8 October 2014
Metals & Mining Equity | Indonesia | Metals & Mining
Sector Index Performance (JAKFIN) 3M
6M
12M
Absolute (%)
-6.3
1.9
5.2
Relative to JCI (%)
-8.0
0.3
-7.3
52w high/low (Rp)
Initiating coverage
The Art of War Ore export ban expected to support nickel price above US$22.5k/MT Further tin regulation to benefit TINS IJ through “one-door” policy Precious metals exposed to the downside as interest hike awaits
58,628/3,957
We are bullish on the sector and favor pure nickel and tin players
130 120
With Indonesia orchestrating a structural deficit for global nickel and tin balance, we expect mining equities that possess these two metals as their primary underlying commodity to outperform. We initiate coverage on Indonesia’s metals & mining sector with a bullish stance. Our top-pick is Vale Indonesia (INCO).
110 100 90 80 70 1-Oct
1-Jan JCI
1-Apr
1-Jul
1-Oct
IP Metals & Mining Index
Source: Bloomberg
The mastermind behind strong nickel prices. The ore export ban from Indonesia that was implemented back in January has sent global nickel prices flying—almost reaching US$21k/MT in May—mainly due to speculation that supply will be insufficient to satisfy global demand, primarily from China. We believe a strong nickel price will be sustained, however, as global nickel inventories start to deplete and to incentivize producers to open new smelters. We target our longterm nickel benchmark price at US$22,500/MT.
Nickel price to justify new smelters ($/MT) 25,000 3,275 20,000
15,000
4,125
21,900
18,625
14,500
10,000
5,000
0 Cash Cost
Capex
Break-Even 15% Target Incentive Px Point Margin (Rounded)
Source: IndoPremier
Further regulation to rally tin price. As the Indonesian government is set to implement a follow-up regulation for tin under Trade Ministry Regulation No. 44/2014 this November, we expect illegal tin supply from the country to be subdued further. By requiring tin producers to go through the local commodity exchange (ICDX) prior to producing and exporting refined tin, we believe the “one-door” policy will minimize supply disruption and create a more visible pricing mechanism for the metal and benefit PT Timah (TINS IJ; Buy). We forecast global tin price to trade at US$25,000/MT in the long-term. We are cautious with precious metals. With the U.S. ending its massive QE program, we expect interest rates to take a hike possibly in mid-2015—posing downside risks to precious metals such as gold and silver. The slowing physical gold demand from China and India would not help a rebound story either as China’s economy surprisingly slowed and India still keeps its current account deficit in check. We believe Aneka Tambang (ANTM IJ; Sell) is exposed to the downside risks in precious metals. Our long-term gold and silver price forecasts are US$1,200/t.oz and US$18.50/t.oz, respectively. Base metals leading the charge. We are bullish on Indonesia’s metals & mining sector as we expect nickel and tin prices to accelerate further owing to the country’s supply-cut story. We initiate on Vale Indonesia (INCO) and Timah (TINS) with BUY ratings; and a SELL for Aneka Tambang (ANTM). Our top-pick is INCO, with DCF-based target price of Rp4,750/share. We view the recent weakness in INCO’s share price to pose a very attractive entry point.
Ticker
INCO IJ
Stanley Liong PT Indo Premier Securities
[email protected] +62 21 5793 1168
Rec.
BUY
Market Cap.
Curr. Price
Target Price
P/E 14F
15F
EV/EBITDA 16F
14F
15F
16F
ROAE 2015F
($ mn)
(Rp)
(Rp)
(x)
(x)
(x)
(x)
(x)
(x)
(%)
2,921
3,650
4,750
15.7
11.5
11.0
8.1
6.1
5.6
13.8% 13.0%
TINS IJ
BUY
733
1,215
1,700
14.1
12.7
12.6
7.3
8.2
7.8
ANTM IJ
SELL
844
1,085
930
202.4
16.0
7.6
9.3
14.5
7.3
5.0%
77.4
13.4
10.4
8.2
9.6
6.9
10.6%
SECTOR
1,499
Sources: Bloomberg, IndoPremier (Share prices are as of closing October 1, 2014)
Refer to Important disclosures on the last of this report
Metals & Mining Initiating Coverage Exhibit 1. We expect nickel to continue outperforming gold
Nickel
Exhibit 2. Nickel price needed to justify new smelters ($/MT) 25,000
Gold
3,275
21,900
15% Target Margin
Incentive Px (Rounded)
160 20,000
150
4,125
18,625
Capex
Break-Even Point
140 14,500
15,000
130 120
10,000
110 100
5,000
90
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
80
Source: Bloomberg, IndoPremier
0 Cash Cost
Source: IndoPremier
Exhibit 3. TINS’ customer base in FY13
Exhibit 4. TINS’ sales volume strategy successful in 1H14 LME Tin Cash (US$/MT) 24,500 24,000
Japan
26%
16%
23,000 Korea
22,500
Indonesia
22,000 21,500
USA
21,000 Singapore
20,500
Others
20,000
5% 11%
Jan-14
Source: TINS, IndoPremier
Mar-14
Apr-14
May-14
Jun-14
Source: TINS, IndoPremier
Exhibit 5. We believe risks are to the downside for gold
Exhibit 6. Investors continue to switch to other asset classes
U.S. 10-Yr Real Yield (%) - RHS 4.0%
85
1,800
75
2.0%
1,200
65
1.0%
45
-1.0%
200 0
50
-2.0%
Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14
Source: U.S. Dept. of Treasury, Bloomberg, IndoPremier
Refer to important disclosures on the last page of this report
40
Mar-14
400
0.0%
Sep-13
600
60 55
800
Mar-13
1,000
70
Sep-12
1,400
80
Mar-12
1,600
3.0%
Sep-11
2,000
Total Known ETF Holdings of Gold (mn t.oz) 90
Mar-11
Gold Spot (US$/t.oz)
Feb-14
Sep-10
7%
Mar-10
5%
23,500
Taiwan
Sep-09
31%
Source: Bloomberg, IndoPremier
2
Metals & Mining Initiating Coverage
Nickel: Leveraging from Indonesian Ban Ore export ban: The key driver behind strong nickel prices Base metals, nickel in particular, have been performing well this year due to supply concerns from Indonesia’s ore export ban. The ban, first introduced back in 2009, was initially set for implementation in 2012, where it was controversially deferred till January 2014. The Indonesia’s ore export ban is aimed to add value to mined products and promote downstream processing businesses. While short-term tradeoff may include slight worsening of Indonesia’s current account deficit (CAD), long-term benefits are expected to come from higher mineral export value through higher selling prices. We expect with Jokowi ushering a new government, discipline will be maintained in regards to upholding the current mining regulations. Per the Government’s Regulation No. 4/2009 on Coal and Mineral Mining, the following minerals are barred from being exported in their raw form (list may not be exhaustive): nickel, tin, bauxite, gold, silver, copper, and chromium. The government, however, offered some leeway for exports of concentrates under the Finance Ministry Regulation No. 6/2014, hence benefiting mining companies such as Freeport and Newmont (both unlisted). The rule stipulates that these concentrates are only allowed to be exported if miners have obtained the so-called export agreement license (surat persetujuan ekspor, SPE) by committing to build a smelter by 2017 and depositing 5% of smelter’s total capex to the government. For the time being, export duty for concentrates is charged for miners like Freeport and Newmont, starting from 7.5% and gradually declining according to their smelters’ construction progress. Going back to the ore export ban, we believe from the three listed mining companies, only Aneka Tambang (ANTM IJ; Sell) would be adversely affected as nickel ore sales made up 36% of the company’s revenue in FY13. Other listed companies such as Vale Indonesia (INCO IJ; Buy) and PT Timah (TINS IJ; Buy) would not be affected as they have been selling refined products. For stock picks, we prefer INCO and TINS as they have a single product portfolio compared to ANTM—which has nickel, gold, silver, coal, and bauxite—and we believe the global price for nickel and tin alike to gain momentum from supply cuts in Indonesia. We are bullish with nickel and tin, but not precious metals (gold and silver). Exhibit 7. Base metals outperformed precious metals (1-year)
Base Metals
Exhibit 8. Nickel surpassed gold performance (1-year)
Precious Metals
Nickel
120
Gold
160 150
115
140
110
130
105
120 110
100
100
95
90
Refer to important disclosures on the last page of this report
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Source: Bloomberg, IndoPremier *Base Metals: Nickel, Tin, Copper, Zinc, and Lead *Precious Metals: Gold, Silver, Palladium, and Platinum
Sep-13
80
90
Source: Bloomberg, IndoPremier
3
Metals & Mining Initiating Coverage Chinese producers strong on production, thin on supply China, the primary demand driver for most, if not all, of the world’s metals, accounts for roughly 44% of total global nickel consumption according to the International Nickel Study Group (INSG). With a market so vast, we estimate that China annually requires 700k-800k tonnes (MT) of nickel supply to support its nickel pig iron (NPI) industry and satisfy its domestic demand. During 2013, the country imported raw nickel ores from Indonesia (58%) and Philippines (41%), totaling 71mn wet metric tonnes (wmt) to maintain its annual NPI production. With the Indonesian ban, we believe the fate of China’s NPI industry is on the brink, not to mention Philippines’ growing interest to follow the archipelagic nation to ban its exports of raw minerals as well. Nonetheless, we believe that even if Philippines backtrack on its ore export ban, we believe it will still not be enough for China to compensate the loss from Indonesia’s ore supply as Philippines’ nickel ores have a low nickel content of only 1.0% compared to Indonesia’s 1.8%. Exhibit 9. Chinese refined nickel producers to solely rely on Philippines for imported ores Indonesia (kMT)
Philippines (kMT)
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Source: Bloomberg, IndoPremier
With rising global nickel prices seen in 1H14, a lot of Chinese NPI and stainless producers have reportedly curbed their nickel imports in hope of a nickel price correction. But the fact remains that while ore supplies may not get replenished for an indefinite time, producers in China seem to continue with their output at a relatively normal rate as can be seen from the chart below (highlighted red). So far, the lowest production point this year occurred in April (40k MT), although the figure quickly surged back again in the following months. 6M14 Chinese refined nickel production stood at 300k MT. Exhibit 10. Chinese refined nickel producers seem to continue production at normal rate (MT)
Chinese producers still strong on output, implying nickel stock deficit on-track with forecasts
90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
0
Source: Bloomberg, IndoPremier
Refer to important disclosures on the last page of this report
4
Metals & Mining Initiating Coverage With what seems to be a lack of discipline from the Chinese refined nickel producers, it is estimated that nickel ore supply in China would be depleted as early as 4Q14. Antaike, a Beijing-based metals research company, expects that Chinese NPI production this year to reach 450k MT (-6.4% yoy), revised up from 400k MT; and 350k MT for FY15E. Current nickel ore stockpile at Chinese ports is estimated to be 90k MT of pure nickel (as of early September) and is projected to only last till end of October. China expected to widen domestic nickel deficit The domestic refined nickel market in China has consistently been in a state of deficit since 1999. Despite production rate growing at 21.9% CAGR from 1999-2013, domestic consumption growth exceeded output and rose at 25.3% during the same period. Going forward, we expect the dynamics in China to stay the same, further aggravating the domestic supply-demand balance. Without the help of imports, we expect China to run at -500k MT deficit by FY18E, from -198k MT in FY13. Though China has been attempting to alleviate its domestic market imbalance through imports, we forecast it will continue to be insufficient given China’s large demand base. China currently relies heavily on Russia for refined nickel imports (46% of total imports in FY13) and there is risk that the Kremlin state would cut nickel export flows should China joins the West in handing out sanctions to Russia in regards to the unrest in Ukraine. Exhibit 11. China’s refined nickel market balance 2010-2018F (kMT) 2010
2011
2012
2013
2014F
2015F
2016F
2017F
2018F
489
703
805
909
849
939
981
1,035
1,094
44%
15%
13%
-7%
11%
4%
6%
6%
470
591
711
600
486
523
551
580
50%
26%
20%
-16%
-19%
8%
5%
5%
(175)
(233)
(214)
(198)
(249)
(453)
(458)
(484)
(514)
Russia
66
112
76
78
83
86
95
105
121
Canada
29
30
25
26
20
27
30
33
38
Australia
26
27
14
14
5
17
19
21
25
Others
41
43
43
50
37
45
49
55
63
212
158
168
145
175
193
214
247
31%
-25%
6%
-14%
21%
10%
11%
15%
Refined Nickel - Domestic Consum. (kMT) % yoy
Refined Nickel - Domestic Prod. (kMT)
314
% yoy
China Domestic Market Balance (kMT)
Import Data (in kMT):
Total Imports (Refined Nickel)
162
% yoy
Total Exports (Refined Nickel) - kMT
46
% yoy
Total China Net Imports - kMT
116
% yoy
Surplus (Deficit) - China, in kMT
(59)
32
30
40
87
47
47
50
54
-30%
-6%
33%
118%
-46%
0%
6%
8%
180
128
128
58
128
146
164
192
55%
-29%
0%
-55%
120%
14%
12%
17%
(53)
(86)
(70)
(191)
(325)
(312)
(320)
(322)
Source: China Port Customs, USGS, BMI, IndoPremier
Refer to important disclosures on the last page of this report
5
Metals & Mining Initiating Coverage Global nickel balance hinges on new smelter developments While LME nickel inventory shows that stocks seem to be at a safe level—335k MT in September so far—we believe the actual availability of such stock to be limited to be shipped out for buyers. According to our research, nickel inventory in LME is usually tied up in financing contracts, scheduled for delivery already, or are held by producers and speculators and will only be released as a last resort. Hence, when there is a shortage in nickel supply, manufacturers would generally go and seek for nickel scrap first before going to the LME for replenishments. While the global refined nickel balance is mostly in a surplus state right now, we believe the market dynamics will start to take a turn and dive into a deficit next year as nickel ore supply steadily diminishes due to the Indonesian ban. For FY14E/15E, Antaike forecasts global refined nickel balance to be at 80k/-60k MT, a level similar to our estimates’ of 80k/-63k MT. In the long-run, we project global nickel production to run at 2.6% CAGR from FY13-18E versus our demand growth forecast of 5.7% for the same period. We estimate that the global nickel market will be in a deficit of more than 100k MT by FY18E. Exhibit 12. LME nickel inventory and price
LME Nickel Stock (MT)
Exhibit 13. Global nickel balance mostly in a surplus (MT)
LME Nickel Cash (USD/MT) - RHS
400,000
35,000
350,000
30,000
30,000
20,000
300,000
25,000
250,000
10,000
20,000
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
0
Jan-09
0
Source: Bloomberg, IndoPremier
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
-10,000
5,000
50,000
Dec-09
10,000
100,000
Jun-09
0
Dec-08
15,000
150,000
Jun-08
200,000
-20,000
-30,000
Source: Bloomberg, IndoPremier
In our global nickel production forecast, we expect that Chinese producers would experience major setbacks in FY14E-15E, where they adjust to the new nickel ore supply dynamics in light of the Indonesian ore export ban. With the Philippines as the sole remaining major nickel ore supplier, China would need to largely downsize its refined nickel production owing to subpar nickel ore grades from the Philippines compared to Indonesia. We assume in FY15E, China’s nickel production will slowly recover as they get to a new normal. Our production growth assumption for China is 6.1% CAGR in FY15E-18E, a modest figure compared to historical levels of >20%. We also expect that there will be a growing number of Chinese producers who will move NPI production out from China and into Indonesia in order to secure nickel ore supply, which in turn would allow them to meet domestic demand.
Refer to important disclosures on the last page of this report
6
Metals & Mining Initiating Coverage Exhibit 14. Global refined nickel balance 2010-2018F (in kMT) 2010
2011
2012
2013
2014F
2015F
2016F
2017F
2018F
Production (in kMT): China
314
470
591
711
600
486
523
551
580
Russia
263
266
267
266
267
266
267
267
267
Japan
166
157
170
178
170
172
175
171
176
Canada
105
142
140
137
105
113
122
132
143
Australia
102
110
129
142
136
136
138
137
137
19
20
18
18
14
15
17
19
20
5%
-10%
0%
-22%
7%
13%
12%
5%
Indonesia % yoy (Indonesia) Others Total Global Production (kMT)
467
499
541
550
591
718
755
832
952
1,436
1,664
1,856
2,002
1,883
1,906
1,997
2,109
2,274
16%
12%
8%
-6%
1%
5%
6%
8%
% yoy Proportion of global production (%) China
22%
28%
32%
36%
32%
25%
26%
26%
26%
Russia
18%
16%
14%
13%
14%
14%
13%
13%
12%
Japan
12%
9%
9%
9%
9%
9%
9%
8%
8%
Canada
7%
9%
8%
7%
6%
6%
6%
6%
6%
Australia
7%
7%
7%
7%
7%
7%
7%
6%
6%
Indonesia
1%
1%
1%
1%
1%
1%
1%
1%
1%
33%
30%
29%
27%
31%
38%
38%
39%
42%
1,427
1,661
1,729
1,801
1,803
1,970
2,092
2,226
2,378
16%
4%
4%
0%
9%
6%
6%
7%
Others Total Global Consumption (kMT) % yoy Surplus (Deficit) - kMT Avg. Global Nickel Price (USD/MT)
9
3
127
201
80
(63)
(95)
(118)
(104)
21,798
22,843
17,530
15,012
18,141
21,068
22,514
22,500
22,500
Source: World Bureau of Metal Statistics (WBMS), Bloomberg, IndoPremier
However, we believe the global nickel price would need to trade way above current levels of US$15k-17k/MT in order to justify any smelter investments in Indonesia by foreign producers such as from China. If we are to assume total capex of US$1bn to open new NPI (low-grade ferronickel) smelter in Indonesia with annual capacity of 30k MT, a replacement cost of US$33k/MT would be obtained. And suppose that the new smelter is going to last for eight years, we would get capex of ~US$4,125/MT. Adding this to a cash cost of US$14,500/MT (a level similar to ANTM’s ferronickel cash cost) to operate the new plant, and assuming producers are targeting for at least 15% margin, this would mean that global nickel price needs to trade above US$21,000/MT in order to justify the new NPI project. Exhibit 15. Nickel incentive price to justify new smelters in Indonesia (US$/MT) 25,000
20,000
15,000
4,125
18,625
Capex
Break-Even Point
3,275
21,900
15% Target Margin
Incentive Price (Rounded)
14,500
10,000
5,000
0 Cash Cost
Source: IndoPremier
Refer to important disclosures on the last page of this report
7
Metals & Mining Initiating Coverage Based on our research, there are at least 17 NPI/ferronickel (FeNi) projects in Indonesia that have been declared by Chinese investors. The list is not exhaustive so there may be additional investments coming from other investors. The question of whether these investments are feasible entirely depend on their feasibility studies, approach with local communities, acquiring mining licenses, and the capability to provide their own power generation so as to not rely on the state-owned electrical company, PLN. Ultimately, these phases may collectively take 5-10 years before being able to operate commercially. Exhibit 16. List of declared ferronickel/NPI projects by Chinese investors in Indonesia No.
Investors
JV Partner
1
Shandong Xinhai Tech. Ltd.
2
Winning Investment (HK) Ltd.
Harita Group
Tsingshan Group
PT Bintang Delapan Investama
4
Zhe Jian Baoli Mining Ltd.
CKRA
5
PT Cheng Feng Industri
3
6
PT Yinyi Mining Indonesia
7
Yong-Xing Alloy Materials Taizhou Co. Ltd
8 9 10 11
Hanking Group Ltd PT. Yinyi Indonesia Mining Investment Group PT Sekar Gp Ifishdeco/ Pan China/Tekindo Gp
China Nickel Resources
13
China’s Zhejiang Baoli Mining
PT Sulawesi Mining Investment
Country
Type
China
NPI
China
FeNi
China
FeNi
China
FeNi
China PT Indonesia Mining Investment
PT Indonesia Mining Investment
Ibris Nickel Pte. Ltd Bumi Makmur Selaras Group Indonesia PT Harum Sukses & PT Bumi Halteng
PT Karyatama Konawe Utara
Cakra Mineral PT Central Omega Resources Tbk PT Modern Internasional Tbk (MDRN)
China
FeNi
China
NPI
China
FeNi
Capex
Capacity
US$ 320mn
100 ktpa
US$ 1.5bn
300 ktpa
Bantaeng, South Sulawesi Bantaeng, South Sulawesi Konawe, SE Sulawesi
US$ 1.5bn
50 ktpa
US$ 1.8bn
600 ktpa
SE Sulawesi
US$500mn
40 ktpa
Obi island, North Maluku Morowali, Central Sulawesi
Completion
2016
US$900mn
China
NPI
China
NPI
China
FeNi
China
FeNi
PT COR Industri Indonesia
China
NPI
PT Bumi Modern Sejahtera
China
NPI
14
E-United
15
(China)
16
Tsinghan
PT Multi Steel
China
FeNi
PAN China Group
PT Bintang Smelter Indonesia
China
NPI
17
Location
China
PT Titan Mineral Utama
Shenwu
12
Indonesian Company
Konawe, SE Sulawesi Bantaeng, South Sulawesi Batu Licin, South Kalimantan Kolawe, North Sulawesi Morowali, North Sulawesi
US$20mn
2014 1Q15
600 ktpa
2015
36 ktpa
3Q14
160 ktpa
South Sulawesi Tuban, East Java Konawe, SE Sulawesi
10 ktpa 225 ktpa
110 ktpa 110 ktpa US$100mn
2016
100 ktpa
Source: Various media sources, IndoPremier
Indonesia nickel ore production and operational outlook We expect Indonesia’s nickel ore production to grow at 15.3% CAGR from FY14E-18E, as the country enters an adjustment period for its production rate this year (-88% yoy) due to the ore export ban. We believe the big decline in output will be particularly led by Aneka Tambang (ANTM IJ), where the company gave guidance that it will produce 1.3mn wmt in ores this year from 11.5mn wmt last year. Going forward, ANTM’s nickel ore production will be solely used to produce ferronickel, whereas a large portion of last year’s number was exported (~82% of total produced nickel ores). ANTM’s ore production accounted for 25% of the nation’s total nickel ore production back in FY13.
Refer to important disclosures on the last page of this report
8
Metals & Mining Initiating Coverage Exhibit 17. Indonesia’s nickel ore production outlook 2011-18F (in k wmt) ANTM Production
Others
% yoy (Indonesia)
50,000
60%
49.3%
45,000
40%
24.3%
40,000
13.4%
20%
8.8% 4.8%
3.9%
35,000 30,000
0%
25,000
-20%
20,000
-40%
15,000
-60%
10,000
-80%
5,000
-88.4% -100%
0 2011
2012
2013F
2014F
2015F
2016F
2017F
2018F
Source: EMIS, IndoPremier
With Indonesia’s ore export ban, ANTM is set to lose its high-margin ore sales. Back in FY13, we estimate that ANTM’s saprolite (high-grade nickel ore; Ni 2.0%) sales offered a 29% cash margin—second highest after gold margin of 44%. Limonite (low-grade nickel ore; Ni 1.5%) sales gave a 16.5% margin. While it is a given that these figures are way below the levels seen during the commodity super cycle (average saprolite and limonite margins during FY0407 were 68% and 62%, respectively), ore sales can be considered as one of the key factors that kept the company’s performance competitive. Ferronickel cash margin saw the worst for ANTM in FY13, where cash cost was above the selling price, coming in at -5%. In contrast, INCO still managed to post a healthy margin of 28%, largely unchanged compared to FY12. We believe the prime reason for this, in large, is because of the type of energy source that these two companies use in their production process. Exhibit 18. ANTM’s historical nickel ore cash margins (%)
Saprolite 80%
Limonite
Nickel Matte (INCO)
Ferronickel (ANTM)
70%
75% 68%
70%
57%
60%
50%
60% 50%
Exhibit 19. Nickel cash margin comparison: INCO vs. ANTM
50%
58% 57%
39%
43%
30%
30%
33% 29%
20%
29%
32% 17%
35% 28%
30%
2007
2008
2009
2010
2011
2012
2013
Source: ANTM, IndoPremier
Refer to important disclosures on the last page of this report
42% 31%
28%
22% 18% 12%
10% -5%
0%
0%
47%
42%
20%
18%
10%
46%
44%
40%
42%
40%
45%
-10%
2009
2010
2011
2012
2013
2014F
2015F
2016F
Source: Companies, IndoPremier
9
Metals & Mining Initiating Coverage Back in FY11, INCO completed its 90 MW Karebbe hydroelectric project and utilized it to power up its electric furnaces (EFs) instead of using high sulfur fuel oil (HSFO). In addition, the company undertook the Coal Conversion Project (CCP) divided into two phases: CCP1 and CCP2. CCP1 aimed to convert the fuel source for its rotary dryers from using HSFO into pulverized coal. The project was completed back in 2H13. For CCP2, INCO targets to finish the project by YE14 and will replace the usage of HSFO in its reduction kilns into pulverized coal as well. ANTM, in comparison, still relies on diesel as its main energy source for its entire production process. The company, however, is currently constructing a 2x30 MW coal-fired power plant—one of the packages in its Pomalaa Ferronickel Plant Expansion Project (P3FP)— to support its ferronickel operations in Pomalaa, Southeast Sulawesi, set to complete in 3Q15. We expect ANTM to realize 10-15% in ferronickel cost-savings as a result of the new project in FY15E-16E. Corporates’ reserves outlook and operational highlights We believe that the nickel ore reserves outlook for ANTM and INCO is still stable going forward given that their mine lives are still >15 years (INCO: 30 years), using FY13’s production level. Furthermore, with ANTM’s major downsizing of its ore production this year to 1.3mn wmt from last year’s 11.5mn wmt due to the ore export ban would mean that the company potentially has more than 100 years for its nickel ore mine life. For INCO, we assume ore production to stay at around 5.0mn wmt versus ANTM’s 1.3-1.4mn wmt for FY14E-15E. We expect INCO to reduce its production by 5-10% in FY16E as the company reportedly plans to shut-off its EF #1 momentarily (5-6 months) in order to expand its total smelting capacity from 80k tpa to 90k tpa. INCO’s ore and nickel matte production should ramp up accordingly in the subsequent years by 5-15% yoy till FY18E, where we then assume stagnant production growth afterwards. Exhibit 20. ANTM’s nickel ore reserves life
Reserves (k wmt)
Exhibit 21. INCO’s nickel ore reserves life
Saprolite (years) - RHS
Reserves (kMT)
Saprolite (years) - RHS
180,000
50.0
200,000
50.0
160,000
45.0
180,000
45.0
140,000
40.0
160,000
35.0
140,000
30.0
120,000
30.0
25.0
100,000
25.0
20.0
80,000
20.0
15.0
60,000
15.0
40,000
10.0
40,000
10.0
20,000
5.0
20,000
5.0
0
0.0
0
0.0
Source: ANTM, IndoPremier
Refer to important disclosures on the last page of this report
35.0
2013
2012
2011
2010
2009
2008
2007
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
60,000
2006
15.9
2005
80,000
2004
100,000
40.0 29.9
2003
120,000
Source: INCO, IndoPremier
10
Metals & Mining Initiating Coverage Looking at ANTM’s and INCO’s historical nickel ore grades, we believe the outlook is stable as well. ANTM’s saprolite is of higher quality (Ni 2.0%) compared to INCO’s 1.7%-1.8% in nickel content. From FY08-13, ANTM did not report out its limonite ore grades anymore, despite its continuous limonite production volumes. Exhibit 22. ANTM’s nickel ore reserves volume
Exhibit 23. INCO’s nickel ore reserves volume
Saprolite (k wmt)
Limonite (k wmt)
Sapro. Grade (%)
Limo. Grade (%)
Saprolite (k wmt) 200,000
160,000 134,800
120,000
140,000
60,000
127,500
120,000
1.75% 1.70%
100,000
1.5%
80,000
1.80%
160,000
2.5% 2.0%
100,000
1.85%
180,000
3.0%
180,000
140,000
Sapro. Grade (%)
1.65%
80,000 60,000
1.0%
1.60%
40,000
40,000
0.5%
20,000 0
0
0.0% 2003
2005
2007
2009
2011
1.55%
20,000
1.50% 2003
2013
Source: ANTM, IndoPremier
2005
2007
2009
2011
2013
Source: INCO, IndoPremier
In our forecast models, we assume global nickel price to increase by high double-digits at least till FY15E following the Indonesia’s ore supply cut. Our long-term assumption for nickel price is pegged at US$22.5k/MT (or US$10.21/lbs). We assume ANTM’s and INCO’s ASPs to be at a discount to LME nickel price. INCO has a deeper discount to the benchmark than ANTM owing to no inventory risk for the company as it has offtake agreements with its parent companies. Exhibit 24. Our nickel benchmark price assumption and companies’ respective ASPs
LME Nickel Price (US$/MT) US$/lbs % yoy
ANTM (US$/lbs) - Ferronickel % per LME
2009
2010
2011
2012
2013
2014F
2015F
2016F
14,712
21,798
22,843
17,530
15,012
18,141
21,068
22,514
6.67
9.89
10.36
7.95
6.81
8.23
9.56
10.21
-30.1%
48.2%
4.8%
-23.3%
-14.4%
20.8%
16.1%
6.9%
6.77
10.12
9.86
7.81
6.32
8.02
9.32
9.95
101.4%
102.4%
95.2%
98.2%
92.8%
97.5%
97.5%
97.5%
INCO (US$/MT) - Nickel Matte
11,376
16,829
18,597
13,552
11,939
14,304
16,612
17,752
% per LME
77.3%
77.2%
81.4%
77.3%
79.5%
78.8%
78.8%
78.8%
Source: Bloomberg, Companies, IndoPremier
Refer to important disclosures on the last page of this report
11
Metals & Mining Initiating Coverage
Tin: Tactical Execution is Key Favorable tin regulation to protect domestic interests Tin is also one of the metals that are regulated by the Indonesian government. Under the Trade Ministry Regulation No. 32/2013 (effective August 30th, 2013), domestically produced tin ingots (at least 99.9% Sn) must be traded first through a local commodity exchange (e.g. ICDX) prior to exports. As far as we are concerned, PT Timah (TINS IJ; Buy) already followed the regulation since its implementation as the company exports 95% of its total refined tin products overseas. Initially, the government also declared that non-ingot tin products such as tin solders must be traded through the ICDX before being exported; but was met with heavy resistance by miners and refiners, arguing that solders are a “finished product”. As of September, tin solders are not required to be traded through the ICDX in order to be exported. What we think is more interesting though, is the government’s upcoming tin regulation that has not gained much of the media’s attention through the Trade Ministry Regulation No. 44/2014. The new policy is expected to provide a clearer picture on the regulation of tin solders. Based on our company meeting with TINS, the new law would require manufacturers of tin solders to procure their raw materials from the ICDX. In essence, producers are not allowed to use their own tin metal/ingot to produce tin solders in-house; they must purchase the metal from the ICDX. So companies like TINS would possibly need to conduct buybacks on their own metal through the local exchange in order to manufacture solders. The government plans to implement such regulation this coming November. With the tin regulation, the government aims to cut down illegal tin smugglings from Indonesia and create a more structured tin pricing mechanism—an aspiration to follow the footsteps of well-reputed global commodity exchanges such as the LME and COMEX. All in all, we believe a regulation like this would give positive benefits to TINS. Exhibit 25. LME tin inventory and price
LME Tin Inventory (MT)
Exhibit 26. Historical overview of Indo’s exported tin volumes
LME Tin Cash (US$/MT) - RHS
Total Indo Tin Export (MT)
% yoy
30,000
35,000
16,000
300%
25,000
30,000
14,000
250%
25,000
12,000
200%
20,000
10,000
15,000
8,000
10,000
6,000
5,000
4,000
-50%
0
2,000
-100%
20,000
150%
15,000
100%
10,000 5,000
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
0
Source: Bloomberg, IndoPremier
50% 0%
0 Jun-11
-150% Jun-12
Jun-13
Jun-14
Source: Bloomberg, IndoPremier
A majority of Indonesia’s exported tin is Singapore-bound (68% on average), which could indicate the extent of illegal tin mining in Indonesia due to its close proximity with Indonesia. On the other hand, TINS’ top buyer back in FY13 was Japan (26% of total sales), and Japan accounted for 3% of Indonesia’s total exported tin. Second biggest market for the company was Taiwan (16%), and then South Korea (11%). Back before FY11, TINS controlled more than 60% of Indonesia’s total tin production. However, with the recent decline in ore grade in TINS’ primary underwater mining locations (Bangka and Kundur), the company’s production level decreased accordingly and now controls less than 40% of the nation’s total refined tin output. The company does not have offtake agreements with any buyers and ever since the tin regulation was implemented from last August, the company declared force majeure with its long-term contract buyers and no longer tracks its customers. TINS now trades its ingots using the ICDX spot price instead of the LME.
Refer to important disclosures on the last page of this report
12
Metals & Mining Initiating Coverage Exhibit 27. Indo’s exported tin volumes per destination (MT)
Singapore
Japan
Malaysia
Netherlands
Exhibit 28. TINS’ refined tin sales per destination (%, 2013)
Others
12,000 Japan
10,000 Taiwan
26%
31%
8,000
Korea
6,000
Indonesia
4,000
USA
16%
5%
Singapore
2,000
5% 7%
0 Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
11%
Others
Jul-13
Source: Bloomberg, IndoPremier
Source: TINS, IndoPremier
We expect persistent deficit in global refined tin balance going forward The global refined tin market has been in a somewhat mixed balance for the past five years: from a surplus in FY09, deficit in FY10-11, then surplus in FY12, and back to a deficit again in FY13. Nonetheless, we expect the global refined tin market to enter into a persistent deficit structure going forward as we believe demand from the electronics industry in United States, Europe, Japan, and China (when its economy recovers) would continue to outpace global refined tin production. We estimate that the global refined tin market to reach a deficit of -17k MT by FY18E, from -8k MT in FY13. Our production growth is targeted at 3.4% CAGR from FY13-18E versus consumption growth of 3.7% for the same period. Hence, we are bullish with global tin price outlook and forecast the metal to trade at US$25.0k/MT in the long-term. Exhibit 29. Global refined tin market balance 2009-18F (in MT)
PT Timah Prod (TINS)
2009
2010
2011
2012
2013
2014F
2015F
2016F
2017F
2018F
45,086
40,413
38,132
29,512
23,718
28,000
26,802
26,802
26,802
26,802
-10%
-6%
-23%
-20%
18%
-4%
0%
0%
0%
63%
52%
37%
38%
43%
39%
38%
36%
35%
% yoy % of Total Indonesia Others - Domestic Total Indonesia Production (MT)
69% 19,914
23,787
34,868
50,288
39,282
37,520
41,339
44,065
46,899
49,848
65,000
64,200
73,000
79,800
63,000
65,520
68,141
70,866
73,701
76,649
-1.2%
13.7%
9.3%
-21.1%
4.0%
4.0%
4.0%
4.0%
4.0%
149,026
155,499
147,863
158,503
197,447
170,597
174,432
178,354
182,363
6.1%
4.3%
-4.9%
7.2%
24.6%
-13.6%
2.2%
2.2%
2.2%
% yoy
China
140,400
% yoy Malaysia
36,407
38,737
40,267
37,791
32,668
28,274
38,772
39,644
40,535
41,446
Thailand
19,092
23,502
23,864
22,847
22,984
16,460
23,263
23,786
24,321
24,868
Other Countries
75,668
82,180
76,624
76,775
74,305
71,897
86,948
87,709
88,439
89,135
336,567
357,645
369,254 365,076 351,460
379,598
387,721
396,437
405,349
414,462
Total Global Production (MT) % yoy
6.3%
3.2%
-1.1%
-3.7%
8.0%
2.1%
2.2%
2.2%
2.2%
18%
% of world production Indonesia
19%
18%
20%
22%
18%
17%
18%
18%
18%
China
42%
42%
42%
41%
45%
52%
44%
44%
44%
44%
Malaysia
11%
11%
11%
10%
9%
7%
10%
10%
10%
10%
Thailand Others
Total Global Consumption (MT)
6%
7%
6%
6%
7%
4%
6%
6%
6%
6%
22%
23%
21%
21%
21%
19%
22%
22%
22%
22%
325,819
371,181
382,078 362,503 359,721
392,427
401,610
411,192
421,110
431,600
9.1%
2.3%
2.4%
2.4%
2.5%
% yoy
13.9%
2.9%
Surplus (Deficit) - MT
10,748 (13,536) (12,824)
Avg. Global Tin Price (USD/MT)
13,618
20,408
25,958
-5.1%
-0.8%
2,573 (8,261) (12,829) (13,888) (14,755) (15,761) (17,138) 21,087
22,270
22,500
24,250
24,787
25,000
25,000
Source: World Bureau of Metal Statistics (WBMS), Company, IndoPremier
Refer to important disclosures on the last page of this report
13
Metals & Mining Initiating Coverage TINS’ sales strategy proved effective in 1H14 During 1H14, TINS managed to produce 10.8k MT (+12.4% yoy) of refined tin from last year’s level of 9.6k MT. However, tin metal sales for the period were down by -11.8% yoy for the company from 11.0k MT to 9.7k MT due to management’s attempt to boost global tin price by restricting tin sales volume. We estimate that TINS accounts for 20-25% of Indonesia’s total exported refined tin volumes annually. Hence, we believe with any supply curtailments from the company would subsequently affect the nation’s total tin exports—which ultimately would influence the global tin supply and price to a certain extent. We believe it is also worth noting that Indonesia is the world’s largest refined tin exporter. We believe that the company succeeded in their short-term strategy, as global tin price managed to spike by +11% from January to end of April, hitting US$23.9k/MT from a low US$21.5k/MT in Jan ‘14. TINS is one of our top picks in the mining space as we believe it has pricing power to a certain degree by controlling tin deliveries. Exhibit 30. Global tin price boosted by reduced supply from TINS in 1H14 LME Tin Inventory (MT)
LME Tin Cash (US$/MT) - RHS
12,000
24,000 23,500
10,000
23,000 8,000
22,500
Global tin price gained +11% due to low volumes from TINS
6,000
22,000 21,500
4,000
21,000 2,000
20,500
0 Jan-14
20,000 Feb-14
Mar-14
Apr-14
May-14
Jun-14
Source: Bloomberg, IndoPremier
We expect TINS to closely monitor its production and sales volume going forward as the company aims to support global tin price above US$23k/MT—which ever since 1H14, the metal has been trading below the desired level as LME stocks kept rising (despite no upward surge in Indonesia’s tin shipments). According to ITRI, Indonesian tin trades have largely dried up since end of August when the metal started to trade at subpar level (85k MT in FY17E onwards. Earnings performance to shift into high gear. In line with our bullish view on global nickel prices, we expect INCO to record 72% CAGR in earnings growth for FY13-17E. We believe the company will have the ability to post double-digit net margin in light of the favorable global nickel price coupled with its cost-savings initiatives. We also view that the company has relatively low operating risk due to the fact that it has offtake agreements with its parent companies (Vale Canada and Sumitomo Metal Mining). The stars are aligned for INCO; initiate at BUY. INCO is our top pick in the mining space as we believe the company’s robust cost management and anticipated surge in global nickel price would further enhance the company’s value. Our target price of Rp4,750/share is DCF-based, with terminal value determined by a 10% success rate in converting its resources into reserves. Financial Highlights (USD mn) Sales Revenue EBITDA Net Profit EPS (US$) EPS Growth (%) P/E Ratio (x) EV/Reserve (US$/MT) ROAE (%) ROIC (%) Dividend Yield (%)
2012 967 256 68 0.0068 -79.8 46.7 1,755 3.9% -2.2% 3.5%
2013 922 236 39 0.0039 -42.7 81.6 1,407 2.2% -0.6% 1.6%
2014F 1,139 377 201 0.0202 419.9 15.7 1,407 11.1% 8.7% 0.7%
2015F 1,322 488 274 0.0276 36.3 11.5 1,435 13.8% 7.5% 3.5%
2016F 1,333 524 287 0.0289 4.8 11.0 1,468 13.4% 6.0% 4.8%
Source: INCO, IndoPremier (Share price as of closing October 1, 2014)
Refer to important disclosures on the last page of this report
24
Metals & Mining Initiating Coverage Exhibit 49. INCO’s sales revenue outlook FY11-17E
Sales Revenue (USD mn)
Exhibit 50. INCO’s sales volume destination per offtake agrmt.
% yoy
1,600
30% 23.5%
1,400
16.1%
13.9%
1,200
20%
10%
1,000 800
20%
-2.6%
Vale Japan
0%
Sumitomo Metal Mining (Japan)
0.8% 600
80%
-10%
-4.7% 400
-20%
200 -22.2%
0 2011
2012
-30% 2013
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
Source: INCO, IndoPremier
Exhibit 51. INCO’s FY13 COGS structure
Exhibit 52. INCO’s cash cost and margin outlook
Cash Cost (USD/MT) 5.5%
Cash Margin (%)
10,000
12.8%
49.6%
Direct Labor
14.2% 0.9%
60% 46.3% 47.3%
9,500
Fuel
9,000
28.4%
Services & Contracts 37.2%
50% 40%
Supplies 11.3%
47.7%
41.8%
30%
28.0%
8,500
Royalties
20% Depreciation
8,000
Others
18.0%
10%
7,500
0% 2011
Source: INCO, IndoPremier
2013
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
Exhibit 53. INCO’s profitability outlook
Gross Margin
EBIT
Exhibit 54. INCO’s projected net earnings
Net Margin
Net Profit (USD mn)
45%
400
40%
350
35% 30%
2012
336
334 274
300
26.9%
25%
20.7%
20%
21.5%
22.2%
250
287
201
200
17.6% 150
15%
100
10% 5%
7.0%
0% 2011
2012
68 39
50
4.2% 2013
0
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
Refer to important disclosures on the last page of this report
2011
2012
2013
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
25
Metals & Mining Initiating Coverage
Shine Bright Like a Diamond Excellent track record in cost management INCO is our top-pick in the mining sector owing to favorable global nickel price outlook and its consistent track record for being able to deliver on its cost-optimization programs such as the Karebbe hydroelectric power plant project (completed in FY11 to power up electric furnaces) and its Coal Conversion Project I (CCP1) back in FY13. Back in FY13, 81% of INCO’s fuel component in its COGS was contributed from HSFO, whereas the remaining 19% was attributed to high speed diesel (HSD). The company undertook CCP1 project in efforts to convert the energy source for its dryer kilns from using high sulfur fuel oil (HSFO) to pulverized coal. We estimate that the project resulted in 5% reduction in HSFO usage from 32.4 bbl/MT to 30.8 bbl/MT. In FY14E, INCO will continue the coal conversion project under the name of CCP2, in which the use of HSFO in reduction kilns will be switched into pulverized coal as well. We forecast INCO’s dependence on the heavy fuel to decrease by 25% yoy in FY14E to only 23.1 bbl/MT. 1H14 result has been encouraging so far where HSFO usage was down by 35% yoy from 32.9 bbl/MT to 21.5 bbl/MT. INCO procures its HSFO supplies from Kuo Oil (S) Pte Ltd., a Singapore-based oil company, and the fuel price is based on the Singapore Platts indices. HSD supplies are sourced from state-owned local company, Pertamina. HSFO is used to operate the processing plant (e.g. rotary dryers and reduction kilns), whereas HSD is used to fuel INCO’s mining fleets (e.g. trucks, cars, tractors) and power generators. Exhibit 55. INCO’s HSFO usage outlook
HSFO (kilo bbl) 2,500
2,360
2,290
Exhibit 56. INCO’s diesel usage outlook
% yoy
Diesel (kilolitres)
2,331 14.0% 1,836
2,000
1,560
1.8%
1,500
1,678 1,472
-3.0% 1,000
500
-5.7%
-14.9%
-15.0%
20%
90,000
15%
80,000
10%
70,000
5%
60,000
0%
50,000
-5%
40,000
-10%
30,000
-15%
20,000
-20%
10,000
-21.2% 0
-25% 2011
2012
2013
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
% yoy
14.0%
20%
10.7% 10%
7.1%
0% -7.7% -3.0%
-10%
-5.7%
-20% -30% -36.9%
0 2011
2012
2013
-40% 2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
With INCO’s rapid initiative to control costs, we forecast the company’s FY14E cash cost (excluding royalty) to decrease by 3.2% yoy to US$8.3k/MT, generating substantial cash margin of 41.8%. We believe the figure will be sustainable going forward as the company will be less dependent on the expensive heavy fuel, HSFO, on a bbl/MT basis. Back in FY13, INCO’s COGS structure was still dominated by fuel (37% of COGS) owing to HSFO and diesel usage. Fuel accounted for 31.5% of the company’s total revenue. Second biggest cost contributor was supplies (18% of COGS), followed by depreciation (14% of COGS), and labor (13% of COGS).
Refer to important disclosures on the last page of this report
26
Metals & Mining Initiating Coverage
Exhibit 57. INCO’s cash cost and margin outlook
Cash Cost (USD/MT)
Exhibit 58. INCO’s FY13 COGS structure
Cash Margin (%)
10,000
5.5%
60% 49.6%
46.3% 47.3%
9,500
47.7%
12.8% Direct Labor
14.2%
50%
41.8%
0.9%
Fuel
40% 9,000
28.4%
Supplies
30%
Services & Contracts
11.3%
28.0%
8,500
37.2%
20%
Royalties Depreciation
8,000
10%
7,500
Others
18.0%
0% 2011
2012
2013
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
Source: INCO, IndoPremier
INCO’s planned expansion set to increase volumes As global nickel prices gained momentum since earlier this year, management gave a more upbeat FY14E guidance compared to last year where it aims to produce 79.6k MT of nickel matte (+5.0% yoy). We assume the company will sell the same amount as it produced. We forecast INCO’s sales volume to increase by 2.6% CAGR from FY13-17E; whereas for INCO’s nickel ASP we estimate it will grow by 10.4% for the same period. Our long-term benchmark nickel price is set at US$22.5k/MT. INCO’s nickel ASP is at 78% of the benchmark’s price owing to no inventory risk as it has offtake agreement with its parent companies (Vale Canada and Sumitomo). Following our meeting with the company, INCO plans to switch off its furnace #1 in FY16E by approximately five months to expand its smelting capacity. Currently, the company has a total capacity of 80k tpa and with the planned expansion, aggregate capacity should add up to 90k MT. Hence, we have shown in our forecast model that INCO’s nickel matte production and deliveries in FY16E will decrease by approximately 5.7% yoy in light of the new project. It is also worth to note that the average life span for INCO’s electric furnaces is around 15 years. Exhibit 59. INCO’s production and sales volume outlook Production (MT)
Deliveries (MT)
% yoy (Deliv.)
90,000
20% 14.0%
80,000 70,000
8.2%
10%
6.8%
60,000
3.1%
50,000
15%
5% 0.0%
40,000
0%
30,000
-5%
20,000
-5.7%
-10%
10,000 0
-11.9% 2011
-15% 2012
2013
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
Refer to important disclosures on the last page of this report
27
Metals & Mining Initiating Coverage INCO schedules its nickel shipments once every two weeks where they are Japan-bound. Though one of the stated destinations is supposedly Canada (as INCO’s main shareholder is Vale Canada), the actual buyer is Vale Japan as it is the consignee for the product. The offtake agreements are currently set to expire in 2025, where extensions and renegotiations are usually made as the expiration year draws near. INCO ships 80% of its nickel matte volume to Vale Japan, and the remaining 20% to Sumitomo. Pricing is based on previous month’s average nickel price. Exhibit 60. INCO’s sales revenue outlook
Exhibit 61. INCO’s customer base per offtake agreement
Sales Revenue (USD mn)
% yoy
1,600
30% 23.5%
1,400
16.1%
13.9%
1,200
20%
10%
1,000 800
20%
-2.6%
Vale Japan
0%
Sumitomo Metal Mining (Japan)
0.8% 600
80%
-10%
-4.7% 400
-20%
200 -22.2%
0 2011
2012
-30% 2013
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
Source: INCO, IndoPremier
INCO’s earnings set to accelerate by 72% CAGR in FY13-17E In line with our bullish view on global nickel prices, we expect INCO to post double-digit net margin and robust earnings in FY14E. Going forward, we believe the company will have the potential to record 72% earnings growth (CAGR) from FY13-17E as persistent deficit in global nickel market should provide INCO with a positive earnings outlook. Exhibit 62. INCO’s profitability overview
Gross Margin
EBIT
Exhibit 63. INCO’s projected net earnings
Net Margin
Net Profit (USD mn)
45%
400
40%
350
35% 30%
336
334 274
300
26.9%
25%
20.7%
20%
21.5%
22.2%
250
287
201
200
17.6% 150
15%
100
10% 5%
7.0%
0% 2011
2012
68 39
50
4.2% 2013
0
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
Refer to important disclosures on the last page of this report
2011
2012
2013
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
28
Metals & Mining Initiating Coverage INCO’s gearing level still at very healthy level INCO has several debt covenants with its creditors, among which are: 1) Debt-to-EBITDA of not more than 4.5x (or 450%), and 2) EBITDA-to-interest expense of a minimum of 2.0x. As of FY13, INCO complied with the covenants as debt-to-EBITDA was 1.0x and EBITDA-tointerest expense was 16.0x. The company emphasizes conservative financial profile (low debt) to prepare for weak cash cycle during a downturn such as last year. It currently has a long-term debt—under Senior Export Facility Agreement, or “SEFA”—payable to Bank of Tokyo-Mitsubishi (BoTM; US$200mn) and Mizuho Bank (MB; US$100mn), which was initially taken out to finance the Karebbe hydroelectric power plant project completed in FY11. As stated in the SEFA facility agreement, the borrowing cost is LIBOR +1.5% p.a. and INCO must: 1) pay US$20k every November 30th, and 2) US$25k to BoTM as well as US$12.5k to MB every February and August of each year until maturity. We estimate that the last principal and interest will be paid by FY19E. Exhibit 64. INCO’s debt-to-EBITDA overview
Exhibit 65. INCO’s EBITDA-to-interest expense outlook
Debt/EBITDA (x) 1.20
EBITDA/Int. Exp. (x) 234
250
1.08 0.98
1.00
200
0.80 150
0.60
0.52
122 107
0.42
100
80
0.40 0.23
43
50
0.15
0.20
0.08
17
16
2012
2013
0
0.00 2011
2012
2013
2014F
2015F
2016F
2011
2017F
Source: INCO, IndoPremier
2014F
2015F
2016F
2017F
Source: INCO, IndoPremier
Sensitivity analysis on earnings Our sensitivity analysis suggests that INCO’s earnings would be most volatile to changes in global nickel prices. Nonetheless, we believe the risk to INCO’s nickel ASP is to the upside due to the expected structural deficit in global nickel balance starting in FY15E. Exhibit 66. Earnings sensitivity analysis (%) FY15E
FY16E
FY17E
Nickel ASP: +/- 1%
3.5%
3.3%
3.2%
Nickel Matte Volume: +/- 1%
1.2%
1.1%
1.1%
HSFO Price: +/- 1%
0.4%
0.4%
0.4%
Source: IndoPremier
Refer to important disclosures on the last page of this report
29
Metals & Mining Initiating Coverage Valuation Our target price of Rp4,750/share for INCO is derived from our fair-value estimate at the end of 2015, using a two-stage DCF methodology based on the following assumptions: •
Explicit forecast for FY16E-25E forms the first stage of our DCF analysis. We assume production and sales volume for INCO’s intermediate product, nickel-in-matte, to stay at a constant level starting in FY18E. Our long-term nickel benchmark price, which starts at FY17E, is pegged at US$22,500/MT.
•
For the second stage of our DCF analysis, the terminal value, we employ the exit multiple approach instead of the terminal growth rate as mining companies such as INCO have finite lives. We estimate that INCO has pure nickel resource of 7.9mn MT as of FY13, which is 3.5x to its reserves level (similar to ANTM and TINS’ level). We assume that the company has 10% success rate in upgrading these resources into reserves, which would give INCO additional 8 years for its nickel reserves, in addition to its actual remaining 11 years for its nickel reserves starting from FY25E (the terminal year) onwards. We then multiply our FCF at the terminal year by these additional years to generate our terminal value for INCO.
•
We assume WACC of 10.2%, cost of equity of 10.4%, and cost of debt of 4.2%. These are derived from input factors such as risk-free rate (8.0%), market risk premium (6.0%), beta (0.4x), target gearing (2.7%), and corporate tax rate (30.0%). INCO’s WACC assumptions in DCF valuation Risk-Free Rate (Rf)
8.0%
Market Return (Rm)
14.0%
Market Risk Premium
6.0%
Beta
0.4
Cost of Equity (ke)
10.4%
After-Tax Cost of Debt
4.2%
Target Gearing
2.7%
Corporate Tax Rate
30.0%
Source : IndoPremier
DCF Valuation
2016F
2017F
2018F
2019F
2020F
2021F
2022F
2023F
2024F
2025F
(in USD mn) EBIT
439.19
506.56
529.35
529.35
529.35
529.35
529.35
529.35
529.35
529.35
Tax Rate
-131.76
-151.97
-158.81
-158.81
-158.81
-158.81
-158.81
-158.81
-158.81
-158.81
NOPAT
307.43
354.59
370.55
370.55
370.55
370.55
370.55
370.55
370.55
370.55
Depr. & Amort. CAPEX
84.59
44.41
45.52
46.66
47.83
19.61
19.81
20.00
20.20
45.91
-172.64
-90.64
-92.90
-95.22
-97.61
-40.02
-40.42
-40.82
-41.23
-93.70
NWC
1.46
-21.43
-5.09
0.49
2.67
3.64
-2.39
-4.67
-5.16
-0.75
FCFF
220.84
286.94
318.07
322.47
323.44
353.77
347.54
345.06
344.36
322.01
200.34
236.14
237.45
218.39
198.71
197.17
175.71
158.26
143.28
121.54
PV of FCF
PV Ter. Value
2,330.24
Value of Firm
4,217.22
Total Debt Value of Equity
# Shares Outs.
-110.73 4,106.49
9,936
Value per Share (US$)
0.4133
Value per Share (Rp)
4,753
million
Source: IndoPremier
Refer to important disclosures on the last page of this report
30
Metals & Mining Initiating Coverage
Sensitivity analysis to 1% change in WACC and terminal value assumptions
WACC
Rp4,753
Resource-Reserve Conversion Rate 0%
5%
10%
15%
20%
8.2%
4,160
4,834
5,507
6,180
6,854
9.2%
3,884
4,498
5,113
5,727
6,341
10.2%
3,631
4,192
4,753
5,313
5,874
11.2%
3,399
3,912
4,424
4,936
5,449
12.2%
3,187
3,655
4,124
4,592
5,060
Source: IndoPremier
INCO’s 12-month forward P/E band overview 70
64x (+2 Std. Dev.)
60
48x (+1 Std. Dev.) 50 40
32x (Average) 30 20
15x (-1 Std. Dev.)
10
-1x (-2 Std. Dev.) 0 -10 Jan-11
Jan-12
Jan-13
Jan-14
Source: Bloomberg, IndoPremier
Refer to important disclosures on the last page of this report
31
Metals & Mining Initiating Coverage
Year to 31 Dec (USD mn)
2012
2013
2014F
2015F
2016F
Income Statement Revenue
967
922
1,139
1,322
1,333
Cost of Sales
(801)
(782)
(785)
(881)
(874)
Gross Profit
167
140
354
441
458
SG&A Expenses
(13)
(13)
(16)
(19)
(19)
Exploration Operating Profit
-
-
-
-
-
154
127
338
422
439
EBITDA
256
236
377
488
524
Net Interest:
(15)
(14)
(8)
(5)
(3)
1
0
1
1
1
(15)
(15)
(9)
(6)
(4)
(6)
(23)
(14)
(0)
(1)
(41)
(35)
(35)
(35)
(35)
Interest Income Interest Expense FX Gain (Loss) Others - Net Pre-Tax Profit Inc. Tax - Net Minority Interest
91
55
280
382
400
(24)
(17)
(79)
(108)
(113)
-
-
-
-
-
68
39
201
274
287
Cash & Equiv.
172
200
252
270
291
Receivables
113
66
95
110
111
Inventory
153
151
152
170
169
Others
127
141
127
127
127
Current Assets
565
557
626
678
698
1,625
1,652
1,693
1,761
1,849
144
72
92
92
92
Non-Curr. Assets
1,768
1,724
1,786
1,853
1,941
Total Assets
2,333
2,281
2,411
2,531
2,639
36
36
22
15
11
-
-
-
-
-
79
76
74
83
82
Net Profit Balance Sheet
Fixed Assets - Net Other LT Assets
Current Maturities ST Borrowings Trade Payables Other Liabilities
51
57
66
71
72
Current Liabilities
166
169
161
169
165
LT Debt
242
195
136
95
67
Other Liabilities
204
203
216
201
201
Non-Curr. Liabilities
446
398
352
296
268
Total Liabilities
612
567
513
465
433
Total Shareholders' Equity
1,721
1,714
1,898
2,066
2,206
Total Liabilities & Equity
2,333
2,281
2,411
2,531
2,639
Source: INCO, IndoPremier
Refer to important disclosures on the last page of this report
32
Metals & Mining Initiating Coverage
Year to 31 Dec (USD mn)
2012
2013
2014F
2015F
2016F
Cash Flow Statement Net Profit
68
39
201
274
287
102
109
40
65
85
-
-
-
-
-
Changes in W/C
(26)
37
3
(34)
1
CF from Oper.
139
189
248
309
377
CAPEX
(148)
(136)
(81)
(133)
(173)
Others
(82)
72
(20)
-
-
(230)
(65)
(101)
(133)
(173) (33)
Depr. & Amort. Minority Interest
CF Investing Change in Debt
(26)
(47)
(73)
(47)
ST Borrowings
-
-
-
-
-
Dividends Paid
(110)
(50)
(21)
(111)
(151)
Others
-
-
-
-
-
CF Financing
(137)
(97)
(94)
(158)
(184)
Cash Reclass.
-
-
-
-
-
Change in cash
(227)
28
52
18
21
Beg. Cash Balance
399
172
200
252
270
End. Cash Balance
172
200
252
270
291
Gross Margin (%)
17.2%
15.2%
31.1%
33.4%
34.4%
Oper. Margin (%)
15.9%
13.8%
29.6%
31.9%
33.0%
EBITDA Margin (%)
26.5%
25.6%
33.1%
36.9%
39.3%
7.0%
4.2%
17.6%
20.7%
21.5%
46.7
81.6
15.7
11.5
11.0
1.8
1.8
1.7
1.5
1.4
12.7
13.5
8.1
6.1
5.6
EV/Reserves (US$/MT)
1,755
1,407
1,407
1,435
1,468
Mkt Cap/Reserves (US$/MT)
1,699
1,394
1,450
1,512
1,575
Key Ratios Earnings Margin
Net Margin (%) Valuation P/E (x) P/BV (x) EV/EBITDA (x)
Leverage Oper. CF/Debt (x)
0.50
0.82
1.57
2.79
4.87
Debt/Equity (x)
0.16
0.13
0.08
0.05
0.04
Debt/EBITDA (x) EBITDA/Int. Exp. (x)
1.08
0.98
0.42
0.23
0.15
16.55
16.07
43.20
79.80
122.48
Profitability ROAA (%)
2.8%
1.7%
8.6%
11.1%
11.1%
ROAE (%)
3.9%
2.2%
11.1%
13.8%
13.4%
ROIC (%)
-2.2%
-0.6%
8.7%
7.5%
6.0%
3.5%
1.6%
0.7%
3.5%
4.8%
Dividend Yield (%) Source: INCO, IndoPremier
Refer to important disclosures on the last page of this report
33
Metals & Mining Initiating Coverage
PT Timah BUY
(TINS IJ)
(Initiating Coverage)
The Metal Strategist
Stock Data Target price (Rp)
1,700
Prior TP (Rp)
-
Share price (Rp)
1,215
Upside/downside (%)
Management expects 7-8% in cost-savings from new coal power plant Supply curtailments boosted 1H14 tin price, but sustainability is key
40
Shares outstanding (m)
7,448
Market cap. (US$ m)
745.7
Free float (%)
35
Avg. 6m daily T/O (US$ m)
1,9
Price Performance 3M
6M
12M
Absolute (%)
-12.0
-7.6
16.
Relative to JCI (%)
-13.6
-9.2
3.5
52w high/low (Rp)
Updated tin regulation to downsize illegal miners; further supply cut We recommend BUY on TINS as operations are backed by government We initiate BUY on PT Timah (TINS) with DCF-based target price of Rp1,700/share, implying FY15E P/E of 17.7x. As the Indonesian government is set to implement an updated policy on refined tin products, we expect TINS to be the prime beneficiary of such regulation. The downsizing of illegal tin miners would result in further cuts in global tin supply and provide strong support for the metal price.
1.595/848
New projects underway. TINS is currently undertaking two new projects, the 2x10 MW coal-fired power plant and the rare earth project. We prefer the former over the latter as the power plant is expected to save 7-8% of total production cost when completed. The rare earth project, though stirred some hype among investors, might be insignificant to the company’s top-line contribution. We estimate that with the company’s plan to produce 50 kg/day of rare earths coupled with ASP assumption of US$230/kg, contribution to revenue may be less than 1%.
160 150 140 130 120 110 100 90 80 70 1-Oct
1-Jan
1-Apr JCI
1-Jul
1-Oct
TINS
Major Shareholders Republic of Indonesia
65%
Estimate Change; Vs. Consensus 2014F
2015F
86
96
Vs. Prior EPS (%)
n/a
n/a
Vs. Consensus (%)
3.6
1.1
Latest EPS (Rp)
The strategist is put to the test. While we view that the company succeeded in boosting global tin price by 11% in 1H14 by curtailing their tin shipments, the metal has not been performing well in 2H14 due to still-high inventories at the LME (estimated at 9-10k MT) due to other tin producers. Despite successfully exhibiting pricing power to a certain degree, the company’s profitability is still a function of global tin supply and demand. Nonetheless, as we expect global tin balance to enter a consistent deficit structure due to new regulations from Indonesia, we believe there is a bull case for global tin price. New regulation to benefit TINS. The Indonesian government is set to implement Trade Ministry Regulation (TMR) No. 44/2014 this coming November as a follow-up to TMR No. 32/2013. This newly updated policy would require manufacturers of tin solders (including TINS) to procure their raw materials—the tin metal itself—from the ICDX. In essence, we view that this would help downsize the amount of illegal tin supply that would have otherwise proliferated and get exported, thus disrupting the global market dynamics. Backed by Indo government; initiate at BUY. With the Indonesian government attempting to eliminate illegal miners, we expect this would provide TINS with a constructive operating framework and further aggravate global refined tin supply. Our target price of Rp1,700/share is DCF-based, with terminal value determined by a 15% success rate in converting its resources into reserves. Financial Highlights (Rp Billions) Sales Revenue EBITDA Net Profit EPS (Rp) EPS Growth (%) P/E Ratio (x) EV/Reserve (US$/MT) ROAE (%) ROIC (%) Dividend Yield (%)
2012 7,363 993 432 58 -51.9 21.0 3,111 9.4% -0.3% 5.0%
2013 5,852 1,027 515 69 19.3 17.6 3,370 10.9% 4.6% 2.4%
2014F 7,111 1,465 640 86 24.3 14.1 4,074 12.6% 5.1% 2.8%
2015F 7,901 1,337 713 96 11.4 12.7 4,773 13.0% 5.0% 3.5%
2016F 8,076 1,382 720 97 1.0 12.6 5,572 12.3% 4.4% 3.9%
Source: TINS, IndoPremier (Share price as of closing October 1, 2014)
Refer to important disclosures on the last page of this report
34
Metals & Mining Initiating Coverage Exhibit 67. TINS’ sales revenue outlook
Exhibit 68. TINS’ production and sales volume outlook
Sales Revenue (Rpbn)
% yoy
Production (MT)
9,000
30% 20%
7,000
10% 0.9% -2.5%
-10%
30,000
0% -10%
15,000
-16.1%
-20%
10,000
-20% -20.5%
0
-30% 5,000
2013
2014F
2015F
2016F
-33.6%
0
-30% 2012
2011
2017F
Source: TINS, IndoPremier
2012
2013
-40% 2014F
2015F
2016F
2017F
Source: TINS, IndoPremier
Exhibit 69. TINS’ FY13 COGS structure
Exhibit 70. TINS’ cash cost and margin outlook
Cash Cost (USD/MT)
4%
0.0% 0.0%
20,000
-9.4%
2011
10%
3.1%
2.8%
0%
3,000
1,000
20%
40,000
25,000
2.2%
4,000
2,000
45,000
35,000
11.1%
6,000 5,000
% yoy (Deliv.)
12.1%
21.5%
8,000
Deliveries (MT)
3%
Cash Margin (%)
19,500
4%
19,000
Raw Materials 7%
18,500
Fuel
35% 28.6%
28.1%
27.4%
27.4% 27.4%
27.4%
25%
18,000
Direct Labor 14%
53%
15%
17,500
Depreciation
17,000
Third Party Service
16,500
Royalty
16,000
30%
20%
21.1%
15% 10%
15,500
Supplies
5%
15,000 14,500
0% 2011
Source: TINS, IndoPremier
2012
2013
2014F
2015F
2016F
2017F
Source: TINS, IndoPremier
Exhibit 71. TINS’ profitability outlook
Gross Margin
Exhibit 72. TINS’ projected net earnings
EBIT
Net Margin
Net Profit (Rpbn)
30%
1,000
897
900
25%
800
20%
600
15% 11.0% 8.8%
9.0%
9.0%
8.9%
8.9%
720
723
2015F
2016F
2017F
515 432
500
10%
713 640
700
400 300 200
5%
5.9%
100 0
0% 2011
2012
2013
2014F
2015F
2016F
2017F
Source: TINS, IndoPremier
Refer to important disclosures on the last page of this report
2011
2012
2013
2014F
Source: TINS, IndoPremier
35
Metals & Mining Initiating Coverage
The Metal Strategist New projects underway; prefer TINS’ new power plant TINS is our second top-pick in the mining space as we expect Indonesia’s regulation on tin products to protect domestic producers’ interests and further exacerbate global refined tin balance going forward. The company is currently undertaking two new projects: 1) Coal-fired power plant, and 2) rare earth processing. The company will commence construction of its new 2x10 MW coal-fired power plant possibly in 1H15. The project will cost Rp100bn (US$10mn) and will be located in Muntok, Bangka. TINS explained that this power plant may be upgraded to 4x10 MW when needed. The new power plant is expected to save 7-8% of total annual production cost by utilizing low calorificvalue (CV) coal procured from one of its domestic subsidiaries. As of FY13, 15% of TINS’ total COGS was attributed to fuel alone (e.g. diesel to power up suction boats, dredges, and processing plant). TINS’ current diesel-powered power plant is located in Batu Rusa, Bangka, near its smelter’s location. Exhibit 73. TINS’ FY13 COGS structure
Exhibit 74. TINS’ cash cost and margin outlook
Cash Cost (USD/MT)
4%
3%
Cash Margin (%)
19,500
4% Raw Materials 7%
Fuel
19,000 18,500
35% 28.6%
28.1%
27.4%
27.4% 27.4%
27.4%
25%
18,000
Direct Labor 14%
53%
15%
17,500
Depreciation
17,000
Third Party Service
16,500
Royalty
16,000
Supplies
20%
21.1%
15% 10%
15,500 5%
15,000 14,500
0% 2011
Source: TINS, IndoPremier
30%
2012
2013
2014F
2015F
2016F
2017F
Source: TINS, IndoPremier
In addition to the new power plant, the company will also develop a mini-plant to process rare earths (e.g. Lanthanum (La), Cerium (Ce), and Neodymium (Nd)) in Tanjung Ular, Bangka. The rare earths have an average selling price of US$230/kg and the company aims to produce 50 kg/day starting in 1H15. The rare earths have been accumulated over the years as they are by-products of the company’s tin mining activities. The high-value metals are generally used for the manufacturing of electronics such as in smart phones and LCDs. We estimate that the contribution from this project to be modest, within 1% of TINS’ total annual revenue. Groundbreaking for the rare earth project took place in August this year and construction should finish within the next eight months. Based on our conversation with the company, total capex allocated was only Rp50bn (US$5mn). The end-market for these rare earths may be either domestic or overseas.
Refer to important disclosures on the last page of this report
36
Metals & Mining Initiating Coverage TINS’ sales revenue to be sustained by refined tin products We believe the outlook for global tin price to be in TINS’ favor owing to persistent deficit market structure going forward. We estimate the company’s sales revenue to increase by 8.6% CAGR from FY13-17E, with our assumed long-term tin price forecast of US$25.0k/MT in FY17E onwards. We expect TINS’ ASP for the metal to grow by 3.0% CAGR from FY13-17E. We also believe refined tin products (e.g. tin metal and solders) would remain TINS’ major revenue contributor in the future. Exhibit 75. TINS’ sales revenue outlook
Exhibit 76. TINS’ sales revenue breakdown
Sales Revenue (Rpbn)
% yoy
Refined Tin
9,000
30%
99%
20% 7,000
5,000
98%
11.1%
6,000
94%
3,000
-10%
-20.5%
2013
2.0%
2.0%
97.6%
96.8%
96.8%
96.8%
96.8%
96.8%
2013
2014F
2015F
2016F
2017F
90%
-30% 2012
2.0%
91%
0 2011
2.0%
92%
-20% 1,000
98.2%
93%
-9.4%
2,000
2.0%
95%
0%
2.2%
1.5%
96%
0.9%
4,000
0.8%
97%
10% -2.5%
Coal & Others
100%
21.5%
8,000
Tin Chemical
2014F
2015F
2016F
2011
2017F
Source: TINS, IndoPremier
2012
Source: TINS, IndoPremier
TINS’ top three customers back in FY13 were: 1) Japan 26%, 2) Taiwan 16%, and 3) South Korea (11%). Nonetheless, with TINS’ declaring a force majeure to all its long-term contracts due to the Trade Ministry Regulation No. 32/2013 that required the export of refined tin through ICDX since last August, the company would no longer keep record of its buyers nor the destination of its refined tin products going forward. TINS currently trade its metals in the ICDX using spot price instead of the LME. It is worth noting that ICDX requires all tin metals to have minimum tin content of 99.9% Sn instead of the 100% Sn previously contained in the earlier version of Trade Ministry Regulation No. 78/2012. Exhibit 77. TINS’ customer base in FY13 (%)
Japan Taiwan 26%
31%
S. Korea Indonesia USA 16%
5%
Singapore 5% 7%
11%
Others
Source: TINS, IndoPremier
Refer to important disclosures on the last page of this report
37
Metals & Mining Initiating Coverage TINS’ ore production to increasingly focus in underwater Looking at TINS’ production historical trend, the company used to find high-quality tin ores (68-72% Sn) as tin concentrates production was previously dominated inland. However, ore production gradually shifted more towards offshore locations since FY09 and tin ores found in the sea were of lower quality (30-40% Sn) than inland. To mine for ores in the sea, TINS utilizes its bucket wheel dredge units (BWD) where it would dig earth up to 70 meters deep, mine the ores, and then wash them before getting them refined further. For shallower grounds, TINS may use its suction boats where it can mine ores up to 30-40 meters deep. The company’s suction boats have been able to assist in locating and mining for tin ores since FY12, where previously it could only help with washing the ores before getting them processed. As of FY13, TINS has 10 units of BWD and 69 units of suction boats to support mining activities in the waters of Bangka and Kundur. For land mining, the company utilizes gravel pumps where it sprays the ground with highpower water and filters for any tin ores found in the pared soils. TINS does not need to use heavy trucks or tractors to mine for its ore as the soil in Bangka area is said to be soft. We forecast TINS’ production to grow at 3.1% CAGR from FY13-17E versus tin deliveries of 3.7% for the same period. Nonetheless, we assume that the company sells as much refined tin as it produced starting FY15E onwards. Exhibit 78. TINS’ ore production location overview
Offshore 100%
75%
79%
71%
Exhibit 79. TINS’ production and sales volume outlook
Inland
52%
46%
Production (MT)
51%
37%
25%
% yoy (Deliv.) 20%
45,000 12.1%
90%
40,000
80%
75%
70%
63%
60%
54% 48%
50%
35,000
10%
3.1%
2.8%
0.0% 0.0% 0%
30,000 25,000
49%
-10% 20,000
40% 30%
Deliveries (MT)
25%
20%
29%
15,000
21%
-16.1%
-20%
10,000 -30% 5,000
10%
-33.6%
0
0% 2006
2007
2008
2009
2010
2011
2012
2011
2013
Source: TINS, IndoPremier
2012
2013
-40% 2014F
2015F
2016F
2017F
Source: TINS, IndoPremier
We forecast TINS’ net margin to stabilize at 8-9% going forward, with limited possibility to go beyond that level as the company still uses expensive diesel in its production mix. We believe there is possible breakthrough only until TINS’ new power plant is ready for full operation. We estimate that TINS’ net profit to grow by 8.9% CAGR from FY13-17E, with possible upside potential as we assume refined tin sales volume to stay stagnant from FY16E onwards. Exhibit 80. TINS’ profitability outlook
Gross Margin
Exhibit 81. TINS’ projected net earnings
EBIT
Net Margin
Net Profit (Rpbn)
30%
1,000
897
900
25%
800
600
15% 11.0% 8.8%
9.0%
9.0%
8.9%
8.9%
720
723
2015F
2016F
2017F
515 432
500
10%
713 640
700
20%
400 300 200
5%
5.9%
100 0
0% 2011
2012
2013
2014F
2015F
2016F
2017F
Source: TINS, IndoPremier
Refer to important disclosures on the last page of this report
2011
2012
2013
2014F
Source: TINS, IndoPremier
38
Metals & Mining Initiating Coverage TINS’ gearing level still within covenants’ provisions TINS has several debt obligations in its balance sheet and is required to fulfill a number of covenants, among which are: 1) Maximum DER of 2.5x, 2) minimum EBITDA-interest expense ratio of 3.0x, and 3) minimum interest coverage ratio of 1.0x. The company’s largest loan facility amounting to US$70mn from Bank of Tokyo-Mitsubishi (BoTM) has matured in August. Exhibit 82. TINS’ debt profile overview
Debt/Equity (x)
Exhibit 83. TINS’ operational leverage outlook
EBITDA/Int. Exp. (x) - RHS
0.50
80.0
0.36 0.33
0.33
2.50
2.33
50.0
2.00
60.0 40.0
50.0
0.30
Oper. CF/Debt (x) - RHS
50.4
70.0
0.39
60.8
0.35
0.25
60.0
0.44
0.45 0.40
Interest Coverage (x)
34.5
37.2
36.9
36.2
0.42
0.48
1.50
52.4 0.20
46.4
33.2
46.6
46.3
0.13
0.15
40.0
30.0 21.7
0.20
30.0 29.5
20.0
0.00 2012
2013
2014F
2015F
2016F
2011
2017F
Source: TINS, IndoPremier
0.00 -0.27
0.0
0.0 2011
0.50
0.27
10.0
10.0
0.05
0.22
0.49
20.0
0.10
1.00
23.8
2012
2013
-0.50 2014F
2015F
2016F
2017F
Source: TINS, IndoPremier
Sensitivity analysis on earnings Our sensitivity analysis suggests that TINS’ earnings would be most volatile to changes in global tin prices. However, as we forecast a consistently deficit global market structure for the metal, we believe global tin price would move in TINS’ favor. Our long-term tin benchmark price is set at US$25,000/MT. Exhibit 84. Earnings sensitivity analysis (%) FY15E
FY16E
FY17E
Tin Metal ASP: +/- 1%
7.3%
7.4%
7.5%
Tin Metal Volume: +/- 1%
1.6%
1.6%
1.7%
Fuel Cost: +/- 1%
1.0%
1.0%
1.0%
Source: IndoPremier
Valuation Our target price of Rp1,700/share for TINS is derived from our fair-value estimate at the end of 2015, using a two-stage DCF methodology based on the following assumptions: •
Explicit forecast for FY16E-22E forms the first stage of our DCF analysis as we expect TINS’ tin reserves to start depleting in FY22E. We assume production and sales volume for TINS’ refined tin products to stay at a constant level starting in FY15E. Our long-term tin benchmark price, which starts at FY17E, is pegged at US$25,000/MT.
•
For the second stage of our DCF analysis, the terminal value, we employ the exit multiple approach instead of the terminal growth rate as mining companies such as TINS have finite lives. Based on TINS’ FY13 data, the company has pure tin resource of almost 700k MT. We assume that the company has 15% success rate in upgrading these resources into reserves, which would give TINS additional 5 years for its tin reserves starting from FY22E (the terminal year) onwards. We then multiply our FCF at the terminal year by these additional years to generate our terminal value for TINS.
•
We assume WACC of 9.9%, cost of equity of 11.0%, and cost of debt of 6.3%. These are derived from input factors such as risk-free rate (8.0%), market risk premium (6.0%), beta (0.5x), target gearing (23.3%), and corporate tax rate (30.0%).
Refer to important disclosures on the last page of this report
39
Metals & Mining Initiating Coverage TINS’ WACC assumptions in DCF valuation Risk-Free Rate (Rf)
8.0%
Market Return (Rm)
14.0%
Market Risk Premium
6.0%
Beta
0.5
Cost of Equity (ke)
11.0%
After-Tax Cost of Debt
6.3%
Target Gearing
23.3%
Corporate Tax Rate
30.0%
Source : IndoPremier
DCF Valuation
2016F
2017F
2018F
2019F
2020F
2021F
2022F
(in Rpbn) EBIT
1,095.44
1,104.85
1,104.85
1,104.85
1,104.85
1,104.85
736.93
Tax Rate
-328.63
-331.45
-331.45
-331.45
-331.45
-331.45
-221.08
NOPAT
766.80
773.39
773.39
773.39
773.39
773.39
515.85
Depr. & Amort. CAPEX
286.33
309.24
83.49
85.16
86.87
88.60
90.38
-493.39
-532.87
-143.87
-146.75
-149.69
-152.68
-155.73
NWC
-89.67
-40.14
9.26
0.87
2.79
1.49
3,301.54
FCFF
470.07
509.62
722.28
712.67
713.37
710.80
3,752.04
427.71
421.91
544.08
488.47
444.88
403.34
1,937.19
PV of FCF
PV Ter. Value
10,230.56
Value of Firm
14,898.15
Total Debt
-2,203.99
Value of Equity
12,694.15
# Shares Outs.
7,448
Value per Share (Rp)
1,704
million
Source: IndoPremier
Sensitivity analysis to 1% change in WACC and terminal value assumptions
WACC
Rp1,704
Resource-Reserve Conversion Rate 5%
10%
15%
20%
25%
7.9%
912
1,432
1,953
2,474
2,994
8.9%
848
1,336
1,824
2,312
2,801
9.9%
789
1,247
1,704
2,162
2,620
10.9%
733
1,163
1,593
2,022
2,452
11.9%
681
1,085
1,489
1,892
2,296
Source: IndoPremier
Refer to important disclosures on the last page of this report
40
Metals & Mining Initiating Coverage TINS’ 12-month forward P/E band overview
25
22x (+2 Std. Dev.)
23 21
19x (+1 Std. Dev.)
19
16x (Average)
17 15
8x (-1 Std. Dev.)
13 11 9
9x (-2 Std. Dev.)
7 5 Jan-11
Jan-12
Jan-13
Jan-14
Source: Bloomberg, IndoPremier
Refer to important disclosures on the last page of this report
41
Metals & Mining Initiating Coverage Year to 31 Dec (Rpbn)
2012
2013
2014F
2015F
2016F
Income Statement Revenue
7,363
5,852
7,111
7,901
8,076
Cost of Sales
(6,088)
(4,409)
(5,581)
(6,200)
(6,338)
Gross Profit
1,275
1,444
1,531
1,700
1,738
(624)
(615)
(566)
(629)
(643)
-
-
-
-
-
651
829
965
1,072
1,095
EBITDA
993
1,027
1,465
1,337
1,382
Net Interest:
(14)
(19)
1
2
(13)
16
16
29
31
17
(30)
(35)
(28)
(29)
(30)
SG&A Expenses Exploration Operating Profit
Interest Income Interest Expense FX Gain (Loss) Others - Net Pre-Tax Profit Inc. Tax - Net Minority Interest Net Profit
-
-
-
-
-
(0)
(38)
(29)
(30)
(29)
636
772
936
1,043
1,054
(205)
(257)
(296)
(330)
(333)
(0)
(0)
(0)
(0)
(0)
432
515
640
713
720
Balance Sheet Cash & Equiv.
670
614
649
355
410
Receivables
471
1,055
1,282
1,424
1,456
Inventory
1,617
2,461
2,648
2,942
3,007
Others
1,201
1,231
1,231
1,231
1,231
Current Assets
3,959
5,361
5,810
5,952
6,104
Fixed Assets - Net
1,723
1,889
2,209
2,386
2,577
449
634
657
689
692
Non-Curr. Assets
2,171
2,523
2,866
3,075
3,269
Total Assets
6,130
7,883
8,677
9,027
9,372
Other LT Assets
Current Maturities ST Borrowings
35
38
33
34
35
264
1,355
2,032
1,931
1,892
Trade Payables
337
406
299
333
340
Other Liabilities
353
641
520
536
538
Current Liabilities
989
2,440
2,884
2,833
2,804
LT Debt
278
226
233
240
247
Other Liabilities
305
325
285
286
289
Non-Curr. Liabilities
583
552
518
526
536
Total Liabilities
1,572
2,991
3,402
3,359
3,341
Total Shareholders' Equity
4,558
4,892
5,275
5,668
6,032
Total Liabilities & Equity
6,130
7,883
8,677
9,027
9,372
Source: TINS, IndoPremier
Refer to important disclosures on the last page of this report
42
Metals & Mining Initiating Coverage Year to 31 Dec (Rpbn)
2012
2013
2014F
2015F
2016F
Net Profit
432
515
640
713
720
Depr. & Amort.
342
197
500
265
286
0
(0)
0
0
0
Changes in W/C
598
(1,154)
(630)
(390)
(90)
CF from Oper.
1,345
(442)
510
589
917
CAPEX
(530)
(407)
(840)
(457)
(493)
Others
(1)
(70)
(55)
(13)
18
(531)
(477)
(896)
(470)
(475)
Cash Flow Statement
Minority Interest
CF Investing Change in Debt
22
(49)
1
8
8
ST Borrowings
(380)
1,091
677
(102)
(39)
Dividends Paid
(448)
(216)
(258)
(320)
(357)
4
35
-
-
-
CF Financing
(803)
862
421
(414)
(387)
Cash Reclass.
-
-
-
-
-
Others
Change in cash
11
(57)
36
(295)
55
Beg. Cash Balance
660
670
614
649
355
End. Cash Balance
670
614
649
355
410
Gross Margin (%)
17.3%
24.7%
21.5%
21.5%
21.5%
Oper. Margin (%)
8.8%
14.2%
13.6%
13.6%
13.6%
13.5%
17.5%
20.6%
16.9%
17.1%
5.9%
8.8%
9.0%
9.0%
8.9%
Key Ratios Earnings Margin
EBITDA Margin (%) Net Margin (%) Valuation P/E (x)
21.0
17.6
14.1
12.7
12.6
P/BV (x)
2.0
1.8
1.7
1.6
1.5
EV/EBITDA (x)
9.0
9.8
7.3
8.2
7.8
EV/Reserves (US$/MT)
3,111
3,370
4,074
4,773
5,572
Mkt Cap/Reserves (US$/MT)
3,143
3,033
3,446
3,963
4,663
Oper. CF/Debt (x)
2.33
-0.27
0.22
0.27
0.42
Debt/Equity (x)
0.13
0.33
0.44
0.39
0.36
EBITDA/Int. Exp. (x)
33.16
29.47
52.40
46.44
46.60
Interest Coverage (x)
21.74
23.80
34.52
37.23
36.95
Leverage
Profitability ROAA (%)
6.8%
7.4%
7.7%
8.1%
7.8%
ROAE (%)
9.4%
10.9%
12.6%
13.0%
12.3%
ROIC (%)
-0.3%
4.6%
5.1%
5.0%
4.4%
5.0%
2.4%
2.8%
3.5%
3.9%
Dividend Yield (%) Source: TINS, IndoPremier
Refer to important disclosures on the last page of this report
43
Metals & Mining Initiating Coverage
Aneka Tambang SELL
(ANTM IJ)
(Initiating Coverage)
Treading on a Rocky Road
Stock Data Target price (Rp)
930
Prior TP (Rp)
-
Share price (Rp)
1,085
Upside/downside (%)
Grim outlook at least until new ferronickel capacity comes into play New CGA operations would not contribute to company’s revenue
-14
Shares outstanding (m)
9,535
Market cap. (US$ m)
852.5
Free float (%)
35
Avg. 6m daily T/O (US$ m)
2.4
Price Performance 3M
6M
12M
Absolute (%)
-4.4
-6.1
-25.7
Relative to JCI (%)
-6.1
-7.7
-38.2
52w high/low (Rp)
1,620/950
130 120 110 100 90 80
We expect upside from nickel to be offset by downside in gold Unstable operational outlook and weak FCF profile; initiate at SELL We initiate coverage on Aneka Tambang (ANTM) with a SELL rating and DCF-based target price of Rp930/share, implying FY15E P/E of 13.7x. With the Indonesian ore export ban posing a downbeat outlook to the company’s operations as well as its propensity to have a wide array of product portfolio, we would keep caution with the stock for now. Waiting for P3FP to give a lifeline. ANTM is set to lose 36% of its FY13 revenue this year due to the Indonesian ore export ban. To mitigate further losses, the company is expediting the completion of its P3FP project which consists of an upgraded ferronickel capacity (FeNi I) from 20k MT to 30k MT and a new 2x30 MW coal-fired power plant, both of which are set to complete by October FY15E. When ANTM’s P3FP project is finished, we then expect the company’s operating margins to slowly recover from a negative figure this year to >10% in FY16E onwards. The company also expects to reduce its ferronickel cash cost by 15% once its power plant is ready for commercial operation.
70 60 1-Oct
1-Jan
1-Apr JCI
1-Jul
1-Oct
ANTM
Major Shareholders Republic of Indonesia
65%
Estimate Change; Vs. Consensus
Latest EPS (Rp) Vs. Prior EPS (%) Vs. Consensus (%)
2014F
2015F
5
68
n/a
n/a
-77.3
-11.7
New CGA project to go into equity section. Despite earlier claims by some sources that the new Chemical Grade Alumina (CGA) plant—a JV between ANTM and Showa Denko (SDK)—could potentially contribute up to US$200mn (~20%) to the company’s total annual revenue, our recent discussion with ANTM clarified that any proceeds would go into the equity section of the P&L. The plant is capable of producing 300k MT of CGA annually and majority of the capacity (67%) would be utilized by SDK. The plant has been fully operational since the start of 2H14. Diversification neutralizes gains. With the expected surge in global nickel price, we do not see ANTM greatly benefiting from it as it is completely barred from exporting nickel ore, whereas the other half of its operations come from gold sales; leaving its ferronickel division that is exposed to the upside from higher nickel prices. We are not bullish on precious metals such as gold and silver owing to expected interest rate hike in the U.S. and slowing physical gold demand from China and India. Risks are to the downside; initiate at SELL. With ANTM significantly losing its nickel ore export revenue this year as well as the company’s tendency to “want-itall” for its product offerings, we believe it will be difficult for the company to outperform its peers. Our target price of Rp930/share is DCF-based, with terminal value determined by a 10% success rate in converting its resources into reserves. Financial Highlights (Rp Billions) Sales Revenue EBITDA Net Profit EPS (Rp) EPS Growth (%) P/E Ratio (x) EV/Reserve (US$/MT) ROAE (%) ROIC (%) Dividend Yield (%)
2012 10,450 1,427 2,993 314 55.3 3.5 927 25.4% 12.0% 8.4%
2013 11,298 874 410 43 -86.3 25.2 1,349 3.2% -0.2% 4.3%
2014F 8,935 1,479 51 5 -87.5 202.4 1,522 0.4% -0.2% 0.9%
2015F 9,641 954 647 68 1165.8 16.0 1,636 5.0% 3.1% 0.0%
2016F 12,676 1,899 1,367 143 111.2 7.6 1,359 9.8% 5.2% 1.9%
Source: ANTM, IndoPremier (Share price as of closing October 1, 2014)
Refer to important disclosures on the last page of this report
44
Metals & Mining Initiating Coverage Exhibit 85. ANTM’s sales revenue outlook
Sales revenue
Exhibit 86. ANTM’s sales revenue breakdown
% yoy
Nickel Ore
16,000
40% 31.5%
14,000 12,000
30% 20%
10,000
7.9%
8.1%
10%
8,000 6,000 4,000
35.4%
-10%
30%
36.0%
30.2%
25.0%
30.4%
20%
-20.9% 0
-30% 2011
2012
2013
2014F
2015F
2016F
10%
42.5%
50.9%
44.8%
53.7%
47.0%
18.6%
44.8%
36.2%
0% 2011
2017F
Source: ANTM, IndoPremier
Coal & Others
60%
40%
-20%
2,000
34.7%
70%
0% 1.0%
Silver
90%
50%
9.6%
Gold
100%
80%
18.3%
Ferronickel
2012
2013
43.1%
0.7%
0.0%
2014F
2015F
52.6%
50.4%
2016F
2017F
Source: ANTM, IndoPremier
Exhibit 87. ANTM’s FY13 COGS structure
Exhibit 88. ANTM’s cash margins outlook (%)
Saprolite
3.7% 7.3%
Limonite
Ferronickel
Gold
60% 52.5%
Trading Purchases 7.9% 35.5% 7.4%
Transport & Mining Fees
50%
Fuel
40%
Direct Labor
51.5% 43.8% 44.1%
35.2%
44.1%
31.0%
44.1%
42.2%
44.1% 42.2%
30%
Supplies 7.7%
13.9%
DD&A
20%
Royalties
10%
18.1%
11.7%
Others
16.6%
0% 2011
2012
-10%
Source: ANTM, IndoPremier
2013 -5.2%
2014F
2015F
2016F
2017F
Source: ANTM, IndoPremier
Exhibit 89. ANTM’s profitability outlook
Gross Margin
Exhibit 90. ANTM’s projected net earnings (in Rpbn)
EBIT
3,500
Net Margin
2,993
35%
3,000
29%
30%
2,500
25%
2,000
1,928
20% 15%
1,336
1,500
19%
1,000
10% 7%
11%
636
11%
410
500
4%
5%
51
1% 0
0% -5%
1,473
2011
2012
2013
2014F
2015F
2016F
2017F
Source: ANTM, IndoPremier
Refer to important disclosures on the last page of this report
2011
2012
2013
2014F
2015F
2016F
2017F
Source: ANTM, IndoPremier
45
Metals & Mining Initiating Coverage
Treading on a Rocky Road Waiting for the P3FP project to clear the road ANTM has a total of three ferronickel smelters and is currently expanding its Ferronickel Plant I (FeNi I), under the project name of Pomalaa Ferronickel Plant Expansion Project (P3FP). FeNi I was built back in 1976, and is expected to offer additional 8-10k MT of smelting capacity once the project is completed. The company currently has total capacity of 18-20k MT to process its ferronickel annually. We forecast that ANTM would have total aggregate capacity of 27-30k MT by 4Q15. Exhibit 91. ANTM’s new oxygen plant location for FeNi smelter
Source: ANTM, IndoPremier
Exhibit 92. The overhaul of ANTM’s FeNi I
Source: ANTM, IndoPremier
The project costs US$500-600mn and was partially funded from the company’s bond issuance back in FY11, which amounted to Rp3tn (US$300mn), 67% of which is used to finance the plant expansion project. The P3FP will also include the construction of new 2x30 MW coal-fired power plant to support ANTM’s ferronickel operations in Pomalaa, Southeast Sulawesi. The company expects to lower ferronickel cash cost by 15% from US$6.60-6.70/lbs to US$5.506.00/lbs in FY15E-16E due to the new coal power generator. Exhibit 93. ANTM’s new coal-fired power plant currently under construction
Source: ANTM, IndoPremier
Refer to important disclosures on the last page of this report
46
Metals & Mining Initiating Coverage CGA project to not contribute to ANTM’s top-line Based on our meeting with ANTM, the Chemical Grade Alumina (CGA) project will not contribute to ANTM’s consolidated revenue. The joint-venture with Showa Denko K.K. (SDK), a leading Japanese chemical engineering firm, was previously thought to be able to contribute US$200mn to ANTM’s annual revenue (~20%). According to our conversation with the company, proceeds from the CGA division will go to the equity section of the P&L. The JV is held by ANTM (80%) and SDK (20%); though operational-wise, it is suggested that SDK has substantial influence in decision-making as well (see next paragraph). Project will consist of a CGA plant capable of refining 850k wmt of washed bauxite ore into 300k MT of CGA per annum. The plant was commissioned back in October last year and is already operational since the start of 2H14. Total capex for this project amounted to US$490mn and is located in Tayan, East Kalimantan. The funding of the project was sourced from the company’s and SDK’s internal funds, as well as loans from Japan Bank for International Cooperation (JBIC) and consortium of Mizuho Bank and Sumitomo Trust and Banking. From a total capacity of 300k MT CGA annually, ANTM only receives a portion of 100k MT that will be sold both domestically and overseas (e.g. Japan). The company estimates that annual domestic demand for CGA to be 75k MT. The remaining capacity, 200k MT, will be utilized by SDK. It is worth to note that CGA is used for the manufacturing of light bricks, LCDs, ceramics, paints, toothpaste, refractories, and etc. ANTM’s sales outlook to be supported from ferronickel and gold We forecast ANTM’s FY14E sales revenue to drop by almost -21% yoy due to Indonesia’s ore export ban as nickel ore sales made up 36% of the company’s FY13 total revenue. We estimate that ANTM’s sales revenue to grow by 5.3% CAGR from FY13-17E. Going forward, we believe ANTM’s sales composition will be dominated by gold and ferronickel. Exhibit 94. ANTM’s sales revenue outlook
Sales revenue
Exhibit 95. ANTM’s sales revenue breakdown
% yoy
Nickel Ore
16,000
40% 31.5%
14,000 12,000
30% 20%
10,000
7.9%
8.1%
10%
8,000 6,000 4,000
35.4%
-10%
30%
36.0%
30.2%
25.0%
30.4%
20%
-20.9% 0
-30% 2011
2012
2013
2014F
2015F
2016F
2017F
Source: ANTM, IndoPremier
Coal & Others
42.5%
50.9%
53.7%
44.8%
47.0%
60%
40%
-20%
2,000
34.7%
70%
0% 1.0%
Silver
90%
50%
9.6%
Gold
100%
80%
18.3%
Ferronickel
10%
18.6%
36.2%
0% 2011
2012
2013
44.8%
43.1%
0.7%
0.0%
2014F
2015F
52.6%
50.4%
2016F
2017F
Source: ANTM, IndoPremier
A majority of ANTM’s sales back in FY13 was destined for the domestic market, most likely owing to its gold division. The company only exported 300 kg of gold, compared to the 9,000 kg that was sold domestically last year. Second and third biggest markets were Europe and China, as the company’s major nickel ore and ferronickel sales were shipped to these two destinations.
Refer to important disclosures on the last page of this report
47
Metals & Mining Initiating Coverage Exhibit 96. ANTM’s customer base in FY13 2%
1%
6%
Indonesia Europe
10%
China 42%
Japan South Korea
18%
Singapore India 21%
Source: ANTM, IndoPremier
Recovery for ANTM may be a long process We view that ANTM’s most lucrative margins came from gold and ore sales. With its nickel ore contribution expected to vanish away in FY14E onwards, we believe it is critical for the company to deliver on its new coal-fired power plant that is expected to reduce ferronickel cash cost by 15% starting in 4Q15. We believe there is a light at the end of the tunnel for ANTM should its ferronickel cash margin starts to rise from a negative last year back to a positive again. It should be noted that ANTM still relies heavily on diesel (80%) for its power generation (remaining 20% comes from state-owned electrical company, PLN). The company currently has six 8x17 MW diesel-based power plants to support its operations (with two additional units as auxiliaries). Exhibit 97. ANTM’s cash margins outlook for its divisions
Saprolite
Limonite
Ferronickel
Exhibit 98. ANTM’s FY13 COGS structure
Gold 3.7% 7.3%
60% 52.5% 50% 40%
Trading Purchases
51.5% 43.8% 44.1%
44.1%
44.1%
44.1%
Transport & Mining Fees
7.9% 35.5%
35.2%
31.0%
42.2%
42.2%
7.4%
Fuel Direct Labor
30% Supplies
18.1%
20%
7.7%
DD&A Royalties
10% 13.9%
11.7% 0% 2011
2012
-10%
2013 -5.2%
2014F
2015F
2016F
16.6%
Others
2017F
Source: ANTM, IndoPremier
Refer to important disclosures on the last page of this report
Source: ANTM, IndoPremier
48
Metals & Mining Initiating Coverage ANTM’s operational outlook hinges on new FeNi capacity While the company targets to ramp up ferronickel sales from 14,441 MT last year to 19,700 in order to save lost sales from nickel ores, we believe it will still be largely inadequate. We view that ANTM’s prospects may start to recover once its P3FP project is completed in 4Q15. We forecast ANTM’s ferronickel production to grow by 11.0% CAGR from FY13-17E versus sales growth of 17.7% CAGR. For gold production, we forecast growth of 15.0% CAGR in FY14E-17E (we start our calculation from FY14E because ANTM will reduce its gold mine output this year owing to depressed global gold price). We estimate gold sales to increase by 11.3% CAGR from FY13-17E. Exhibit 99. ANTM’s ferronickel volumes outlook
Exhibit 100. ANTM’s gold volumes outlook
Production (MT)
Sales (MT)
Production (kg)
Sales (kg)
% yoy (Prod.)
% yoy (Sales)
% yoy (Prod.)
% yoy (Sales)
30,000 25,000 20,000
60%
16,000
40%
50%
14,000
30%
40%
12,000
20%
30%
15,000
0 2011
2012
2013
2014F
2015F
2016F
-10%
6,000
0%
5,000
0%
8,000
10%
10,000
10%
10,000
20%
-20%
-10%
4,000
-30%
-20%
2,000
-40%
-30%
0
-50% 2011
2017F
Source: ANTM, IndoPremier
2012
2013
2014F
2015F
2016F
2017F
Source: ANTM, IndoPremier
With FeNi I switched off right now for the P3FP project, ANTM is operating at its maximum limit. Nonetheless, we believe once its newly expanded plant is fully operational, this should provide more upside for ANTM’s revenue potential. We expect the company to post high double-digit sales growth (+31% yoy) with the new capacity in FY16E. Exhibit 101. ANTM’s ferronickel production capacity outlook Total FeNi Capacity (MT)
% Util. Rate (%) 110%
35,000 30,000 25,000
104%
105%
101%
101% 100% 96%
20,000
95% 15,000
95%
94%
90%
91%
10,000 5,000
85%
0
80% 2011
2012
2013
2014F
2015F
2016F
2017F
Source: ANTM, IndoPremier
Refer to important disclosures on the last page of this report
49
Metals & Mining Initiating Coverage Ample room for improvement for ANTM We are not positive with ANTM’s financial outlook for the time being as it is the one who is hit the hardest in light of the ore export ban. We forecast this year’s net margin to be near 0%— or possibly negative given its poor performance from 1H14—and then slowly recovering to more than 10% by FY16E. Nonetheless, our thesis for ANTM’s recovering performance largely hinges upon its new coal-fired power plant that is expected to lower ferronickel cash cost in FY15E-16E. Should this project offers less than what was initially expected, we view that there would be deeper downside for our valuation on ANTM. Exhibit 102. ANTM’s profitability outlook
Gross Margin
EBIT
Exhibit 103. ANTM’s projected net earnings 3,500
Net Margin
2,993
35%
3,000
29%
30%
2,500
25%
2,000
1,928
20% 15%
1,336
1,500
19%
1,000
10% 7%
11%
5%
636
11%
410
500
4%
51
1% 0
0% -5%
1,473
2011
2012
2013
2014F
2015F
2016F
2011
2017F
Source: ANTM, IndoPremier
2012
2013
2014F
2015F
2016F
2017F
Source: ANTM, IndoPremier
We view that under current pressured market environment for ANTM, the company may be challenged to continue with its long list of ambitious projects (at least for the time being) such as the FeNi Haltim project (US$1.6bn; annual capacity of 40k MT ferronickel), nickel pig iron & stainless steel project, Mempawah Smelter Grade Alumina (SGA) project (US$1.8bn), and the anode slime project. We forecast 35% of ANTM’s long-term capital structure to be financed through debts, and the rest from equity. ANTM has debt covenants with its creditors where it must, among others, maintain its debt-to-equity ratio within a maximum limit of 250% (or 2.5x). As of FY13, the company’s DER was 0.55x. Exhibit 104. ANTM’s DER ratio (x) 0.70
Exhibit 105. ANTM’s interest coverage (x) 25.0
0.64
0.60
0.58
0.55
0.55
0.50 0.40
19.1
20.0
0.43 0.38
15.0
12.2
10.0
0.30
6.9
0.20
5.0
3.8
3.7
0.10
-0.4
0.0
0.00
2012
2012
2013
2014F
2015F
2016F
2017F
Source: ANTM, IndoPremier
2013
2014F
2015F
2016F
2017F
-5.0
Source: ANTM, IndoPremier
We judge that ANTM has a fragile FCF profile to support its vastly diverse business portfolio. Any increase in one particular commodity’s price can be entirely offset by the decline of another—such as the anticipated surge in global nickel price due to the Indonesian ore export ban but may be entirely nullified by the drop in gold price. With a weak EBIT and a potentially demanding future capex for its projects, ANTM has little room to tolerate weak performance.
Refer to important disclosures on the last page of this report
50
Metals & Mining Initiating Coverage We also view that the company’s internal management to still have ample room for improvements such as can be seen from its cash conversion cycle of 109 days back in FY13, versus INCO’s 61 days (44% lower). A long conversion cycle would negatively impact ANTM’s net working capital (NWC) and suppresses its FCF. Exhibit 106. ANTM’s FCF profile outlook (in Rpbn)
Exhibit 107. CCC analysis between ANTM & INCO (no. of days)
1,000
ANTM
562 359
500
256
INCO
180
16
160
0
140
2011
2012
2013
-500
2014F
2015F -311
2016F
2017F
115
120
-485
105 109
100
-1,000
80 60
-1,500
76
-2,000
61
59
40 20
Source: ANTM, IndoPremier
2013
2012
2011
2010
2009
2008
2007
2006
2005
-2,735
2004
2002
-3,000
2003
0
-2,500
Source: ANTM, IndoPremier
Sensitivity analysis on earnings Our sensitivity analysis suggests that ANTM’s earnings would be most volatile to changes in gold and nickel prices. We believe it will be difficult for the company to record strong performance to its bottom-line as we anticipate any gains in global nickel price due to the Indonesian ore export ban to be neutralized by the drop in gold price.
Exhibit 108. Earnings sensitivity analysis (%) FY15E
FY16E
FY17E
Gold ASP: +/- 1%
6.0%
3.1%
3.3%
Nickel ASP: +/- 1%
4.8%
3.7%
3.5%
Gold Sales Volume: +/- 1%
1.7%
0.9%
0.9%
Ferronickel Sales Volume: +/- 1%
1.0%
1.2%
1.1%
Source: IndoPremier
Refer to important disclosures on the last page of this report
51
Metals & Mining Initiating Coverage Valuation Our target price of Rp930/share for ANTM is derived from our fair-value estimate at the end of 2015, using a two-stage DCF methodology based on the following assumptions: •
Explicit forecast for FY16E-26E forms the first stage of our DCF analysis. We assume production and sales volume for ANTM’s two primary commodities—ferronickel and gold— to stay at a constant level starting in FY18E. Our long-term benchmark prices for nickel and gold, which starts at FY17E, are pegged at US$22,500/MT and US$1,200/t.oz, respectively.
•
For the second stage of our DCF analysis, the terminal value, we employ the exit multiple approach instead of the terminal growth rate as mining companies such as ANTM have finite lives. Based on ANTM’s FY13 data, the company has nickel resource of 480mn wmt with average grade of 1.7% Ni; we assume that the company has 10% success rate in upgrading these resources into reserves, which would give ANTM additional 21 years for its nickel reserves, in addition to its actual remaining 46 years for its nickel reserves starting from FY26E (the terminal year) onwards. We then multiply our FCF at the terminal year by these additional years to generate our terminal value for ANTM. With assumed 10% resource-reserve conversion rate, we expect ANTM’s gold reserves would have completely depleted by FY26E.
•
We assume WACC of 9.3%, cost of equity of 10.4%, and cost of debt of 6.8%. These are derived from input factors such as risk-free rate (8.0%), market risk premium (6.0%), beta (0.4x), target gearing (30.9%), and corporate tax rate (25.0%). ANTM’s WACC assumptions in DCF valuation Risk-Free Rate (Rf) Market Return (Rm) Market Risk Premium Beta Cost of Equity (ke) After-Tax Cost of Debt
8.0% 14.0% 6.0% 0.4 10.4% 6.8%
Target Gearing
30.9%
Corporate Tax Rate
25.0%
Source : IndoPremier
Refer to important disclosures on the last page of this report
52
Metals & Mining Initiating Coverage DCF Valuation
2016F
2017F
2018F
2019F
2020F
2021F
2022F
2023F
2024F
2025F
2026F
1,483.13
1,621.42
1,776.80
1,776.80
1,776.80
1,776.80
1,776.80
1,474.57
1,474.57
1,428.73
1,135.74
-370.78
-405.35
-444.20
-444.20
-444.20
-444.20
-444.20
-368.64
-368.64
-357.18
-283.94
1,112.35
1,216.06
1,332.60
1,332.60
1,332.60
1,332.60
1,332.60
1,105.93
1,105.93
1,071.55
851.81
(in Rpbn) EBIT Tax Rate NOPAT
Depr. & Amort.
416.07
441.04
467.50
495.55
525.28
556.80
590.21
625.62
663.16
702.95
869.31
CAPEX
-957.85
-1,016.58
-1,078.92
-1,145.10
-1,215.34
-1,289.91
-1,369.07
-1,453.10
-1,542.30
-1,637.00
-1,844.61
NWC
-550.61
-382.53
-457.72
-209.05
-243.77
-275.44
-54.19
717.07
-36.35
78.86
694.12
FCFF
19.97
257.99
263.46
474.00
398.77
324.05
499.56
995.52
190.44
216.36
570.64
18.27
216.07
201.93
332.48
255.97
190.36
268.56
489.79
85.74
89.15
215.18
PV of FCF
PV Ter. Value
14,307.21
Value of Firm
16,670.72
Total Debt
-7,803.62
Value of Equity
8,867.10
# Shares Outs.
9,538
Value per Share
million
930
Source: IndoPremier
Sensitivity analysis to 1% change in WACC and terminal value assumptions
WACC
Rp930
Resource-Reserve Conversion Rate 0%
5%
10%
15%
20%
7.3%
727
1,013
1,298
1,583
1,869
8.3%
589
846
1,104
1,361
1,619
9.3%
464
697
930
1,162
1,395
10.3%
352
562
773
984
1,194
11.3%
251
442
632
823
1,014
Source: IndoPremier
ANTM’s 12-month forward P/E band overview
250
200
150
118x (+2 Std. Dev.) 100
50
77x (+1 Std. Dev.) 36x (Average) -6x (-1 Std. Dev.)
0 Jan-11 -50
Jan-12
Jan-13
Jan-14
-47x (-2 Std. Dev.)
Source: Bloomberg, IndoPremier
Refer to important disclosures on the last page of this report
53
Metals & Mining Initiating Coverage Year to 31 Dec (Rpbn)
2012
2013
2014F
2015F
2016F
Income Statement Revenue
10,450
11,298
8,935
9,641
12,676
Cost of Sales
(8,427)
(9,683)
(8,167)
(8,164)
(9,988)
Gross Profit
2,023
1,616
768
1,478
2,687
(1,036)
(1,114)
(777)
(839)
(1,103)
Exploration
(90)
(80)
(71)
(77)
(101)
Operating Profit
896
421
(81)
562
1,483 1,899
SG&A Expenses
EBITDA
1,427
874
1,479
954
Net Interest:
(68)
25
(53)
80
89
Interest Income
166
85
137
232
210
(235)
(61)
(189)
(152)
(121)
-
-
-
-
-
Others - Net
3,068
(579)
202
217
242
Pre-Tax Profit
3,895
(133)
68
859
1,814
(902)
543
(17)
(211)
(446)
(0)
(0)
(0)
(0)
(0)
2,993
410
51
647
1,367
Interest Expense FX Gain (Loss)
Inc. Tax - Net Minority Interest Net Profit Balance Sheet Cash & Equiv.
3,869
2,793
4,734
4,294
4,472
Receivables
1,722
1,153
912
984
1,293
Inventory
1,450
2,446
2,063
2,062
2,523
606
689
759
836
921
7,647
7,080
8,468
8,176
9,209
Others Current Assets Fixed Assets - Net
4,663
6,700
6,542
6,935
7,351
Other LT Assets
7,398
8,085
7,785
7,988
8,225
Non-Curr. Assets
12,062
14,785
14,327
14,922
15,576
Total Assets
19,709
21,865
22,795
23,098
24,785
Current Maturities ST Borrowings
46
129
861
689
551
1,664
2,470
2,593
3,371
4,383
Trade Payables
417
547
461
461
564
Other Liabilities
915
710
627
588
845
Current Liabilities
3,041
3,856
4,543
5,109
6,343
LT Debt
3,199
4,457
4,679
3,744
2,995
636
760
809
862
918
Non-Curr. Liabilities
3,835
5,216
5,489
4,606
3,913
Total Liabilities
6,876
9,072
10,031
9,715
10,257
Total Shareholders' Equity
12,832
12,793
12,763
13,383
14,528
Total Liabilities & Equity
19,709
21,865
22,795
23,098
24,785
Other Liabilities
Source: ANTM, IndoPremier
Refer to important disclosures on the last page of this report
54
Metals & Mining Initiating Coverage Year to 31 Dec (Rpbn)
2012
2013
2014F
2015F
2016F
2,993 531
410
51
647
1,367
453
1,560
393
416
0
0
0
0
0
Changes in W/C
804
(866)
371
(220)
(551)
CF from Oper.
4,253
(3)
1,994
792
1,205
CAPEX
(2,492)
(2,637)
(1,512)
(903)
(958)
Others
(4,350)
(133)
473
-
-
(6,842)
(2,770)
(1,038)
(903)
(958)
Cash Flow Statement Net Profit Depr. & Amort. Minority Interest
CF Investing Change in Debt
30
1,341
955
(1,108)
(886)
ST Borrowings
1,656
806
123
778
1,011
Dividends Paid
(868)
(449)
(92)
-
(194)
-
-
-
-
-
CF Financing
818
1,698
986
(330)
(69)
Cash Reclass.
-
-
-
-
-
Others
Change in cash
(1,771)
(1,076)
1,942
(440)
178
Beg. Cash Balance
5,640
3,869
2,793
4,734
4,294
End. Cash Balance
3,869
2,793
4,734
4,294
4,472
Gross Margin (%)
19.4%
14.3%
8.6%
15.3%
21.2%
Oper. Margin (%)
8.6%
3.7%
-0.9%
5.8%
11.7%
Key Ratios Earnings Margin
EBITDA Margin (%)
13.7%
7.7%
16.6%
9.9%
15.0%
Net Margin (%)
28.6%
3.6%
0.6%
6.7%
10.8%
P/E (x)
3.5
25.2
202.4
16.0
7.6
P/BV (x)
0.8
0.8
0.8
0.8
0.7
Valuation
EV/EBITDA (x)
8.0
16.7
9.3
14.5
7.3
EV/Reserves (US$/MT)
927
1,349
1,522
1,636
1,359
Mkt Cap/Reserves (US$/MT)
842
956
1,145
1,222
1,018
Leverage Oper. CF/Debt (x)
0.87
0.00
0.25
0.10
0.15
Debt/Equity (x)
0.38
0.55
0.64
0.58
0.55
Debt/Total Capital (x)
0.28
0.36
0.39
0.37
0.35
Interest Coverage (x)
3.82
6.94
-0.43
3.71
12.23
ROAA (%)
17.1%
2.0%
0.2%
2.8%
5.7%
ROAE (%)
25.4%
3.2%
0.4%
5.0%
9.8%
ROIC (%)
12.0%
-0.2%
-0.2%
3.1%
5.2%
8.4%
4.3%
0.9%
0.0%
1.9%
Profitability
Dividend Yield (%) Source: ANTM, IndoPremier
Refer to important disclosures on the last page of this report
55
Head Office PT INDO PREMIER SECURITIES Wisma GKBI 7/F Suite 718 Jl. Jend. Sudirman No.28 Jakarta 10210 - Indonesia p +62.21.5793.1168 f +62.21.5793.1167
Institutional Equity & Private Client Benny B. Soebagjo
Head of Equities
[email protected]
Angkula Ruriawan
Equity Sales
[email protected]
Alexander Salim
Equity Sales
[email protected]
Edward Azizy
Equity Sales
[email protected]
Henry Sutanto
Equity Sales
[email protected]
Isna Alfiathi
Equity Sales
[email protected]
Angky Amarylis
Sales Trader
[email protected]
Thomas Samuil
Sales Trader
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INVESTMENT RATINGS BUY : Expected total return of 10% or more within a 12-month period HOLD : Expected total return between -10% and 10% within a 12-month period SELL : Expected total return of -10% or worse within a 12-month period ANALYSTS CERTIFICATION. The views expressed in this research report accurately reflect the analyst;s personal views about any and all of the subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. DISCLAIMERS This reserch is based on information obtained from sources believed to be reliable, but we do not make any representation or warraty nor accept any responsibility or liability as to its accruracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendations contained in this document do not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities. PT. Indo Premier Securities or its affiliates may seek or will seek investment banking or other business relationships with the companies in this report.