INCO:Bottom-up control - Mandiri

INCO held a conference call yesterday. The main highlights from the conference call were the indicative 71k tons production volume in FY11F, 5% higher than our FY11F estimate of 68k tons and cost saving from the Karebbe project. INCO has confirmed the limited impact in the Japanese market since Vale’s operation in the Matsuzaka regency still runs at full capacity and steels demand is picking up following the rapid recovery post tsunami tragedy. Lower production in 1Q11 of 16,501tons (-8.4% yoy, -8.3% qoq) was mainly due to temporary shutdown on its production activities due to 6.1 SR earthquake that jolted Sorowako in February 2011. We still like INCO considering its bottom-up control, becoming the most cost efficient company with operating margin of 50%, the highest in the metal industry. We maintain our Buy rating and TP at Rp6,700/share..

1Q11 in line. INCO reported 1Q11’s revenue of US$322mn (+26.2%yoy, - 2.1%qoq) followed by net profit of US$111.9mn (+46.7%yoy, +2.7%qoq), in line with our and consensus estimates, accounting for 23-25% FY11F estimates. Nickel-in-matte production in 1Q11 was 16,501tons (-8.4%yoy, -8.3%qoq) accounted for 24.3% our FY11F estimate of 68,000tons. 1Q11’s ASP was US$20,246/tons (+42.8%yoy, +12.4% qoq), 8% higher than our FY11F’s estimate.

5% higher than our production target. The 2nd electric furnace rebuilding program is expected to lead a partial 13-week shutdown in 4Q11 and 8-week in 1Q12. We can expect 30% reduction of production volume in 4Q11 out of its normal level of 19k tons last year based on the company’s guidance or about 13-14k tons output in 4Q11. Interestingly, INCO’s expects 71k tons production volume in FY11F, about 5% higher than our FY11F estimate. Accounting these numbers, INCO needs to produce 20.5k tons nickel-in-matte in 2Q and 3Q 2011.

6% cost saving from Karrebbe. The Karebbe project has already been 87% completed by end of 1Q11. Our calculation shows that diesel consumption per ton might reduce by 50% from its current consumption learning from the 2009 figures when its thermal generators were turned off. Overall, we expect the company could save around 6%% in its total production cost post Karebbe completion and gradual 5-6% production growth up to 90k tons by 2015.

Retain Buy rating. We prefer to be conservative by maintaining our forecast despite of higher indicated volume and ASP until we get the 2Q11 figures. We maintain our TP of Rp6,700/share implying 15.1xPER11F and our Buy rating.