Wednesday, June 8, 2011

International Nickel Indonesia

by DBS  Securities

International Nickel Indonesia (INCO) plans to shut-down one of its four electric furnaces in Soroako for five months starting in October for routine maintenance. Assuming 75% utilization rate for each electric furnaces, we estimate INCO’s output would drop by 7% y-o-y to 68,000 tons in FY11F before recovering to 73,000 tons in FY12F.

Meanwhile, INCO’s third hydro power plant in Karebbe is near completion ( > 78% complete) and is expected to start operation on schedule in 2H2011. With more power, INCO should be able to increase production capacity gradually through de-bottlenecking of its production facility and increase in capacity from 77,000 tons to 90,000 tons by 2014. We forecast 7% production CAGR over FY11F-15F.

We reiterate our HOLD call for INCO, Rp5,000 TP based on blended valuation of DCF (WACC 9% 3% terminal growth), 14x FY11 PE and 8.0x EV/EBITDA. We like INCO because it is one of the lowest cost nickel producers, and will be the prime beneficiary of rising nickel prices. But we think the shares are fairly priced. INCO is trading at 12.0x FY11F PE, above regional peers’ 10x. Maintain HOLD.

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