Weakening dollar should prompt higher nickel price through its transmission of oil price. In turn, higher nickel price could result in higher both INCO’s earnings and share price since INCO’s customer buy INCO’s nickel in matte at 78% of spot price. BUY.
± Weakening Dollar Should Prompt Higher Nickel Price
With US still continuing their QE2 policy, it is most likely that the dollar should not gain strength to other major currencies in the near term. Looking back at the historical data, weakening dollar has prompted higher oil price and oil price correlated positively with nickel spot price. INCO share price also moves in the same direction with nickel spot price, the reason being its two largest long-term customers, Vale Inco (parent company) and Sumitomo who buy INCO’s nickel in matte at 78% of LME nickel spot price. We forecast ASP in FY11F to be around US$7.9/lb or 9% increase from ASP in FY10F at US$7.3/lb, assuming 18% of LME US$9.9/lb in FY10F. In 9M10, ASP already up 55% yoy to US$7.3/lb (US$16,119/ton) from US$4.7/lb (US$10,381/ton) in 9M09. Based on our sensitivity analysis, every 10% increase in ASP, an increase in net profit by 22% can be expected. This high degree of correlation is also due to INCO’s low financial leverage position. For the last four years, INCO was in net cash position and this condition will remain relatively unchanged for the next years in our view.
± Furnace Repair Bringing Lower Production in 2011
Despite an increase in INCO’s ASP, production has gone south this year as one furnace (out of four) has been out of operation. The furnaces are used to melt the nickel ore and the repair is needed to extend the lifetime of the furnace. Since the repair could take quite some time (until the end of the first quarter 2011) this should result in lower production in 2011. We see INCO total production in FY11F would be around 7% lower at 70,000 mt compare to 75,000 mt in FY10F. Nevertheless, higher oil prices should prompt higher HSFO (a cost component) as well, but INCO’s strategy to reduce cost by building and using more of hydro power is positive in our view. Thus, lower fuel cost is expected in the future. In 2011F, we estimate fuel cost which include fuel and lubricant cost, would take about 44% of total cash cost compare to 47%, and in the long run after 90 MW Karebbe project start commence in 2H11, fuel cost can keep declining in average at 37% of total cost.
± Valuation, at Discount
We set our target price for INCO at Rp5,200, which is based on blended valuation method in order to capture short-term and long-term valuation. Our TP implies 2011F PE of 12.1x or still below its +1 standard deviation. We like INCO’s long-term buyers, high ROE, net cash, and cost reduction strategy. Risk: nickel price volatility and lower production. Reinitiate with BUY.
Tidak ada komentar:
Posting Komentar