Weighing the impacts of rising tin price vs. La Nina, we view that Timah, on overall, will be adversely affected. In term of volume, La Nina will impede offshore mining so that sales volume target could be unachievable. In term of costs, lower quantity means higher cost/unit due to big portion of fixed cost in offshore mining. At the same time, onshore sourcing al! so become s very costly as suppliers speculate on further rise in tin ore price and ask for a substantial increase in price. We reduced our FY10F-11F net profit by 15.4% and 25.8%, and downgrade the stock to Sell. The stock is trading at PER10-11F of 20.1-15.1x.
La Nina will curb tin ore exploitation. La Nina could negatively impact tin ore exploitation in two ways. For offshore mining, it prevents TINS from exploiting deeper sea areas so that the tin ore quantity mined will be smaller. For onshore mining, the company will find it difficult in sourcing tin ores from small miners as small miners tend not to sell their stocks because they bet on further price increase.
Losing cost control. In addition to smaller production level, TINS could also lose control over its production costs. For offshore mining whose most of the costs is fixed (fuel and ship spareparts), smaller quantity mined translates into higher ore cost per ton. This condition has been getting worse with sharp increase in ship sparepart costs. For onshore mining, if the company wants to meet 44k tons FY10F sales contract, it has to rely more on tin ore purchasing from sma! ll-scale miners, who would respond by increasing the prices sharper than the LME price increase.
Downgrade forecasts. In 2H10, TINS’s profit may be higher compared with 1H10 as it has enough inventory level to take advantage of rising price. However, we lowered our FY10F volume assumption to 44k tons as 1H10 sales volume only represented 41.2% of our previous FY10F and we doubt that the company can catch up with it in 2H10 considering the bad weather. Net effect is FY10F net profit downgrade by 15.4%, despite higher selling price assumption of US$19k/ton for FY10F. For FY11F, we estimate that the company’s prof! it may st ill be low in 1H11 due to costly inventory. We downgrade FY11F net profit by 25.8%.
Downgrade to Sell. We cut our target price to Rp2,300/share by incorporating worse outlook of sales volume and cost control. Our target price was derived using DCF method with WACC of 14.7%. The stock is currently trading at PER10-11F of 20.1x-15.1x. Main risk are tin selling price and weather condition.
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