UOB Kay Hian -A N E K A T A M B A N G Solid Gold And Nickel Volume To Boost Future Earnings

We upgrade Aneka Tambang (ANTM) to BUY on the back of several positive catalysts:
Margin improvement for the next few quarters on higher nickel price. Due to higher nickel price recently, we believe ANTM's margin would improve in the next few quarters. We expect ferronickel cash cost to be maintained at about US$10,362/tonne (US$4.70/lb) for 2009, slightly above the 1Q09 cash cost of about US$4.60/lb. As a result of stronger gross margin expected for the remaining quarters of 2009, we expect ANTM to register gross margin of 20.2% for 2009, up from 6% in 1Q09 but still lower than the 27.6% posted in 2008.

Strong nickel price, ytd. Nickel price has jumped by 28% ytd to US$14,860/tonne (US$6.74/ lb), driven by: a) slow growth of nickel inventory in 2Q09 compared to 1Q09, b) surge in nickel demand in China and c) the start of restocking by stainless steel mills. However, we remain cautious as there is still no improvement in end-user demand. We expect LME nickel price to decline by 36% yoy to US$13,500/tonne (US$6.12/lb) in 2009 before rising 11% yoy to US$15,000/tonne (US$6.80/lb) in 2010.

Higher contribution from gold division. We expect sturdy contribution from the gold division on the back of a new gold mine operation (Cibaliung gold project) in 2H10, which will boost ANTM's gold production by 18 - 21% yoy in 2010-11. This project is expected to produce gold with annual capacity of 2,200kg and mine life operations until 2017. However, we are still conservative on forecasting the gold production of only 4,000kg for 2011 vs ANTM's expectation of about 4,800kg.

Prolonging gold mine life in existing operation. ANTM managed to boost its gold reserves and resources at the existing Pongkor mining site by about 34% during 2008 to approximately 5,337wmt. Based on the current annual production of about 2,800kg, this will prolong ANTM's mine life operation of the Pongkor gold and silver mines by five years to 2019.

Upgrade to BUY. We raise our target price to Rp2,500 from Rp1,200 based on 2.7x 2010 P/B, which is still lower than the average 3-year P/B of 3.0x given that the earnings for 2009 and 2010 are likely to hit a trough. The stock currently trades at 17.8x 2010 PE. However, under the bull case at the nickel price assumption of US$20,000/tonne for 2010, we expect 2010 PE to drop to about 13.8x. As such, we upgrade the stock from HOLD to BUY.