Danareksa Timah To shine again

To shine again
Lower production costs will help profitability

TINS’ production costs are closely correlated to the crude oil price (see Exhibit 1). Thus, as a result of the slump in crude oil prices, the company should enjoy much lower production costs in 2009. This will help TINS to maintain its profitability despite the low tin prices. Hence, in spite of an estimated 28.1% decline in revenues in 2009, the EBITDA margin will actually rise to an estimated 31.3% from 24.8% in 2008.

A greater focus on cheaper offshore mining
As shown by its tin-in-concentrate production in 2008, the company is shifting its mining activities toward offshore production (see Exhibit 2). In 2008, offshore production accounted for 29% of the company’s total tin-in-concentrate production, or significantly higher than 2007’s 21%. To support its offshore mining activities, the company shall acquire 2 dredges in 2009 and another one in 2010. The company currently has 21 dredges. We believe this shift in focus toward offshore production bodes well for profitability going forward. Note that the company suffered an operating loss in 4Q08 (see Exhibit 3) – mostly due to higher inland production costs. We estimate that the company’s inland production costs in 2008 were US$12,010/ton, or significantly higher than the offshore production costs of around US$8,090/ton. In 2009, we believe TINS will be able to increase offshore production to 40%.

A promising outlook for tin prices
The decline in tin prices is slowing (see Exhibit 4). All in all, we believe that the fundamentals for tin are good since the tin market has been very tight in recent years (tin consumption has exceeded production in each of the last three years; see Exhibit 5). For 2009, tin demand will be lower, but then again so will production. As such, tin stocks are likely to remain at historically low levels, and any shock – on the demand or supply side – could lead to higher tin prices.

BUY recommendation maintained
We have made changes to our assumptions since our previous assumptions were too high (see Exhibit 6). First of all, we lower our estimates for sales volumes and average selling prices. This leads to a lower revenues forecast (see Exhibit 7). However, we also lower our oil price assumption. This gives a boost to our profit forecasts. At the same time, we increase our average WACC to 22% from 18% previously. At the current share price, TINS trades at an attractive PE 09F/10F of 4.4x/3.2x. As such, we maintain our BUY recommendation but with a slightly lower TP of Rp1,630 (previously Rp2,000).