Vale Indonesia – TP Rp3,900

Fully valued
Results below expectations. Vale Indonesia (aka Inco)’s FY11 net profit dropped 24% YoY to US$333m on the back of lower sales volumes and rising costs. The result is below our and consensus estimates of US$367m and US$404m respectively. 4Q11 net profit plunged 84% QoQ to US$13m, as Vale had to shut down two (out of four) furnaces, coupled with lower nickel price and rising service costs.

Production volume plunged in 4Q11. Vale produced 13.7k tonnes of nickel in matte in 4Q11, a drop of 24% QoQ and the lowest quarterly production over the last six years, owing to the rebuild of furnace #2 and an accident which forced furnace #1 to undergo repairs since mid-November. As expected, 2011 production volume came at 66.9k tonnes, only a tad lower than our forecast of 68k tonnes.

Spike in production cost. Despite lower production volume, Vale’s COGS rose 16% QoQ in 4Q11 to US$194m. Fuel cost was not the culprit as the prices of diesel fuel and HSFO were virtually unchanged on a quarterly basis, while volume consumed was 30-39% QoQ lower.
Vale blamed rising service costs, among them repair bills on furnace #1, and we suspect the company also booked extra depreciation charges as Karebbe is now up and running.

Optimism for 2012 and beyond. Vale expects no major shutdown after February 2012, when it should have finished rebuilding furnace #2, increasing the furnace’s capacity by 20% or 3.5k tonnes. Production volume is targeted at 72k tonnes for 2012, to be increased further to a minimum of 80k tonnes in 2013, utilising power generated by Karebbe.

Fully valued, downgrade to HOLD. Vale’s abysmal performance was chiefly due to an unfortunate accident and accelerated booking of costs. We believe unit cash costs ex-fuel will revert to normal levels in 2012, at under US$2/lb. However, oil prices have spiked recently, and this will put a dent on profitability in 2012. We lower our TP slightly to Rp3,900, pegging the stock at 2012F PER of 11.5x. HOLD.

Source: KIMENG dated 22 February 2012