Persistently elevated ore prices favor upstream and integrated players

Largely in line with our view (see Indonesia Nickel: Nickel ore drives downstream prices, 16 August 2024), nickel ore and NPI prices outperformed in the third quarter (Fig. 1). While LME nickel prices declined by 12% q-q, nickel ore prices surged to around USD51/t, up 15% q-q, and NPI prices also saw gains. The market continues to feel the effects of the nickel shortage, compounded to some extent by weather-related disruptions impacting ore deliveries.

Aneka Tambang (ANTM IJ, Buy) — we estimate the company to book better-than-expected earnings in 3Q24F compared to our FY24F forecast, which is already 15% higher than Bloomberg consensus estimates. We believe ANTM benefits from: 1) higher gold prices, and 2) increased nickel ore sales following another RKAB (Indonesia term for mining work plan and budget) approval in September amounting to 1mn wmt of ore. We expect higher nickel and gold sales for the in 3Q24F, from both the volume and ASP side. Given the current nickel shortage, we believe ANTM is positioned as one of the beneficiaries, further supported by its attractive valuation (-1SD 5Y P/E band).

Trimegah Bangun Persada (NCKL IJ, Buy) — we believe its 3Q24F results will modestly surpass market expectations. Despite optically a decline y-y (due to lower MHP margin and a high base last year), we believe the overall performance will be derived from: 1) the increase in NPI prices, and 2) higher limonite ore sales following the full ramp-up of ONC (Obi Nickel Cobalt) HPAL (High Pressure Acid Leaching) since August. We estimate ONC to produce up to 28,000tons of MHP in 3Q24F (+69% y-y). Our current valuation for 2025F stands at a P/E of 9.22, with an ROE of 21.50% (highest among its peers).

Harum Energy (HRUM IJ, Buy) — Despite showing year-on-year improvement due to a low base, we expect HRUM to fall short of consensus estimates. We believe its coal business is expected to benefit from higher prices, with ASP +15% y-y, while nickel ASP comes off from elevated levels to -9% y-y. However, HRUM has had increased output from WMI RKEF commissioning earlier in the year, which will boost nickel sales volumes, in our view.

Merdeka Copper Gold (MDKA IJ, Buy) — after a soft 2Q result, we are expecting a recovery from MDKA. We expect ore sales to continue to pick up, and the company is on track to sell 10-11mn wmt of limonite ore. Regarding copper and gold, we anticipate MDKA to be able to ride the wave of higher gold prices given a +19% increase in ASP y-y. However, given the currency appreciation, we expect MDKA to book a forex loss for the quarter.

Vale Indonesia (INCO IJ, Neutral) — we expect the 3Q24 results to be in line with consensus estimates. We project a 7% q-q decline in ASP and a margin contraction due to a slight increase in cash costs. However, in our view, production is expected to normalize in 3Q24 following the completion of maintenance in 2Q. While awaiting approval for the RKAB permit, the recent company guidance suggests that INCO is prepared to begin selling nickel ore from its new Pomalaa concession. Our current valuation for 2025F stands at a P/E of 20.52 with an ROE of 4.80%.

Stocks for action

Our pecking order in the nickel space is ANTM > NCKL > HRUM > MDKA > INCO. We view elevated ore and nickel intermediary prices to favor more upstream nickel players like ANTM and NCKL. Looking forward, ANTM is fresh off announcing a value-accretive deal with Tsingshan, and NCKL possesses the further advantage of being the most prudent and having the lowest cash cost among its peers.

Fig. 2: Metal companies’ 3Q24F estimates

Fig. 3: Metal companies’ valuation table

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

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Michael Wildon (michael.wildon@verdhana.id) 

Edward Prima (edward.prima@verdhana.id)