BNP Paribas - Aneka Tambang: Potential upside from its gold mines and cheaper valuation than INCO.

We recently visited PT Aneka Tambang, ANTM IJ (IDR 2,325, NOT RATED). The key takeaways from the meetings are as follows:
The company reported that orders for nickel ore and Ferronickel are starting to come in again after experiencing some shipment cancellations in both the 3Q and 4Q. They believe that this is because end users are currently taking a view that nickel price has bottomed and they are re-stocking. This is in line with our view that nickel price has bottomed in the 3 & 4Q when it went below the USD9,000/tonne.

However, the company also cautioned that demand for nickel for industrials may still have to wait for a sustained recovery. Now that the nickel price is on a recovery, touching the USD14,500/tonne level, additional demand may come in from marginals players coming on line again and if it touches USD16,000/tonne, the Chinese pig iron producers may start producing again. Thus it will have to rely on a sustained demand recovery to break the USD16,000/tonne level. At current price, INCO is already pricing in nickel price of above USD25,000/tonne.

After recording a loss in its nickel operation in the 1Q due to low nickel price, the 2Q is expected to turn to a profit. The saving grace in for the 1Q09 has been from gold mining in Pongkor and its gold trading business.

Based on consensus earnings, the stock is currently valued at 34x 09 and 25.6x 10 earnings, but this is at close to the bottom of the nickel price cycle. On top of that there is potential upside from its gold operations, which currently produces about 2.8 MT/ year from its Pongkor mine while starting in 2011 contribution from the Cibaliung mine is going to add another 2 MT/year. Rough calculation assuming gold price of USD1,000/troy oz and cash production costs of USD450/troy oz indicate that by 2011, there will be additional EBITDA of approximately USD50 m vs. expected EBITDA in 2010 of USD150 m.

Our preference in the metal space in Indonesia: (1) TINS IJ (NOT RATED), (2) ANTM IJ (NOT RATED) and (3) INCO IJ, SELL, TP 2,000.