Vale Indonesia: Tough Times as Long as Nickel Prices Remain Low
Vale Indonesia, Indonesia's largest nickel producer, is one of those mining companies that has been plagued by low commodity prices. Various securities companies have cut their recommendation for the purchase of Vale Indonesia's shares due to persistently low nickel prices. Net profit of Vale Indonesia is expected to decline by 50 percent (y/y) to USD $26 million in 2016 as the company's average nickel sales price is expected to fall 29.5 percent (y/y) to USD $6,848 per ton this year.
However, Panin Sekuritas expects that the company's cost of goods sold can be curtailed to an average of USD $4,680 per ton, down 32.1 percent from the realization in 2015, and this would soften the decline of Vale Indonesia's EBITDA (the company's cost of goods sold can be curtailed due to the globe's low crude oil prices; crude oil accounts for about 25 percent of Vale Indonesia's total costs). The company's EBITDA is expected to fall 15.3 percent (y/y) to USD $193 million, while nickel production is expected to remain flat at 81,400 tons in 2016.
As there are currently no factors that can positively influence the company's financial performance, Panin Sekuritas advises investors to sell their shares of Vale Indonesia, particularly as there are no signs that nickel prices will rebound. In fact, nickel prices are expected to remain depressed. The securities firm set its target price for Vale Indonesia at IDR 1,225 per piece (with a price-to-earnings ratio of 33.9 times). On Tuesday (05/04) Vale Indonesia's shares fell 1.38 percent to IDR 1,790 per share. However, so far this year its shares have gained 9.48 percent.
The average nickel price in the first quarter of 2016 is expected to fall below the average price in the fourth quarter of 2015 and this makes business difficult for Vale Indonesia, a company controlled by Brazilian iron ore giant Vale. The only key strategy to offset rising pressures on the company's corporate earnings is to cut costs, for example through its coal conversion program (this program aims to use coal to fuel its dryers rather than the more expensive high-sulphur fuel oil).
Vale Indonesia may cut its capital expenditure to USD $90 million this year. As such, its expansion plans in Sorowako (South Sulawesi) are expected to be delayed until after 2018.
Vale Indonesia operates the world’s largest integrated laterite nickel mining and processing operation in Sorowako. Its main product is nickel-in-matte. Nickel is used for the manufacturing of various items, including laptops, mobile phones, coins, airplanes, cars and buildings. Earlier, Vale Indonesia announced it will not pay dividend over 2015.
Future Projection Vale Indonesia's Financial Highlights:
| 2013 | 2014 | 2015 | 2016F | 2017F | |
| Revenue | 921.6 | 1,038.1 | 790.0 | 558.0 | 586.0 |
| Net Profit |
38.7 | 172.3 | 52.0 | 26.0 | 37.0 |
| EBITDA | 236.0 | 411.9 | 228.0 | 193.0 | 205.0 |
| P/E Ratio (x) | 30.6 | 6.0 | 17.4 | 33.9 | 25.2 |
| PBV (x) | 0.7 | 0.6 | 0.5 | 0.5 | 0.5 |
| EV/EBITDA (x) | 5.1 | 2.2 | 3.8 | 4.4 | 4.3 |
| Dividend Yield (%) | 0.0 | 1.0 | 10.4 | 3.8 | 1.7 |
in million US dollar unless otherwise stated
Source: Panin Sekuritas (04/04/2016)