Vale Indonesia Robust 4Q12 earnings

Vale Indonesia: Robust 4Q12 earnings, FY12 results below consensus (Under review)

• FY12 results below consensus – INCO reported FY12 net profit of US$67mn (-80%YoY), about 20% below consensus, as operating profit down 75% YoY to US$115mn with margin compressed to 12% from 37% in FY11, mostly due to lower ASP which dropped 26%YoY to US$13,552/t and higher project development cost (related to Bahodopi development, project CEPAT and operational maintenance improvement program) which up by 32%YoY to US$39mn and 3 times higher finance cost of US$15.5mn as the grace period of the loan facility end in late 2011. FY12 production volume grew modestly by 6% to 70,717 tons.

• All-time high production in 4Q12 with excellent efficient operations boost bottom line – Robust 4Q12 bottom line of US$39mn (+178%YoY, +65%YoY) as operating margin improved to 20% vs 10% in 4Q11 or 15% in 3Q12. All-time high production volume in 4Q12 at 21,306tons (+55% YoY, +4%QoQ) led to stronger economic of scale with excellence efficient operation in fuel consumption supported by higher power contribution from hydropower (see exhibit 3). 4Q12 ASP was US$13,176/t (-12%YoY, +5%QoQ).

2013 Outlook – Annualizing 4Q12 production capacity would come out at 84k tons full-year capacity. However, due to seasonality and ongoing maintenance program, Company only expects 10% growth volume or about 77k tons production in 2013. Further details for 2013 business plan & guidance will be discussed with the BoD in the conference call on Monday, 4 March 2013 at 4pm Jkt time.
Currently, we’re reviewing our rating and forecasts on the counter. With consensus top line of US$1,120mn, it implies ASP of US$14.5k/ton which is 12% lower than current LME nickel spot price of US$16.5/t and expecting 24% operating margin. Based on consensus INCO trades at 14.7x P/E for 2013.

Related article: Vale Indonesia: Key takeaways from conference call with the BoD

Vale Indonesia Key takeaways from conference call with the BoD

Vale Indonesia: Key takeaways from conference call with the BoD (Under review)

Vale Indonesia held a conference call yesterday with key speaker Mr Fabio Bechara, CFO of the Company. Please find the key highlights below:

2013 outlook - Company targets to produce 77k tons nickel in matte (+10% YoY growth) and expects 5% total cost saving per tonnage in FY2013. The cost efficiency initiatives are  combination from better economic of scale,  fully effect of Karrebe hydropower, coal convertion project for the drier which expected to be commissioning in 2Q13 to replace some HSFO consumption and others operational efficiency program.  The net saving from the coal conversion project itself is expected around US$18-20mn or about 2-2.5% of the COGS

Company plans to spend US$125mn capex (12% lower than FY12) for this year with main project for coal conversion infrastructure and logistics. And the debt repayment schedule for this year about US$38mn. Company remains mute on the nickel price outlook as global crisis economy outlook remain uncertain combined with high LME inventory.

Another bumpy year ahead in 2014 - To achieve 90k tons target production by 2015, Company plans to shut down its  electric furnace no 1 (which has been repaired and completed early year 2012) to rebuild and upgrade the power capacity from 75MW to 90MW, similar to furnace no 2. Therefore we’ll see a bumpy year ahead 2014 to INCO share price it may affect 20-25% of the total production capacity, learn from the previous overhaul it may take 20-25 weeks to complete.

CoW renegotiation process underway - Company remain mute about the potential outcome from its renegotiation with the Minister of Energy and Minerals (ESDM) about its CoW status as it is still underway.  However, Company highlighted that additional project development cost (with regard on some projects development including Bahodopi mines) recorded in the the P&L will start to be capitalized into balance sheet as there’s certainty or clarity about its CoW extension status from the ESDM. Company expects that the renegotiation will complete in 2Q13.

Based on the latest case, Government has successfully amended and increased the royalty rate for Freeport and Newmont from 1% to 3%, offering important insights into the current state of Indonesia mining industry extremely has come at a significant cost to foreign investor confidence in Indonesia. Therefore, in our view Vale Indonesia likely to face the same challenges.