Indonesia Nickel Strong prices factored-in - DBS Vickers

• Nickel prices have risen respectably, limited upside from current levels
• China is key driver of nickel demand
• Expect moderate earnings growth this year; capacity expansion insufficient to offset risk of volatile nickel prices
• Nickel prices need to rise further to justify higher valuations; reinstate coverage of ANTM and INCO with Hold rating

Limited upside to nickel prices. After surging 48% yoy last year, we expect nickel prices to moderate with rising supply as idle capacities are revived, and there is greater extent of substitution. The strong prices are encouraging substitution to lower or non-nickel content stainless steel, which would cap nickel demand, and hence, prices. We estimate nickel prices would reach US$23,000/ton in FY11-12F before normalizing to US$22,000 in FY13F. Our FY11F nickel price is 10% below the current spot price.

Slower earnings momentum. Nickel producers’ net profit had surged by 157-175% yoy in FY10, but we expect growth to moderate to only 2-7% this year on expectations of limited upside to nickel prices. We also expect lower production due to routine maintenance. ANTM has stronger earnings growth supported by 45% higher gold production at its newly acquired Cibaliung gold mine and stronger price outlook for gold, while INCO’s growth will stall as we estimate 7% lower production on maintenance. However, we expect short term share price volatility in response to strong 1Q11 earnings (arising from strong nickel prices in Jan-Feb11)

Rich valuations capping share price upside. We believe the current share prices have priced-in most of the positive news flow on strong nickel prices. Stocks are also trading at 12x FY11F PE against regional peers’ 10x, despite their smaller size and narrower product range (nickel contributes 70-100% of revenue). We believe that higher nickel price is necessary to justify higher valuation. Reinstate coverage of Aneka Tambang (ANTM) with a Hold call and Rp2,500 TP, and International Nickel Indonesia (INCO) with a Hold call and Rp5,000 TP. Risks to our call is stronger-than- expected nickel prices.