management

There has been a lot of ink spilled in the media over the management situation. There is a large overspending and over commitment issue. The company has quickly jumped into being a Producer of two distinct assets and is frankly doing too much and has lost focus on the core responsibility of managing the company equity appropriately. Karoon is now a very different organisation, away from their core goals and to a point where the company's free cashflow has now evaporated.

Spending

The company has quickly turned from looking like Baúna was close to fully paid down and moving to a pure liquidation focus with strong FCF, yet now, the company would be close to FCF neutral as Who Dat exploration has drained excess cash. This spending in itself is not problematic52, but the circumstances and timing of the spending53.

Karoon undermined their own principle from their 2021 Strategic Direction of “In Control of our Destiny”54, but also their original direction to be Brazil focused. Specifically undermining their strategy of “Brazil M&A”, “Neon Area Development” and “consider complementary strategic oil acquisition opportunities”. Not to mention the other objective of “Operational Excellence”.

Buying a field nowhere near their existing operation is not complementary, especially where they were going down the pathway of having an Integrated Operational Area55 in the Santos Basin. It has in fact stretched them too far.

Surely they will take a victory lap soon about how successful their 2021 strategy has been in their 2025 refresh. I will be happy to be corrected.

The diversification away from being 100% in Brazil seems reasonable. There is no mention of any expansion ability at Baúna, and some activity at Neon with modest and risky potential. Perhaps it's unwritten that there is not a lot of confidence in Neon/Goia, whilst production rates (and earnings) are dropping.

This is all easy to say now (late 2024), following Who Dat for a year, this would have been much harder to see on announcement of the Acquisition.

Previous Management Scorecards

Below is the score card for TY2356 which the management's performance bonus is based upon. This is the most recent one as of late 2024.

One can quickly see the Safety performance of the company is weighted nearly identically to the “Project Objective” of changing the financial calendar for the company. This is beyond ridiculous.

(In an earlier score card there was no weighting for safety).

What is perhaps worse is that the Strategic objective of “acquiring a substantial second production asset” is weighted 8x times more important to safety. The FPSO may have sunk, yet this wouldn’t affect management's bonus incentive more than purchasing Who Dat. Yes I am being ridiculous, but this is a logical outcome of the management scorecard.

I get a sense of ‘no fatality’ meaning bonuses from reading the TY23 Karoon remuneration report. This is probably written by people sitting in a fancy office on Southbank in Melbourne57, whereas the real risk is outsourced.

Conclusion & Current Opportunity

Whilst the above commentary has not been rosy, the equity market has similarly provided its own fairly damning assessment. Karoon is currently priced on the ASX at $926M. The opportunity in Karoon is in the context of this market pricing.

Strategy Issues

There’s a temptation to go back to the simplicity of a single Brazilian asset and just cashflow the asset. But given the damage to the companies equity valuation, looking forward to Who Dat asset adds a lot to the business. There are probably a lot of positives for Karoon if Who Dat was divested immediately at a fire sale price and Corporate costs were tightened up, this is however shortsighted58.

Who Dat seems to have a lot more life and better risk adjusted upside potential than the Baúna/Neon/Goiá Area. From this deep dive I get the sense that Karoon are struggling to find ways to economically expand in Brazil and therefore have grown into the GOM instead. 2 of the drill wells seem reasonable and will add volumes and $ to the field immediately. The partner also seems reasonable.

The strategy has deviated heavily, the downtime at both assets has been inexcusable, however this is a reflection of the past and current state.

Valuation Issues/Opportunity

The ‘upside’ is that the equity has been so severely punished that it is priced at a point where the entirety of the Who Dat acquisition has been eliminated from the Market Cap and more.

• Prior to the Raising, the SP was $2.40 with 567M SOI for $1.36B Market cap.

• Currently at $1.30, the Market cap is ~$1.0B59, ($1.20 was $0.92B, $1.40 is $1.07B)

• This is approximately $300M below the current market pricing, with Who Dat vs without.

This level of equity valuation is likely sufficient to value Baúna alone (assuming we get good uptimes). Applying a multiple on a declining asset is fraught with danger, but the yearly free cash flow from Baúna should be at least AU$300M/year for the near future.

Who Dat is an 8 kboed asset (Net NRI) which could be liquidated. There are 2 nearfield drill wells which have had much of the cost and technical risk sunk.

The market is not rewarding any of the development capex, this money has been taken from Karoon’s balance sheet and essentially lit on fire, instead of simply leaving it alone or returning it to its owners who are better placed to look after it.

If the above isn’t clear enough for Karoon Management, I have another big suggestion: Stop Issuing new equity.

Grow your business without raising equity at every stage. Karoon has a market cap of A$1B yet has Contributed Equity is US$1.21B. This is close to nearly every second dollar having been lit on fire.

Following all of the above, once the market cap is a bit more healthy, management should consider upping the dividend. Continue the liquidation of the assets into cash flow for equity holders.

See if the dividend can be held at a A$0.20 to $0.30 fully franked dividend annually for a few years. See where the price and yield settles, presumably its 10-15%. ASX investors will be all over this ASX investors have a strong preference for dividends and this domain is dominated by Coal Players, which many are turned off by and will indiscriminately avoid under any circumstance.

Very few companies have this opportunity. Don’t let it pass by pissing the cash into holes under the seabed. Put it into the hands of your shareholders who may then hate you less next AGM and not try and get you kicked out.

Summary

I would theorise most of the downside risk is already in place at this point in time, and the upside considerably outweighs the downsides.

The equity has been deservedly punished, but there has also been a situation of a lot of bad luck too. I am optimistic that 2025 is much less operationally challenging for KAR, that earnings will reflect this.

The company needs to stop empire building, tighten up the spending and focus on the common equity holding.

Editor’s Note

My background is in Completion Engineering, Subsea Engineering and self learned many aspects of finance and economic assessment. I am interested in Karoon due to:

1. They are a local Aussie company (its a little parochial).

2. Their assets are analogs to what I’m fairly familiar with.

3. They are small enough to be awfully specific when they give details on field, so I can relate to the wells, reservoir and vessels.

4. They are fairly hated by the market, liquid and interestingly priced.

5. Low coverage in this name. I may have some value to add to the finance community, with a more technical subsea lens.

Disclosure

• This information is for general knowledge and informational purposes only and does not constitute financial, investment, or other professional advice.

• I have a small long position established recently, post the Who Dat acquisition and operational issues.

• I have no association with the company other than the equity holding and never talked to a Karoon employee or anyone who has worked on their assets.

• No Assistive Technologies were used in the creation of this material. I didn’t even run a grammar check sorry :) .

My engineering experience is largely in Offshore oilfield engineering, specifically completions & well workovers for a major E&P. I spent 7 years working across 4 installations in the North Sea (Subsea & Platform). Following my North Sea experience I moved back to Australia and got a job in the mining sector for a major Australian mining company.

I have no formal financial background, but have been active in markets as long as I can remember.

I am analytical, highly pro cheap energy and fairly unforgiving. I have significant (to me) holdings in the basic building blocks of our society. Oil & Gas, Thermal & Met Coal, LNG, Iron Ore & Copper, Steel Blast Furnaces and Defence.

My personal interests are markets, finance, energy, mining, coding, music, (formerly travel) and fitness.

I keep a fairly psueudo anonymous name/profile for privacy reasons, there are many on here who know me in real life. Focus on the message, not the messenger.

“Your Name is dumb”

My handle “Ironic Capital” is fleeting. It’s a dumb name. It was originally created in around ~2020 as a private Twitter/X account name, mocking the 0% interest rate environment, negative oil price, fake online currencies and zombie companies getting squeezed on commentary from influencers.

General Disclosures

1. I live in Australia, I may have an irrational interest in things happening on an island far away from the rest of the world.

2. I have no interest in selling subscriptions and I have nothing to sell.

3. I’m not a writer, have not interest in writing and will not write often. I won’t use AI to write for me.

4. I don’t write about companies I am directly associated with.

Contact

If by some reason you want to write to me privately, you can email me at hi@ironiccapital.co or DM me on Twitter/X.