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.