Timah, target price Rp2,250

Lower tin price forecast

Less bullish on tin price outlook. Following December’s astronomical export volume figure, we lower our tin price forecast for 2012 to US$23k/tonne from the previous US$25k/tonne. As we think that collaboration among Indonesia tin producers to control supply would be unlikely, the LME price is likely to remain depressed in the midst of abundant supply and anaemic global growth.

Indonesia flooded the global tin market in December. The Ministry of Trade reported that the tin export figure of 15,103 tonnes in December was almost seven times higher than November’s figure of 2,202 tonnes. Cumulatively, export volume increased by 4% YoY in 2011 to 96,019 tonnes worth US$2.35b (+37% YoY).

Shocking achievement. We had known that tin producers would start exporting again in December, after several parties had violated the export ban agreement. However, the fact that their export volumes would compensate for the vacuum in the previous two months came as
a complete surprise to us. December’s figure was more than twice the average monthly shipment of 7,356 tonnes in 11M11.

Attempts at stabilising tin price may fail. There is now an attempt to open a tin bourse in Indonesia to curb speculation, and thus reduce price volatility. In addition, the producers will impose a self-determined quota of 4,500 tonnes per month to support the tin price. Ambitious and
noble as these goals are, we do not expect them to materialise, if history is of any guidance.

Cutting our TP as sales volume target is also low. Timah aims to sell 40k tonnes of tin in 2012, which is lower than our previous target of 42k tonnes. We have further lowered our sales volume target to 37k tonnes, which constitutes flat growth from the 2011 level. We also reduce our TP for the company to Rp2,250 (from the previous Rp2,650), thus pegging the stock at 2012F PER of 16.6x and EV/EBITDA of 8.4x.

Spectacular export figure in December
Indonesia flooded the global tin market in December. The Ministry of Trade reported that the tin export figure of 15,103 tonnes in December was almost seven times higher than November’s figure of 2,202 tonnes. Cumulatively, export volume increased by 4% YoY in 2011 to 96,019 tonnes worth US$2.35b (+37% YoY).

Export ban simply ineffective. Since the very first beginning, there has been evidence suggesting that the export ban is not very effective, to put it mildly. First, the total export volume in October, the first month the ban took place, actually inched up by 4% m/m, instead of falling.
Next, Timah negotiated, and was granted, an exemption, thus allowing the company to resume shipments to contract buyers. Thus, we were not surprised when a spokesman from a group of six tin smelters said that shipments would be back to normal in December.

Astonishing export figure. Despite anticipating the resumption of exports, December’s figure still came as a complete surprise for us: the the export volume compensated for the vacuum in the previous two months. To put it into perspective, December’s figure was more than twice the average monthly shipment of 7,356 tonnes in 11M11.

Collaboration between miners is difficult
New tin bourse meets lukewarm reception. In order to reduce speculation, and thus reduce price volatility, Indonesia will open a new tin bourse starting next February. The market is for physical settlement only, whereby the price (FOB) is determined through auction and the
appointed auction winner must then settle the payment within two days.
Further, both buyers and sellers must be registered and pay membership fees. Reception has been lukewarm thus far, with just five registered sellers (including Timah) and only one buyer from Korea.

Adherence to export quota unlikely. In addition to having their own tin bourse, Indonesia’s tin producers are also trying to impose a selfdetermined quota of 4,500 tonnes per month, However, after witnessing the undoing of the recent export ban agreement due to the lack of cooperation between the miners, along with the failure to get producers to become registered members in the bourse, we think this attempt to limit export volume would be a failure.

Price might remain depressed for quite some time. With the Euro zone economy heading back into recession and signs of growth slowing down in China, it is hard for us to be bullish on the tin price. Further, with unrestricted exports from Indonesia, tin price in 2012 does not look
promising. That said, we do not expect a further correction, as global demand still outstrips supply. However, our previous scenario in which tin price would rebound to US$25k/tonne in 2012 now appears overly optimistic.

Cutting our TP, reiterate BUY. We lower our FY12 ASP assumption to US$23k/tonne to reflect our less bullish stance on the tin price outlook. We also lower our respective sales volume assumptions for 2012 and 2013 to 37k and 38k tonnes from the previous 42k and 43k tonnes.
Based on 11.9% WACC and 1% terminal growth, we cut our TP to Rp2,250 from the previous Rp2,650. Nonetheless, we maintain our BUY call, as we believe the supply-demand imbalance for tin would lead to higher tin prices in 2013 and 2014.

APPENDIX 1
Definition of Ratings
Kim Eng Research uses the following rating system:
BUY Total return is expected to be above 10% in the next 12 months
HOLD Total return is expected to be between -5% to 10% in the next 12 months
SELL Total return is expected to be below -5% in the next 12 months

Source: KIM ENG dated 17 January 2012