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Vale Indonesia (INCO IJ) (Buy) - Clearer picture: ore sales to drive financials

Vale Indonesia (INCO IJ) (Buy) - Clearer picture: ore sales to drive financials

Mining MW EP 424 6th Mar, 2025

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Clearer picture: ore sales to drive financials

Upgrade to Buy with an unchanged TP of IDR4,000

Leveraging mine to improve overall financial trajectory

We like INCO for its vast nickel resources and extensive concession areas (Fig. 1), which remain largely unexplored, offering future volume upside potential. Indeed, based on the latest management guidance, INCO has revealed greater feasibility for its upstream mine and HPAL projects, totalling USD8.6bn in planned gross investment. Ore sales, the company’s low-hanging-fruit project, could potentially drive a three-year revenue CAGR of 29% and an EBITDA CAGR of 36%, according to our estimates, and will commence as early as 2H25, according to management (Fig. 2 and Fig. 3) We believe this could improve INCO’s EBITDA margin from 25% in 2024 to 30% in 2027F. We expect its limonite ore from the mines will supply four new HPAL facilities that are scheduled to come online by late 2026. In line with its ESG commitments, these HPAL projects will utilize green energy sources, according to management.

We revise our revenue and NPAT estimates; ore sales to commence in 2025F

We revise our revenue/NPAT for 2025F by +11%/-45% as we include ore sales contribution but revise down earnings as we increase cash cost due to higher overall material and fuel costs (~15-17% higher than previously estimated). Despite these higher costs, we expect INCO to maintain cash costs below ~USD10k/t. For 2025F, we factor in a new revenue stream from ore sales. We expect INCO to start selling saprolite ore with an initial target of 1.8mn wmt and a cash cost of >USD20/t, which should decline as production scales up. We expect ore sales to significantly contribute to revenue in 2026F, with HPAL contributions kicking in by 2027F. Balance sheet wise, we expect INCO to raise a total of USD1.2bn in debt to support its mine development.

Bullish scenario but timing is key; upgrade to Buy with a TP of IDR4,000

We upgrade our rating to Buy from Neutral for INCO with a target price of IDR4,000, implying 36x FY25F P/E. The TP is unchanged, although this is now based on a rolled-forward FY25 EV/EBITDA (from FY24 previously) at an unchanged 7x multiple, or at -0.5 SD of its five-year average. Amid subdued nickel prices, we believe INCO’s new nickel ore sales initiatives will be a catalyst in 2025. Furthermore, we like INCO for its commitment to ESG. Over the long term, with abundant resources, we see INCO playing a strategic role as a key ore supplier in Indonesia's expanding nickel industry. Downside risks include regulatory changes and setbacks from future projects.

Year-end 31 DecFY24FY25FFY26FFY27F
Currency (USD)ActualOldNewOldNewOldNew
Revenue (mn)9509011,0009491,39102,018
Reported net profit (mn)58132721511010140
Normalised net profit (mn)58132721511010140
FD normalised EPS0.56c1.33c0.69c1.52c0.96c1.32c
FD norm. EPS growth (%)-79.816.421.914.140.038.1
FD normalised P/E (x)32.6–26.4–18.9–13.7
EV/EBITDA (x)5.3–5.7–5.1–4.6
Price/book (x)0.7–0.7–0.7–0.6
Dividend yield (%)––––––1.2
ROE (%)2.24.82.65.23.64.6
Net debt/equity (%)net cashnet cashnet cashnet cash8.226.9
Source: Company data, Verdhana estimates

Key data on Vale Indonesia

Income statement (USDmn)
Year-end 31 Dec
FY23
FY24
FY25F
FY26F
FY27F
Revenue
1,232
950
1,000
1,391
2,018
Cost of goods sold
-885
-842
-872
-1,120
-1,563
Gross profit
347
108
128
270
455
SG&A
-22
-38
-23
-59
-98
Employee share expense
Operating profit
325
70
105
211
357
EBITDA
499
238
294
418
600
Depreciation
-174
-168
-189
-206
-243
Amortisation
EBIT
325
70
105
211
357
Net interest expense
-10
-7
-17
-46
-89
Associates & JCEs
Other income
41
12
30
15
17
Earnings before tax
355
74
118
181
285
Income tax
-78
-16
-38
-71
-115
Net profit after tax
277
58
80
110
169
Minority interests
0
0
0
0
0
Other items
0
0
-8
-8
-30
Preferred dividends
Normalised NPAT
277
58
72
101
140
Extraordinary items
Reported NPAT
277
58
72
101
140
Dividends
-60
0
0
0
-23
Transfer to reserves
217
58
72
101
117
Valuations and ratios
Reported P/E (x)
6.8
32.6
26.4
18.9
13.7
Normalised P/E (x)
6.8
32.6
26.4
18.9
13.7
FD normalised P/E (x)
6.8
32.6
26.4
18.9
13.7
Dividend yield (%)
3.2
–
–
–
1.2
Price/cashflow (x)
4.0
7.5
8.2
8.0
4.5
Price/book (x)
0.7
0.7
0.7
0.7
0.6
EV/EBITDA (x)
2.6
5.3
5.7
5.1
4.6
EV/EBIT (x)
4.1
18.0
16.1
10.2
7.7
Gross margin (%)
28.2
11.4
12.8
19.4
22.6
EBITDA margin (%)
40.5
25.1
29.4
30.0
29.8
EBIT margin (%)
26.4
7.4
10.5
15.2
17.7
Net margin (%)
22.5
6.1
7.2
7.3
6.9
Effective tax rate (%)
22.0
22.0
32.0
39.4
40.5
Dividend payout (%)
21.7
0.0
0.0
0.0
16.3
ROE (%)
11.3
2.2
2.6
3.6
4.6
ROA (pretax %)
15.3
3.0
3.8
6.2
8.4
Growth (%)
Revenue
4.5
-22.9
5.3
39.0
45.1
EBITDA
8.9
-52.2
23.3
42.3
43.7
Normalised EPS
38.3
-79.8
21.9
40.0
38.1
Normalised FDEPS
38.3
-79.8
21.9
40.0
38.1
Source: Company data, Verdhana estimates
Cashflow statement (USDmn)
Year-end 31 Dec
FY23
FY24
FY25F
FY26F
FY27F
EBITDA
499
238
294
418
600
Change in working capital
59
51
-25
-21
-47
Other operating cashflow
-88
-37
-35
-158
-124
Cashflow from operations
470
251
233
239
429
Capital expenditure
-319
-448
-724
-745
-222
Free cashflow
151
-196
-491
-506
207
Reduction in investments
0
0
0
-797
Net acquisitions
0
0
0
0
Dec in other LT assets
-79
1
9
-33
-63
Inc in other LT liabilities
17
36
36
56
35
Adjustments
31
-20
-30
-11
37
CF after investing acts
120
-179
-477
-494
-580
Cash dividends
-60
0
0
0
-23
Equity issue
0
111
0
0
0
Debt issue
3
-1
150
500
550
Convertible debt issue
Others
2
44
33
33
-1
CF from financial acts
-55
155
183
533
526
Net cashflow
65
-24
-294
39
-54
Beginning cash
634
699
675
381
421
Ending cash
699
675
381
421
367
Ending net debt
-690
-667
-223
238
841
Balance sheet (USDmn)
As at 31 Dec
FY23
FY24
FY25F
FY26F
FY27F
Cash & equivalents
699
675
381
421
367
Marketable securities
Accounts receivable
102
84
98
136
198
Inventories
156
149
155
180
243
Other current assets
77
97
102
142
206
Total current assets
1,033
1,005
736
879
1,013
LT investments
0
0
0
0
797
Fixed assets
1,696
1,975
2,510
3,048
3,027
Goodwill
Other intangible assets
Other LT assets
197
197
188
221
284
Total assets
2,926
3,177
3,435
4,149
5,121
Short-term debt
6
6
51
201
366
Accounts payable
141
171
161
207
289
Other current liabilities
70
87
96
132
191
Total current liabilities
217
263
308
540
846
Long-term debt
3
2
107
457
842
Convertible debt
Other LT liabilities
142
178
214
270
306
Total liabilities
361
444
630
1,268
1,994
Minority interest
0
0
0
0
0
Preferred stock
0
0
0
0
0
Common stock
414
526
526
526
526
Retained earnings
2,150
2,207
2,279
2,355
2,601
Proposed dividends
Other equity and reserves
Total shareholders' equity
2,565
2,733
2,805
2,881
3,127
Total equity & liabilities
2,926
3,177
3,435
4,149
5,121
Liquidity (x)
Current ratio
4.77
3.81
2.39
1.63
1.20
Interest cover
32.2
9.4
6.1
4.6
4.0
Leverage
Net debt/EBITDA (x)
net cash
net cash
net cash
0.57
1.40
Net debt/equity (%)
net cash
net cash
net cash
8.2
26.9
Per share
Reported EPS (USD)
2.79c
0.56c
0.69c
0.96c
1.32c
Norm EPS (USD)
2.79c
0.56c
0.69c
0.96c
1.32c
FD norm EPS (USD)
2.79c
0.56c
0.69c
0.96c
1.32c
BVPS (USD)
0.26
0.26
0.27
0.27
0.30
DPS (USD)
0.01
0.00
0.00
0.00
0.00
Activity (days)
Days receivable
36.1
35.9
33.3
30.7
30.2
Days inventory
64.4
66.2
63.5
54.6
49.4
Days payable
53.0
67.7
69.5
60.0
58.0
Cash cycle
47.5
34.3
27.3
25.3
21.6
Source: Company data, Verdhana estimates
Company profilePT Vale Indonesia Tbk (INCO) was established in 1968 and was first listed on the Indonesia Stock Exchange in 1990 with the ticker INCO IJ. INCO is involved in mining, producing, and refining nickel activities in three main concession areas, namely Pomalaa (Southeast Sulawesi), Bahodopi (Central Sulawesi), and Sorowako (South Sulawesi), totalling over 118k ha. Nickel ore mining operations are currently carried out in Sorowako as the main feed to INCO’s smelter facility. The smelter facility is equipped with four electric furnaces capable of producing up to 73ktpa of nickel in matte. As of 2021, the company had nickel reserves of 112.6mn tonnes with a nickel grade of 1.72%.
Valuation MethodologyOur target price of IDR4,000 derived from7x FY25F EV/EBITDA target or at -0.5 SD of its 5-year average, implying 36x FY25F P/E. The benchmark index is JCI index.
Risks that may impede the achievement of the target priceDownside risks include regulatory changes and setbacks from future projects.
ESGINCO commited to preserve the earth by implementing environmentally friendly technologies for its mining and nickel processing. Its ESG effort includes: 1) builds and operates three hydropower plants with a total capacity of 365 MW for its operational in Sorowako; 2) land rehabilitation and a policy to maintain total open mine areas under 1,450 ha.; 3) waste management by processing waste treatment facilities (Pangkalai Waste Water Treatment and Lamella Gravity Settler); 4) implement Community Development and Empowerment Program (PPM) by partnering between community and local government; and 5) promotes transparency by Anti-Bribery and Corruption (ABC) socialization for all employees. For future projects, INCO maintain its commitment to ESG by using LNG and/or REC (Renewable Energy Certificate) from state-owned utility co, PLN (not listed). Apart from environmental-friendly processing, INCO also highlighted theirits sustainable mining operations; shows their injury rate has been declining in the past few years.

Fig. 1: INCO ore resources comparison – significant mine area to explore and optimize

Source: Company data, Verdhana research

 

Fig. 2: INCO revenue – ore sales as a quick win strategy

Source: Company data, Verdhana estimates
Fig. 3: INCO EBITDA – ore sales to improve EBITDA trajectory

Source: Company data, Verdhana estimates

 

Fig. 4: INCO ROE and EBITDA margin improvement trajectory

Source: Company data, Verdhana estimates

 

Fig. 5: INCO key project breakdown

ProjectAnnual ProductionCapex (USDmn)Status
Morowali Mine5.5 mn wmt saprolite, 10.4 mn wmt limonite                            600Phase 1 to be completed in 4Q25, Phase 2 in 4Q27
Morowali JV - HPAL60 ktpa                        1,400Collaboration signed
Pomalaa Mine28.15 mn wmt saprolite and limonite                        1,000Completion in 2Q26
Pomalaa JV - HPAL120 ktpa                        3,400Under construction, completion in 4Q26
Sorowako Mine11.5 mn wmt                            257In construction, completion in 3Q26
Sorowako JV - HPAL60 ktpa                        1,910Land acquisition & permit process, completion in 4Q26
TanamaliaN/AN/AFeasibility study in progress, partner selection for technical HPAL JV operator
Total Capex                        8,567 
Source: Company data, Verdhana research

 

Fig. 6: INCO key project timeline

 DEVELOPMENT TIMELINE2025202620272028
1Q2Q3Q4Q1Q2Q3Q4Q  
Mine development          
Bahodopi saprolite ore   Phase 1    Phase 2 4Q27 
Pomalaa sap-lim ore sales     Complete   Block 5 prod
Sorowako limonite ore sales      Complete   
HPAL JV          
Pomalaa HPAL KNI - Huayou, Ford (30%)       Complete  
Sorowako HPAL SOA - Huayou (30%)       Complete  
Bahodopi HPAL Sambalagi - GEM (30%)         Complete
Tanamalia HPAL (30%)         TBA
Note:  Assume 30% stake for HPAL projects
Source: Company data, Verdhana research

 

 

Fig. 7: INCO EV/EBITDA valuation

EV EBITDA valuation (USDmn) 
EV EBITDA target FY25F (x)                     7
EBITDA FY25F                 294
Enterprise Value             1,967
Net debt (cash) FY24               (667)
Equity Value             2,634
Minority                      -
Shares Outstanding (mn)           10,540
Target Price (USD/share)                0.25
Target price (IDR/share)             4,000
Source: Company data, Verdhana estimates

 

Our ore assumptions – INCO is expected to produce and sell ore from three concessions namely Bahodopi, Pomalaa and Sorowako mines. We assume a blended ASP of ~USD38/t for 2025F-2026F, which is expected to normalize to ~USD26/t as the company sells more limonite ore starting 2027F. We assume a blended cash cost of ~USD26/t for 2025F and 2026F with long term cash costs of USD20/t as the company achieve economies of scale. For 2025F, we expect the company \to finish the construction of the Bahodopi site, which is expected to contribute 1.5mt of ore sales in 2025. While constructing, currently INCO has ~290kt of ore from Pomalaa mine during construction and is able to sell soon in 1Q-2Q25.

Bahodopi mine: The company targets to deliver ore in 3Q-4Q of 2025 with annual expected production of 5.5mn wmt saprolite ore and 10.4mn wmt limonite ore.

Pomalaa mine: The company has started mobilizing contractors, looking to deliver first ore by 1H26 with a total 28mn wmt saprolite-limonite combined annually.

Sorowako mine: With land acquisition and permit processing in progress, the company targets to complete construction in 3Q26 with at total of 11.5mn annual limonite sales.

 

MHP – INCO will build 4 HPAL plants, totalling 300ktpa of gross MHP capacity. This includes Pomalaa HPAL (120ktpa capacity), Sorowako HPAL (60ktpa capacity), Bahodopi HPAL (60ktpa capacity) and Tanamalia HPAL (60ktpa capacity; details yet to be released).

Fig. 8: INCO total ore sales trajectory

Source: Company data, Verdhana estimates
Fig. 9: INCO to record a 17% nickel sales CAGR

Source: Company data, Verdhana estimates

 

Capex and funding

We expect INCO to incur total of net capex of USD3.9bn, comprising USD1.9bn for mining development capex of and USD2bn for its HPAL stake. INCO will focus on developing its nickel mines, while its partners (Huayou [603799 CH, Not rated], and Ford [F US, Neutral]) will construct HPAL facilities during the construction period. The Pomalaa HPAL (120ktpa capacity) and Sorowako HPAL (60ktpa capacity) projects will implement a competitive call option ownership scheme within a five-year window, according to management. Meanwhile, the Bahodopi HPAL project will employ a milestone-based capital injection plan from INCO. These strategic approaches are beneficial for INCO’s cash flow, in our view, allowing it to focus on its upstream mining development in Bahodopi and Pomalaa. Over the next three years, we expect INCO to raise USD1.2bn in debt to support its mining development as well as exercising its 30% HPAL rights.

 

Fig. 10: INCO capex schedule

Source: Company data, Verdhana estimates
Fig. 11: INCO 5Y EV/EBITDA band

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.


This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities or financial products. PTVSI and its associates, its directors, and/or its employees may from time to time have interests in the securities mentioned in this report or it may or will engage in any securities transaction or other capital market services for the company (companies) mentioned herein.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this report and certifies that the views about the companies including their securities expressed in this report accurately reflect his/her personal views.  The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.


RESTRICTIONS ON DISTRIBUTION

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Rating Table

Rating
Up from Neutral
Buy
Target price
Remains
IDR 4,000
Closing price
3 March 2025
IDR 2,900
Implied upside+37.9%
Market Cap (USD mn)1,855.3
ADT (USD mn)1.4

Relative performance chart



Source: LSEG, Verdhana
M cap (USDmn)
1,855.3
Free float (%)
20.3
3-mth ADT (USDmn)
1.4
(%)
1M
3M
12M
Absolute (IDR)
2.1
-17.4
-28.3
Absolute (USD)
1.8
-20.1
-31.7
Rel to Jakarta Stock Exchange Composite Index
9.4
-8.0
-17.4

Research Analysts

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

Edward Prima (edward.prima@verdhana.id)

Tags: METALS AND MINING, INCO, INCO JK, INCO IJ, Michael Wildon Ng, Edward Prima
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