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Merdeka Copper Gold MDKA IJ -Buy- Pani gold project MDKAs next major play

Merdeka Copper Gold MDKA IJ -Buy- Pani gold project MDKAs next major play

Commodities and Energy MW EP 1K 3rd Oct, 2024

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Pani gold project: MDKA’s next major play

Maintain Buy with revised TP of IDR3,400

2Q24 results review: Nickel shows promise amidst mixed results

MDKA recorded 2Q24 earnings of USD3mn, below our/consensus estimates. Revenue came broadly in line with our and consensus estimates, with nickel remaining a major contributor, accounting for 86% of 2Q revenue (vs. 82% in 1Q). Despite the quarterly improvement in the nickel segment, gold/copper fell short of expectations, with revenue of each segment making up only 39% of our estimates.

Gold price drives up Pani gold project valuation

Adjusted for the current 28% YTD increase in gold prices, we raise our valuation for the Pani project by 34% to USD1.8bn (vs. USD1.4bn earlier), representing 27% of MDKA’s valuation. After commissioning in late 2025, Pani's initial heap leach production could reach 70-90kozpa (a 67% increase vs current 120kozpa gold production), with a peak production of ~500kozpa following the commissioning of carbon in leach by ~2030F. Pani will have a low all-in sustaining cost (AISC) of ~USD900/oz, translating into a robust margin of ~60% at current gold price, in our view. Moreover, the expertise from TB Gold mine strengthens our confidence that the Pani project will run smoothly.

We revise our EBITDA estimates by -3%

We raise our FY24F gold and copper price assumptions by 11%/7%. We revise our EBITDA by -3% for FY24F, adjusting for the lower nickel production while also lower our overall earnings to reflect higher minority portion. We believe our FY25F EBITDA estimate of USD635mn will reflect the incremental addition from its ESG HPAL and AIM projects, which have not yet been factored into consensus estimates (Fig. 5). Moreover, we expect ~USD650mn of capex in FY24F, mostly for Pani, existing TB Gold, Wetar and HPAL projects.

Still one of the major copper/gold proxy; maintain Buy with new IDR3,400 TP

We maintain our Buy call for the stock with a lower SOTP-bsaed TP of IDR3,400, with a WACC of 11% (9.4% earlier). The copper segment remains the largest contributor to our SOTP valuation at 43%, followed by gold at 35%, and nickel at 22%. While near-term results may not be significant, the positive YTD performance in gold and copper is likely to prompt investors to consider the future value of MDKA’s multi-billion dollar asset potential. The stock currently trades at 34x FY25F P/E. Risks include: 1) execution risks in project development, 2) capital raising, 3) weaker-than-expected commodity prices, and 4) production constraints.

Latest guidance on MDKA's projects are below:

 

Tujuh Bukit Gold Oxide:
- Increase in reserves by 560koz of gold, and extending mine life until 2029, vs the original plan of 2026.

Pani Gold:
- Heap leach commissioning in late 2025 (70-90koz of gold), AISC at $900/oz
- R recovery rate likely to be upgraded to 82-83%, from initially 78-80% in early Pre Feasibility Study (PFS).
- Capex of USD120-130mn annually starting from FY24F-25F for development.


Tujuh Bukit Copper
- Increase in indicated resources, and some resources will be drawn into reserves.
- SLC mine layout is likely to be revised to increase throughput from 4Mt to 5.5Mt


Nickel
- PT ESG HPAL (30ktpa): Increased ownership from 55% to 60%. 51.4% of the project is completed with targeted completion in November 2024.
- PT Meiming HPAL (25ktpa): Subscribed for a 12.5% interest funded by cash; to be completed in 1H25.
- Limonite ore sales target of up to 10.5 Mt for FY24; building more infrastructure to supply to ESG and Meiming HPAL next year.
- NPI guidance lowered to 80-85 ktons due to the shut down of one furnace. No change in cash cost guidance.
- HGNM production of 50-55ktons


AIM project:
- AIM is expected to be fully operational across all processing circuits by late 2024, and will operate at full capacity in 2025.
- EBITDA expectation for FY25F is USD180-220mn, at 15-20koz/kt of gold and copper each, depending on copper prices.


Capex guidance:

Capex for FY24F will be focussed on Pani and HPAL development, consisting: USD120mn for Pani, USD100mn is allocated to TB and Wetar, USD100mn will be spent for SCM development, and finally for HPAL development (stake adjusted).

Year-end 31 DecFY23FY24FFY25FFY26F
Currency (USD)ActualOldNewOldNewOldNew
Revenue (mn)1,7072,2262,1962,7592,7673,4683,425
Reported net profit (mn)-21561206123350277
Normalised net profit (mn)-21561206123350277
FD normalised EPS-0.09c0.23c0.01c0.84c0.50c1.43c1.13c
FD norm. EPS growth (%)-134.5––265.68,553.570.3124.3
FD normalised P/E (x)––2,977.9–34.4–15.3
EV/EBITDA (x)29.9–23.4–12.6–8.3
Price/book (x)4.6–4.3–3.9–3.1
Dividend yield (%)–––––––
ROE (%)-2.15.70.118.111.924.822.3
Net debt/equity (%)115.5157.1150.0170.8159.2122.1118.4
Source: Company data, Verdhana estimates

Key data on Merdeka Copper Gold



Income statement (USDmn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Revenue
870
1,707
2,196
2,767
3,425
Cost of goods sold
-705
-1,561
-1,942
-2,188
-2,476
Gross profit
165
146
254
579
948
SG&A
-53
-49
-83
-119
-161
Employee share expense
Operating profit
112
97
171
460
787
EBITDA
235
242
325
635
989
Depreciation
-124
-145
-154
-176
-201
Amortisation
EBIT
112
97
171
460
787
Net interest expense
-42
-67
-109
-136
-150
Associates & JCEs
Other income
20
-17
0
0
0
Earnings before tax
90
12
62
323
637
Income tax
-25
-7
-21
-57
-70
Net profit after tax
65
6
42
266
567
Minority interests
-6
-26
-40
-143
-290
Other items
Preferred dividends
Normalised NPAT
58
-21
1
123
277
Extraordinary items
Reported NPAT
58
-21
1
123
277
Dividends
Transfer to reserves
58
-21
1
123
277
Valuations and ratios
Reported P/E (x)
72.9
–
2,977.9
34.4
15.3
Normalised P/E (x)
72.9
-206.1
2,977.9
34.4
15.3
FD normalised P/E (x)
72.9
–
2,977.9
34.4
15.3
Dividend yield (%)
–
–
–
–
–
Price/cashflow (x)
17.5
46.9
26.1
16.5
7.9
Price/book (x)
4.2
4.6
4.3
3.9
3.1
EV/EBITDA (x)
27.4
29.9
23.4
12.6
8.3
EV/EBIT (x)
57.9
74.7
44.4
17.5
10.4
Gross margin (%)
18.9
8.5
11.6
20.9
27.7
EBITDA margin (%)
27.1
14.2
14.8
23.0
28.9
EBIT margin (%)
12.8
5.7
7.8
16.6
23.0
Net margin (%)
6.7
-1.2
0.1
4.5
8.1
Effective tax rate (%)
27.9
54.1
33.1
17.6
11.0
Dividend payout (%)
0.0
–
0.0
0.0
0.0
ROE (%)
48.7
-2.1
0.1
11.9
22.3
ROA (pretax %)
5.2
2.5
3.6
8.6
13.3
Growth (%)
Revenue
128.3
96.2
28.7
26.0
23.8
EBITDA
37.0
2.6
34.5
95.5
55.6
Normalised EPS
19.9
-134.5
–
8,553.5
124.3
Normalised FDEPS
19.9
-134.5
–
8,553.5
124.3
Source: Company data, Verdhana estimates
Cashflow statement (USDmn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
EBITDA
235
242
325
635
989
Change in working capital
-1,276
-42
-17
-57
41
Other operating cashflow
1,283
-109
-147
-321
-493
Cashflow from operations
243
91
161
257
537
Capital expenditure
-1,799
-774
-646
-671
-712
Free cashflow
-1,556
-684
-485
-414
-176
Reduction in investments
-78
-78
-78
-78
8
Net acquisitions
Dec in other LT assets
20
20
20
20
15
Inc in other LT liabilities
4
4
4
4
17
Adjustments
-385
-93
49
38
-32
CF after investing acts
-1,995
-830
-489
-430
-168
Cash dividends
0
Equity issue
237
0
51
0
0
Debt issue
1,066
145
456
388
-79
Convertible debt issue
Others
950
760
40
143
290
CF from financial acts
2,253
905
548
531
212
Net cashflow
258
75
58
101
44
Beginning cash
185
444
519
577
678
Ending cash
444
519
577
678
722
Ending net debt
1,000
1,071
1,469
1,756
1,633
Balance sheet (USDmn)
As at 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Cash & equivalents
444
519
577
678
722
Marketable securities
Accounts receivable
76
123
158
199
246
Inventories
251
444
505
568
536
Other current assets
125
122
122
122
122
Total current assets
896
1,207
1,361
1,568
1,627
LT investments
62
127
132
147
139
Fixed assets
1,206
1,767
2,271
2,779
3,305
Goodwill
325
359
359
359
359
Other intangible assets
Other LT assets
1,389
1,505
1,493
1,480
1,465
Total assets
3,877
4,964
5,616
6,333
6,895
Short-term debt
344
455
592
709
704
Accounts payable
110
304
383
431
488
Other current liabilities
151
151
151
151
151
Total current liabilities
605
909
1,126
1,291
1,342
Long-term debt
1,100
1,134
1,454
1,725
1,652
Convertible debt
Other LT liabilities
148
156
179
194
211
Total liabilities
1,852
2,200
2,759
3,210
3,205
Minority interest
1,022
1,837
1,878
2,020
2,311
Preferred stock
Common stock
728
728
779
779
779
Retained earnings
283
262
264
387
664
Proposed dividends
Other equity and reserves
-8
-64
-64
-64
-64
Total shareholders' equity
1,003
927
979
1,103
1,379
Total equity & liabilities
3,877
4,964
5,616
6,333
6,895
Liquidity (x)
Current ratio
1.48
1.33
1.21
1.21
1.21
Interest cover
2.7
1.4
1.6
3.4
5.2
Leverage
Net debt/EBITDA (x)
4.25
4.43
4.52
2.76
1.65
Net debt/equity (%)
99.7
115.5
150.0
159.2
118.4
Per share
Reported EPS (USD)
0.25c
-0.09c
0.01c
0.50c
1.13c
Norm EPS (USD)
0.25c
-0.09c
0.01c
0.50c
1.13c
FD norm EPS (USD)
0.25c
-0.09c
0.01c
0.50c
1.13c
BVPS (USD)
0.04
0.04
0.04
0.05
0.06
DPS (USD)
0.00
0.00
0.00
0.00
0.00
Activity (days)
Days receivable
202.2
21.3
23.4
23.5
23.7
Days inventory
-73.8
81.2
89.3
89.5
81.4
Days payable
19.3
48.3
64.8
68.0
67.7
Cash cycle
109.2
54.1
48.0
45.1
37.4
Source: Company data, Verdhana estimates
Company profileMDKA is a leading growth metal mining company in Indonesia with strong key shareholders and management, which have been instrumental to its success in securing significant projects with strategic partners. MDKA's current production sites are at Tujuh Bukit (TB) Oxide (105-124koz Au p.a.), and Wetar (19-24kt Cu p.a.). MDKA has several projects in the pipeline: 1) Acid Iron Metal Project (AIM), which it partners with Tsingshan to produce sulphuric acid; 2) Pani JV, a gold mine with estimated resources of 6.63Moz Au; 3) Nickel project through PT Merdeka Battery Materials (MBMA IJ) that has nickel mine (SCM mine with ~1.9bn wmt nickel resources) and operates rotary kiln electric furnace (RKEF) coupled with high pressure acid leach (HPAL) and industrial project in the future; and 4) TB Porphyry which has considerable gold and copper deposits (i.e. 8.1Mt Cu and 27.4Moz Au resources). It plans to commence production at the upper high grade zone (UHGZ) in 2027, and expects to generate 267koz of Au and 112kt of Cu per annum post ramp up period.
Valuation MethodologyOur TP on MDKA at IDR3,400 is derived from SOTP which includes 1) nickel: matte facility, ESG HPAL 2) Pani gold positive feasibility study 3) TB copper positive resources update, with a WACC of 11%. The copper segment contributes 43% to our SOTP followed by gold and nickel with 35% and 22% each. The benchmark index is JCI index.
Risks that may impede the achievement of the target priceRisks to our call: 1) execution risks in project development, 2) capital raising, 3) weaker-than-expected commodity prices, and 4) production constraints.
ESGMDKA has committed itself to the Greenhouse Gas (GHG) Nationally Determined Contributions (NDCs) of Indonesia.The company aims to achieve 29% reduction in GHG emissions intensity by 2030 versus the baseline in 2021, and to be ‘zero-net emissions’ by 2050. In order to reach this goal, MDKA has established an ESG and Sustainability Committee, which is chaired by the Vice President Director, and it has been working with an independent consultant to confirm GHG emissions at the company’s operating mines. The company will be replacing old generators with new ones that consume 10% less fuel, and it has installed 600 solar panels at Wetar with the end goal of 19kW capacity.


Key charts and financials

Fig. 1: MDKA's development timeline

Source: Company data, Verdhana research

 

Fig. 2: MDKA's capex assumption

Source: Company data, Verdhana estimates
Fig. 3: MDKA's net gearing and improving ROE trend

Source: Company data, Verdhana estimates

 

Fig. 4: MDKA— Changes in our NAV estimates for FY25F

Source: Company data, Verdhana estimates

 

Fig. 5: MDKA— EBITDA forecasts

Source: Company data, Verdhana estimates

 

Fig. 6: MDKA— Revenue proportion by commodity

Source: Company data, Verdhana estimates
Fig. 7: MDKA— Attributable EBITDA by commodity

Source: Company data, Verdhana estimates

 

Fig. 8: MDKA— share price vs gold copper and nickel price

Source: Company data, Verdhana research

 

Fig. 9: MDKA— Change in our assumptions

Source: Company data, Verdhana estimates

 

Fig. 10: MDKA— SOTP Valuation

Source: Company data, Verdhana estimates

 

Fig. 11: SOTP valuation – Copper contributes 42% of our SOTP valuation

Source: Company data, Verdhana research
Fig. 12: MDKA's 5-year EV/EBITDA band

Source: Bloomberg

 

Fig. 13: MDKA – flow chart and weightings

Source: Bloomberg, Verdhana research

 

 

2Q24 results review: Nickel shows promise amidst mixed results

MDKA released 2Q24 results with earnings of USD3mn, below our/consensus estimates. Revenue came broadly in line with our and consensus estimates, with nickel remaining a major contributor, accounting for 86% of 2Q24 revenue (compared to 82% in 1Q). This is attributed to increased limonite ore sales of USD47mn (4.7x q-q). A performance decline was seen in copper/gold segments which booked a lower PBT of -USD2mn/USD7mn (vs last quarter of -USD1mn/USD10mn) while nickel booked a PBT of USD44mn (+242% q-q).

Despite the quarterly improvement in the nickel segment, gold/copper segments fell short of expectations, with each segment's revenue making up only 39% of our estimates. However, the outlook for copper and gold remains rather positive, following the price increase and the Pani gold project likely going on stream in FY25.

Fig. 14: 2Q24 results recap

MDKA 2Q24 results snapshot           
in USD mn2Q231Q242Q24QoQYoY 6M236M24YoY%Ve%Cons
Revenue3065415532%81% 5201,094110%49%50%
Gross Profit15335566%280% 468992%30%33%
EBITDA31579365%201% 75150101%41%43%
EBIT02142103%9910% 1862238%29%30%
Net Profit(64)(15)3N/AN/A (61)(13)N/A  
            
Gross Profit5%6%10%   9%8%   
EBITDA10%10%17%   14%14%   
EBIT0%4%8%   4%6%   
Net Profit-21%-3%0%   -12%-1%   
            
MDKA segment ex elimination           
in USD mn2Q231Q242Q24QoQYoY 6M236M24YoY%Ve 
Revenue (USD mn)           
Gold            58            59            57-5%-2%             96          11317%39% 
Copper            37            36            19-48%-49%             69            55-21%39% 
MBMA - NPI          156          239          2411%54%           299          48060%49% 
MBMA - HGNM            53          197          190-4%259%             53          387631%58% 
MBMA - Limonite sales            -                8            47476%N/A             -              55N/A39% 
EBIT (USD mn)           
Gold            12            14            11-19%-8%             19            2528%39% 
Copper              3              4              3-14%-6%             (5)              7N/A-24% 
MBMA            (2)            13            46249%N/A               4            591279%47% 
EBITDA (USD mn)           
Gold            27            23            2511%-6%             44            487%39% 
Copper            10              9            1234%22%               7            21205%1479% 
MBMA              4            29            63117%1462%             17            92434%48% 
PBT (USD mn)           
Gold              9            10              7-30%-22%             13            1622%28% 
Copper            (2)            (1)            (2)N/AN/A           (15)            (3)N/A43% 
MBMA          (10)            13            44242%N/A           (14)            57N/A67% 
Source: Company data, Verdhana research

 

Fig. 15: MDKA – operational results recap

MDKA operational data2Q231Q242Q24QoQYoY 6M236M24YoY%Ve% of target
Tujuh Bukit Gold           
Gold production (Koz)            38            24            255%-34%             64            50-23%42%45%
Gold sales (Koz)            30            27            25-6%-15%             50            524%44%47%
Gold ASP (USD/oz)      1,972      2,106      2,2627%15%       1,938      2,18313%  
Gold AISC (USD/oz)      1,060      1,479      1,4921%41%       1,141      1,48530%  
Cash margin (USD/oz)         912         627         77023%-16%          797         698-12%  
Wetar Copper           
Copper production (Ktons)           3.1           3.0           3.619%16%            7.2           6.7-7%44%44%
Copper sales (Ktons)           4.3           4.3           2.0-53%-53%            7.9           6.3-20%42%42%
Copper ASP (USD/ton)      8,700      8,356      9,28111%7%       8,761      8,628-2%  
Copper AISC (USD/ton)    10,825      8,135      7,518-8%-31%     10,737      7,826-27%  
Cash margin (USD/ton)     (2,125)         220      1,764700%N/A      (1,976)         801N/A  
MBMA RKEF           
NPI production (Ktons-Ni)            12            21            225%84%             21            43101%49%48%
NPI sales (Ktons-Ni)            11            22            21-4%89%             19            42121%48%48%
NPI ASP (USD/ton)    14,123    11,055    11,5364%-18%     15,544    11,291-27%  
NPI AISC (USD/ton)    13,459    10,223    10,3701%-23%     15,261    10,295-33%  
Cash margin (USD/ton)         664         832      1,16640%76%          283         996252%  
MBMA HG Ni Matte           
HGNM production (Ktons-Ni)              4            12            1311%202%               4            25473%51%48%
HGNM sales (Ktons-Ni)              3            14            13-11%322%               3            27796%54%52%
HGNM ASP (USD/ton)    17,423    13,673    14,8198%-15%     17,424    14,213-18%  
HGNM AISC (USD/ton)    15,524    13,162    13,016-1%-16%     15,524    13,093-16%  
Cash margin (USD/ton)      1,899         511      1,803253%-5%       1,900      1,119-41%  
SCM Limonite ore           
Saprolite sales (mn wmt)            -             1.1           1.314%N/A             -             2.4N/A59%52%
Limonite sales (mn wmt)            -             0.6           2.9359%N/A             -             3.5N/A23%33%
Sap ASP (USD/wmt)            -             31           29-6%N/A             -             30N/A  
Lim ASP (USD/wmt)            -             13           1727%N/A             -             16N/A  
Blended ASP (USD/wmt)            -             24           20-17%N/A             -             22N/A  
Blended CC (USD/wmt)            -             10             7-30%N/A             -              -  N/A  
Cash margin (USD/ton)            -             14           13-8%N/A             -   N/A  
Source: Company data, Verdhana research

 

Fig. 16: MDKA— Key performance charts - quarterly trend

Source: Company data, Verdhana research

 

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. 

GENERAL DISCLOSURE/DISCLAIMER 
This report is prepared by PT Verdhana Sekuritas Indonesia (“PTVSI”) a securities company registered in Indonesia, supervised by Indonesia Financial Services Authority (OJK) and a member of the Indonesia Stock Exchange (IDX).

This report is intended for client of PTVSI only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PTVSI.

The research set out in this report is based on information obtained from sources believed to be reliable, but PTVSI do not make any representation or warranty as to its accuracy, completeness or correctness. The information in this report is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. Any information, valuations, opinions, estimates, forecasts, ratings or targets herein constitutes a judgment as of the date of this report is published, and there is no assurance that future results or events will be consistent.


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ANALYST CERTIFICATION
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Rating Table

Rating
Remains
Buy
Target price
Reduced from IDR 3,700
IDR 3,400
Closing price
1 October 2024
IDR 2,690
Implied upside+26.4%
Market Cap (USD mn)4,332.5
ADT (USD mn)5.7

Relative performance chart


M cap (USDmn)
4,332.5
Free float (%)
51.4
3-mth ADT (USDmn)
5.7
(%)
1M
3M
12M
Absolute (IDR)
14.0
9.3
-6.6
Absolute (USD)
15.9
17.4
-5.0
Rel to Jakarta Stock Exchange Composite Index
14.4
2.3
-16.7

Research Analysts

Michael Wildon Ng (michael.wildon@verdhana.id)

Edward Prima (edward.prima@verdhana.id)

Tags: Basic Materials, MDKA JK, MDKA IJ, Michael Wildon Ng, Edward Prima
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