CLSA INCO Positive Takeaways from Analyst Meeting

Inco Indonesia (INCO IJ) - Positive takeaways from analyst meeting, from Olie

We attended Inco analyst meeting yesterday. Representing the company were CEO, Mr. Arif S. Siregar, CFO, Mr. Claudio Renato Chaves Bastos, and Director of IR, Mr. Indra N. Ginting. Management highlighted that water level at the reservoir that runs Inco’s hydropower plant is close to maximum level. The management is therefore confident that the company could achieve the targeted production of around 140m lb, 20% lower than last year. The company will maintain production as long as there is enough water and price makes economic sense.

Management sees cash cost to lower further from US$4.2/lb in 4Q08 as 1) diesel as consumption would be much reduced as diesel generator was fully switched off in late Oct08, 2) price of HSFO has been on a decline after lagging crude oil in 4Q08, 3) the company is also cutting down on contractors, and lastly 4) there will be reduction in other operating expenses. Karebbe hydropower facility is progressing as both civil and engineering works are going as scheduled. Management expects the new power plant to be ready by 1H11. Meanwhile coal conversion project is progressing as scheduled as well, with completion expected in 1H10. Total capex for Karebbe is estimated at US$410m while that for coal conversion is estimated at US$100m. CFO mentioned that capex could actually be lower in realization, not sure by how much, as capex calculation was based on 2008 peak raw material price.

We also had a chance to have a short chat with CEO regarding pressure from the government to relinquish part of undeveloped concession area. He said that there has been little discussion with the government on that issue thus far. He further elaborated that even the current plan and requirement to develop deposit in Bahodopi and East Pomalaa would only be conducted if, as stated in the contract of work (CoW), these projects are technically and economically feasible. There is no requirement to relinquish the area, according to CoW.

We maintain our BUY rating. We believe Inco will be the survivor of current commodity down cycle. The company will emerge bigger and stronger with much reduced cash cost within two years time once Karebbe hydropower and coal conversion are completed.