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Monday, December 12, 2011

International Nickel Indonesia Tbk - Weigh More on Nickel Prices

by Trimegah Securities

Pressures on Nickel Prices

By only producing nickel in matte, INCO’s financial performance is highly sensitive to the nickel prices movement. Nickel price dipped by 39.3% from its Feb’11 peak recently amid global economic concern. As described in our sector outlook, we believe that nickel prices will get double pressures from macro headwind and its oversupply environment. As such, we cut our 2012-2013 nickel prices assumption by 6.8% and 11.4% to reach USD20,500/ton and USD19,500/ ton, respectively.

Weaker Production in 4Q11,

Expected to Recover in 2012 INCO will shut down its furnace no.2 for 21 weeks for maintenance within the end of this year and early next year, which will bring a declining YoY nickel in matte production. As such, we expect INCO production to decline by 8.4% YoY to reach 69.6k tons in 2011 and 71.3k tons in 2012. Besides the furnace maintenance, INCO will also conduct several projects in order to meet its medium term production target of 90mn tons in 2015. It will upgrade 2 generators of Larona hydro power plant in 2012, install a power demand stabilization system on Furnace no.4, and developing its 32,123ha of mining concessions in Bahodoppi, Central Sulawesi. INCO will build a road that will connect Bahodopi and Sorowako and also dryer facilities in the area.

Welcoming Karebbe Power Plant

INCO has officially operated its 3rd hydro power plant, Karebbe in the end of 3Q11. The 1x90MW installed capacity, together with INCO’s current 275MW installed hydro power plant in Larona and Balambano, is expected to relieve the company from thermal power plant usage in any operational activities. Before the operational of Karebbe, INCO’s two installed hydro power plants (275MW) are only sufficient to power 65,000 tons of production. It needed combined with the 1x78 MW diesels and gas fired thermal power plant, they are able to power INCO’s full production capacity of 77,000 ton. The thermal power plant will be used as a back up generator, depending on nickel price and water levels on its reservoir.

Downgrade to HOLD, Lower TP of Rp3,800

We downgrade our call to HOLD on the back of our lower DCF-based target price calculation along with our less sanguine outlook on base metals sector in 2012. We incorporate our new nickel price assumption, which reduce our 2011-2012 ASP assumption by 6.8%-11.4%. We maintain our 2011 nickel in matte production but slightly reduce our 2012 and 2013 volume by 2.6% and 5.0%, respectively, to be more conservative. Cost saving on Karebbe will not be enough to sustain margins due to the declining nickel prices, in our view. Our FY12-FY13 EPS is now 22.5% and 32.3% lower than our previous estimation. Our new target price implies 12.2x 2012 est PE ratio

Key Risks: Fluctuation on global nickel prices, permit and legal issue with local government with regards to the company’s Contract of Works obligation.

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