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BAHANA Beacon Spotlight

12 November 2010

International Nickel Indonesia


Sector: Metal Mining (NEUTRAL)

BUY
(From: Hold) Price:IDR4,925 TP: IDR6,000 (From IDR4,500) TP/consensus: 122% JCI: 3,745 Exhibit 1. Key forecasts and valuations Year to 31 Dec 2009 2010F 2011F 2012F Revenue (USDm) 761 1,207 1,176 1,316 EBIT (USDm) 232 600 565 623 Net prof. (USDm) 170 447 425 473 Bahana/cns. (%) 119 107 105 EPS (IDR) 175 412 379 419 EPS growth (%) (50.2) 136.2 (8.0) 10.4 EV/EBITDA (x) 14.6 7.4 7.7 7.2 PER (x) 28.2 11.9 13.0 11.8 FCFPS (IDR) 69 222 376 350 FCF yield (%) 1.4 4.5 7.6 7.1 BVPS (IDR) 1,619 1,792 1,913 2,130 PBV (x) 3.0 2.7 2.6 2.3 DPS (IDR) 113 79 199 188 Yield (%) 2.3 1.6 4.0 3.8 ROAA (%) 8.8 19.7 16.3 16.4 ROAE (%) 11.0 25.4 20.8 20.8 EBIT mgn. (%) 30.5 49.7 48.0 47.3 Net gearing (%) nc nc nc nc Exhibit 2. Company information Share price (10/11/10) : 4,925 Share outstanding (m) : 9,936 Mkt cap. (IDRb/USDm) : 48,936/5,493 3-m avg.daily t.o.(IDRb/USDm) : 76.3/8.6 Bloomberg code : INCO IJ Exhibit 3. Shareholders information Vale Inco (%) : Sumitomo Metal Mining (%) : Free float (%) : Exhibit 4. Share price performance
(IDR) 5,200 ('000) 520,000 468,000 4,900 416,000 4,600 364,000 312,000 260,000 4,000 208,000 156,000 104,000 3,400 52,000 3,100 11/11/09 0 11/11/10

Surabhi Chopra
E-mail: surabhi@bahana.co.id Phone: +6221 250 5081 Ext. 3603

Nickel giant
Fine tuning earnings and reducing risk free rate significantly, We have raised our 2011 nickel price assumption from USD22,500 to USD23,200/ton while lowering our production by 12% in 2011 to 65k tons, in line with INCOs plan to shut down one of its four furnaces for 21 weeks in 2H11. The net impact results in 3.3% reduction in our 2011 earnings, bringing 2011 EPS to IDR379, down 8% y-y. On a more positive note, we have increased our long-term benchmark price from USD21,500 to USD22,500/ton, in line with the conservative assumption we use on ANTM. We believe further upside exists if nickel prices were to rise from current levels. Higher long-term benchmark price and lower risk free rate of 3.8% from 6.5% will bode well for the share price performance of INCO in our view. translating to 21.8% potential upside; Raise to BUY INCOs current capacity of 72,324tons will see a 25% jump to 90,718tons, although no guidance on timing has been provided. In fact, INCO has not provided any guidelines on any parameter (other than production in 2011 will decline y-y), which we believe is the major culprit of its share price underperformance of 11.7% in ytd (exhibit 8). Thus, we apply a scenario whereby long-term production will reach 90,718tons, arriving at an equity value of IDR6,100. On the other hand, assuming 80,000tons as the longterm production, we arrive at an equity value of IDR5,500. Assuming 70-30% probability we arrive at target price of 6,000/share (+21.8% upside). With nickel prices on an uptrend, it is worth highlighting that every USD1,000/ton change in benchmark price impacts our DCF by 11%. BUY. Worlds third largest nickel reserves We like INCOs status as worlds third largest nickel reserves with 121m tons of nickel ores, equivalent to 2,166k tons of nickel, translating into a mine life of about 31 years on the assumption that the company attains its maximum production of 90,718tons from 2015 onwards. INCO is also one of the worlds lowest cost producers of nickel with operating margins of about 50%, compared to 27% for ANTM and TINS. INCO is also in a net cash position with a cash balance of USD494m. The company, the largest market cap in the metal space, has payout ratio of 50% and dividend yield of 4.0%. New power project to reduce cost by USD440/ton Fuel-related costs are the largest forming 35-45% of INCOs total COGS. Hence, in 2Q11, INCO plans to start a project to raise its hydroelectric power capacity by 90mw or 33%, increasing total power supply by 25% to 443mw. Overall, the project was 67% completed at the end of the 3Q10. This will support higher production as well as reduce cost by about USD20cents/lb or USD440/ton, or 6% reduction in cash cost per ton. Note that in order to produce one pound of nickel-in-mate using hydro energy costs one cent while auxiliary backup costs 150 times more or USD1.5.

58.7 20.1 21.2

4,300

3,700

1/23/10 Volume (RHS)

4/6/10

6/18/10

8/30/10 INCO IJ Px Last

Source: Bloomberg

Exhibit 5. Relative share price performance


(%) 20.0 10.0 0.0 (10.0) (20.0) (30.0) (40.0) (50.0) (60.0) (70.0) 11/11/09 1/23/10 JCI (LHS) 4/6/10 6/18/10 8/30/10 (%) 20.0 10.0 0.0 (10.0) (20.0) (30.0) (40.0) (50.0) (60.0) (70.0) 11/11/10

INCO Relative to JCI (RHS)

Source: Bloomberg

Disclosure: Bahana Securities does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report

BAHANA Beacon Spotlight


International Nickel Indonesia
Year to 31 December PROFIT & LOSS (USDm) Sales Gross profit EBITDA Depreciation EBIT Net interest inc./(expense) Forex gain/(losses) Other income/(expense) Pre-tax profit Taxes Minority interest Extraordinary gain/(losses) Net profit BALANCE SHEET (USDm) Cash and equivalents S-T investments Trade receivables Inventories Fixed assets Other assets Total assets Interest bearing liabilities Trade payables Other liabilities Total liabilities Minority interest Shareholders' equity CASH FLOW (USDm) EBIT Depreciation Working capital Other operating items Operating cash flow Net capital expenditure Free cash flow Investing cash flow Equity raised/(bought) Net borrowings Other financing financing cash flow Net cash flow Cash ending RATIOS ROAE (%) ROAA (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Payout ratio (%) Current ratio (x) Interest coverage (x) Net gearing (%) Debts to assets (%) Debtor turnover (days) Creditor turnover (days) Inventory turnover (days) MAJOR ASSUMPTIONS ASP (USD/ton) growth % Sales vol. (tons) growth % USD/IDR
Source: Company, Bahana estimates

12 November 2010

2008 1,312 504 564 86 478 5 (2) (18) 463 104 359 166 64 147 1,336 130 1,843 2 44 276 322 0 1,521 478 65 (126) (119) 299 (157) 142 (173) (7) 0 (247) (254) (128) 166 24.7 19.3 43.0 36.4 27.4 19.2 4.8 790.5 nc 0.1 20 20 66 17,724 (40.7) 73,048 (4.7) 9,691

2009 761 245 323 91 232 0 (1) 5 237 66 170 261 98 118 1,379 182 2,038 150 33 274 457 0 1,581 232 84 (60) (61) 194 (127) 67 (134) 144 0 (109) 35 95 261 11.0 8.8 42.4 30.5 22.4 30.6 7.2 1,220.4 nc 7.4 51 23 83 11,222 (36.7) 66,890 (8.4) 10,175

2010F 1,207 614 684 85 600 (4) 0 0 596 149 447 494 155 135 1,552 162 2,498 227 38 289 554 0 1,943 600 85 (34) (153) 498 (258) 240 (258) 77 0 (85) (8) 232 494 25.4 19.7 56.7 49.7 37.0 50.0 8.5 52.8 nc 9.1 49 23 83 16,770 49.4 72,000 7.6 9,163

2011F 1,176 578 653 88 565 2 0 0 567 142 425 721 151 136 1,564 156 2,729 257 38 288 584 0 2,145 565 88 8 (140) 521 (100) 421 (100) 30 0 (224) (194) 228 721 20.8 16.3 55.5 48.0 36.2 50.0 10.6 43.9 nc 9.4 49 23 83 18,096 7.9 65,000 (9.7) 8,863

2012F 1,316 639 684 61 623 7 0 0 630 158 473 933 169 155 1,604 170 3,031 287 43 295 626 0 2,405 623 61 (39) (150) 495 (100) 395 (100) 30 0 (213) (183) 212 933 20.8 16.4 51.9 47.3 35.9 50.0 11.8 43.4 nc 9.5 49 23 83 17,550 (3.0) 75,000 15.4 8,800

Despite higher ASP, net profit to decrease 5% y-y in 2011 on lower production

Net cash position throughout

Cash balance of USD721m by end of 2011

High profitability margins on superior cost structure, making it one of the worlds lowest cost producers

ASP to rise 8% y-y in 2011 but sales volume to drop 9.7% yy

Surabhi Chopra (surabhi.chopra@bahana.co.id) +6221 2505081 ext. 3603


PT Bahana Securities Equity Research International Nickel Indonesia 2

BAHANA Beacon Spotlight


Exhibit 6. INCOs earnings revisions
Year-end Dec 31 (USDm) 2010F Revenue 1,207 EBITDA 614 EBITDA margin (%) 684 Operating profit 56.7 Operating margin (%) 600 Reported net profit 49.7 Net margin (%) 447
Source: Company, Bahana estimates

12 November 2010

Old 2011F 1,220 600 675 55.3 585 48.0 440

2012F 1,310 625 680 51.9 620 47.3 465

2010F 1,207 614 684 56.7 600 49.7 447

New 2011F 1,176 578 653 55.5 565 48.0 425

2012F 1,316 639 684 51.9 623 47.3 473

2010F -

Change % 2011F 2012F (3.6) 0.5 (3.6) 2.2 (3.3) 0.5 (3.4) (3.3) 0.5 1.7

Fine earnings

tuning

Exhibit 7. Peer comparables, 2011F


INCO 2011F BUY 6,000 4,925 21.8 4.0 25.88 48,936 78.1 16.5 1.0 13.0 15.8 2.6 7.5 nc 1,913 379 199 16.3 20.8 65,000 65,000 18,096 ANTM 2011F BUY 3,000 2,700 11.1 2.5 13.6 25,754 77.0 32.3 1.9 13.3 14.7 2.4 6.4 nc 1,127 203 68 15.0 19.2 18,000 18,000 23,200 TINS 2011F HOLD 2,350 3,000 (21.7) 3.5 (18.2) 15,099 118.6 40.4 2.4 9.8 7.7 2.8 5.0 nc 1,071 306 105 23.5 31.5 47,000 46,260 21,500 SECTOR

Recommendation Target price Price Upside/downside (%) Dividend yield (%) Total return (%) Market cap (IDRb) 3m avg daily turn. (IDRb) 3M avg daily volumes (m) 3M total daily volumes (b) PE (x) PE (x) @TP PBV (x) EV/EBITDA (x) Net gearing (%) BVPS (IDR/share) EPS (IDR/share) DPS (IDR/share) ROA (%) ROE (%) Production ( tons) Sales volume ( tons) ASP (USD/ton) Growth (%) Revenue Gross profit Operating profit EBITDA Profit before tax Profit after tax Margin (%) Gross profit Operating profit EBITDA Profit before tax Profit after tax
Source: Company, Bloomberg, Bahana estimates *Total

89,789*

As the upside on ANTM is now lower than 15%, INCO has become our new top pick in the sector

5.4 12.5 14.1 2.6 6.8

17.1 22.2

(2.6) (5.8) (5.7) (4.6) (4.9) (4.9)

1.1 6.6 8.5 9.3 8.9 8.9

31.2 36.6 42.1 38.0 45.2 45.2

4.2 4.9 6.3 6.5 7.5 7.5

49.2 48.0 55.5 48.2 36.2

33.1 26.3 34.1 25.6 19.3

31.5 26.1 28.5 25.9 15.6

41.8 38.4 45.1 38.3 28.0

PT Bahana Securities Equity Research International Nickel Indonesia

BAHANA Beacon Spotlight


Exhibit 8. Coal & mining relative share price performances, ytd 2010
(%) 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) (30.0) (40.0) (50.0) (60.0)
81.4

12 November 2010

(%) 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) (30.0) (40.0) (50.0) (60.0)

INCO has underperformed the JCI by 11.7% despite good results, partly due to lack of guidelines from the company

19.6

18.8 3.8 (1.1)

BYAN

ITMG

INDY

TINS

METAL & COAL SECTOR

ADRO JAKMINE
(8.5) (11.4)

INCO
(11.7)

PTBA
(22.0)

ANTM
(23.7)

BUMI

(50.7)

Source: Bloomberg

Exhibit 9. World primary nickel consumption by first use, 2009 The stainless steel industry accounts for the largest user of nickel

Battery 3% Electroplating 8% Foundry casting 4% Non-ferrous alloy 13%

Others 5%

Stainless steel 62% Alloy steel 5%

Stainless steel Electroplating


Source: Metalytics

Alloy steel Battery

Non-ferrous alloy Others

Foundry casting

Exhibit 10. World growth in non-ferrous metal consumption, 1995 - 2009


consumption index (1995=100) 200 180 160 140 120 100 80 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Nickel demand has been on the rise but at slower pace than other metals, partly due to weakness in the auto industry

Alumunium

Copper

Lead

Nickel

Tin

Zinc

Source: Metalytics

PT Bahana Securities Equity Research International Nickel Indonesia

BAHANA Beacon Spotlight


Exhibit 11. China's growing importance as a metal consumer, 2000 - 2009
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 Lead 2005 2006 2007 Tin 2008 Zinc 2009 Steel

12 November 2010

Nickel demand is largely dependant on consumption in China, which accounts for at least a third of world nickel consumption

Alumunium
Source: Metalytics

Copper

Nickel

Exhibit 12. China's metal consumption growth rates


(Compound annual growth rate, 2000-2009)

Nickel Lead Steel Alumunium Copper Zinc Tin 0%


Source: Metalytics
10% 14% 13% 17% 17% 20%

25%

In the past, Chinas nickel demand growth was phenomenal,

5%

10%

15%

20%

25%

30%

Exhibit 13. World metal consumption growth


(Compound annual growth rate, 2000-2009)

dragging up global growth rates


4.3% 3.6% 2.9%

Steel Alumunium Lead Zinc Copper Nickel Tin 0.0%


Source: Metalytics
1.5% 1.2% 1.1% 0.8%

1.0%

2.0%

3.0%

4.0%

5.0%

PT Bahana Securities Equity Research International Nickel Indonesia

BAHANA Beacon Spotlight


Exhibit 14. China's self-sufficiency in non-ferrous metals, 2009
(USDb) 35 30 25 20 15 10 5 0 Alumunium Copper Lead Domestic
Source: Metalytics
56% 16% 84% 19% 85% 62%

12 November 2010

Chinas demand growth has far outstripped domestic mining capacity for non-ferrous metals

Nickel Import

Tin

Zinc

Exhibit 15. China's stainless steel production, 1990 2011F


('000 tonnes) 12,000 10,000 8,000 6,000 4,000 2,000 0 1990
Source: Metalytics

Chinas stainless steel production growth has averaged 33% p.a. over the last 10 years

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010F

Exhibit 16. Production, 2005-2014F


100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F
Source: Company

(k tons) 90.0 76.4 71.6 76.7 72.4 67.3 72.0 75.0 65.0 80.0 90.7 90.7 90.7 90.7

Production to decline 9.7% y-y in 2011

PT Bahana Securities Equity Research International Nickel Indonesia

BAHANA Beacon Spotlight


Exhibit 17. ASP, 2005-2018F
(USDk/ton)

12 November 2010

30 25 20 15 10 5 0
11.6 18.4

29.9

17.7 11.2

16.8

18.1

17.6

17.6

17.6

17.6

17.6

17.6

17.6

Long-term benchmark price of USD22,500/ ton translates to USD17,550/ton (78%) for INCO, based on its sales agreement

2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F
Source: Company

Exhibit 18. Key assumptions, 2009-2015F


Production (m pounds) Production (tons) Sales (m pounds) Sales (tons) Price (USD/lb) Price (USD/ton) Benchmark price (USD/ton) Diesel cost (USD/litre) HSFO cost (USD/litre) Cash production cost (USD/lb) Diesel litres (m litre) HSFOl litres (m litre)
Source: Company, Bahana estimates

2009 148 67,329 148 66,890 5.1 11,222 14,925 0.6 0.4 2.8 60 374

2010F 148 72,000 148 72,000 7.7 16,770 21,500 0.6 0.4 3.2 140 397

2011F 153 65,000 153 65,000 8.5 18,096 23,200 0.7 0.5 3.6 126 359

2012F 157 75,000 157 75,000 8.0 17,550 22,500 0.8 0.5 3.7 146 414

2013F 162 80,000 162 80,000 8.0 17,550 22,500 0.8 0.5 3.8 156 442

2014F 198 90,000 198 90,000 8.0 17,550 22,500 0.9 0.6 3.8 175 497

2015F 200 90,718 200 90,718 8.0 17,550 22,500 0.9 0.6 4.0 176 501

We assume long-term production of 90,718 tons

Exhibit 19. Mining processing


Uses lots of high sulphur fuel oil (HSFO) Uses lots of Diesel

Mine

Dryer

Reduction klin

Electric

C onverter

Nickel-inmate

1 ton of nickelinmate requires USD22 of hydro power and USD3,307 of auxiliary power or 1 pound of nickel-in-mate needs US1cent of hydropower and USD1.5 of auxiliary power

Used in batteries and stainless steel

Further refined to become 99.9% of nickel (LME) grade)

Sale 80% to vale Inco and 20% to Sumitomo

Source: Company

PT Bahana Securities Equity Research International Nickel Indonesia

BAHANA Beacon Spotlight


Exhibit 20. Hydroelectric power usage on INCOs plants

12 November 2010

Balambano 30% L arona 45%

Hydroelectric power contributes 275mw of power with 90,718 production needing additional power of 62mw, supported by 90mw of hydroelectric power

Karebbe (in c ons truc tion) 25%

Source: Company

Exhibit 21. Auxiliary backup Auxiliary power provides 78mw or 22% of total power required; separately, INCO requires 2.5m bbl of HSFO and 140m liters of Diesel oil

C A T D ies el M BDG Dies el 38% 31%

Steam T urbine 31%

Source: Company

PT Bahana Securities Equity Research International Nickel Indonesia

BAHANA Securities
Research: +62 21 250 5081
Harry Su harry.su@bahana.co.id Head of Research Strategy, Telcos, Consumer ext 3600 direct: +62 21 250 5735 Teguh Hartanto teguh.hartanto@bahana.co.id Deputy Head of Research Banks, Cement ext 3610 Andry Asmoro andry@bahana.co.id Economist ext 3605

Pandu Anugrah pandu.anugrah@bahana.co.id Analyst Toll road, Auto, Heavy Equipment, Construction ext 3606

Surabhi Chopra surabhi@bahana.co.id Analyst Coal, Metals, Telcos ext 3603

Natalia Sutanto natalia.sutanto@bahana.co.id Analyst Property ext 3601

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Equity Desk: +62 21 250 5508

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Head Office Graha Niaga, 19th Floor Jl. Jend. Sudirman Kav. 58 Jakarta 12190 Indonesia Tel. 62 21 250 5081 Fax. 62 21 522 6049

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