Wednesday, December 7, 2011

Pressures on Nickel Prices

by Trimegah Securities

69% of ANTM’s revenue is mainly contributed by selling ferro-nickel and nickel ore commodity. As such, ANTM’s financial performance will be 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. On the other hand, we increase our gold price assumption as we believe that the commodity will outperform during the global macro uncertainty.

Good News from Its Projects Development

We understand that investors main concern on ANTM so far is stick around its ability to execute its several strategic projects. Compared to previous years, ANTM managed to record a significant progress in 2011 and it’s expected to continue further in 2012. CGA Tayan construction has already reached 34.15% as of 9M11. The factory with 300k tons of annual production capacity is planned to begin its commercial operation in Jan’14.

Next projects waiting to be done would be Pomalaa’s FeNi modernization and 4th FeNi development in Halmahera. ANTM has started to offer 2 series of bond worth a total of Rp1.5tr in Nov’11, 70% of which will be designated to finance those projects. Another significant progress on its FeNi Halmahera should provide a huge catalyst for the company as it would double the company’s installed ferronickel capacity. In the mean time, however, we believe that the unfavorable nickel prices outlook will play more dominant on company’s performances as production volume is expected to be flat.

Flat Production Level, Earnings Highly Depend on ASP

We largely maintain our 2012 production expectation, except for gold. We foresee a flat 18,000tons of ferronickel production due to the ongoing maintenance project on its 3 FeNis. Nickel ore production is expected to increase before its sales are prohibited in 2014. For nickel ore, we expect 8.0mn tons and 6.6mn tons of production and sales volume, respectively. Despite of the surging gold prices,

ANTM’s gold production is expected to only reach 3.0tons in 2011 because the company has yet to mine the planned gold veins in Cibaliung while Pongkor’s production continued to deplete due to the lower ore grade. We cut our gold production in 2011-2013 to reflect the delays on Cibaliung production. We are looking for 3.2 tons and 3.5 tons of gold production in 2012 and 2013.

Maintain HOLD, TP of Rp1,700

We maintain our HOLD recommendation with lower DCF-based target price driven by our lower nickel price assumption to reflect the unfavorable ST to MT nickel outlook. We do raise our gold price assumption, but due to its less contribution to company’s earnings, FY12-FY13 EPS still declined by 2.0% and 25.2%, respectively. Our price target is reflecting 9.1x 2012est PE ratio.

Key Risks: Execution risks on the company’s projects will become our main concern, along with fluctuation of global nickel prices.

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