Vale Indonesia (INCO IJ)
Lowering our FY24-25F post 1Q24 earnings miss; maintain Buy rating on upside from HPAL projects
- 1Q24 net profit miss (4.5/4.9% of our/ cons. FY24F) was caused by lower cash margin due to unexpectedly higher fuel costs and lower ASP
- We cut FY24-25F net profit est. by -31.3%/-21.9% to account for lower matte output, ore grade, and a higher fuel consumption
- We maintain Buy rating with a lower SOTP-based TP of Rp5,700. Key risks to our call include lower nickel prices and a lower utilization rate
Poor 1Q24 earnings from lower ASP and revaluation of derivative assets
INCO posted a net profit of US$6mn (-93.7% yoy/ -88.4% qoq, reaching 4.5%/4.9% of ours/cons est.) due to a diminishing cash margin from lower ASP at US$12.6k/t (-41.6% yoy/ -11.2% qoq), and rising cash cost to US$9.4k/t, (-15% yoy/ +2.8% qoq), caused by a declining stockpile which led to a shorter ore retention time. This led to higher moisture in the ores necessitating higher fuel consumption for drying. Furthermore, INCO posted a US$12.8mn loss on the recognition of fair value of its call option in KNI (i.e., the Pomalaa HPAL project), triggered by lower nickel price assumption and project timeline achievement. Nonetheless, 1Q24 revenue reached US$230mn, (-36.7% yoy/-21.9% qoq), inline with ours/ cons. at 24%/23.6% of FY24 est.
Trimming our FY24-25F est. on lower sales volumes expectations
Although we expect an increase in its 2Q24 earnings due to a higher LME price (+11% qoq), we have lowered our revenue and net profit forecasts for FY24-25E to US$969mn/94mn (-1.5% and -31.3% vs. our prev. est.) and US$954mn/92mn respectively. Our downward revision primarily reflects higher COGS est. to USD854mn (+5.3% vs. prev.), driven by ongoing high fuel consumption and lower ore grades in 1H24 (1.7% in 1Q24 compared to our assumed 1.75%). Additionally, we anticipate maintenance activity in 2Q24 to reduce sales volume to c.16.5kt (-9% qoq) and raise its unit cash cost.
Revenue upside opportunities from potential sales of ore
INCO significantly increased its ore reserves to 840mn wmt (+151% vs. 334mn wmt) as of 1Q24. This growth primarily stems from the recognition of limonite reserves in Pomalaa and saprolite reserves in Pomalaa and Bahodopi. Looking ahead, ongoing exploration efforts suggest further potential reserve additions, indicating ample capacity for future utilization. While these reserves are primarily earmarked for internal growth projects, there is also potential for future sales to third parties. Notably, MIND ID has signed an ore offtake framework agreement with INCO, paving the way for potential ore sales starting from FY26 onwards.
Maintain Buy with a DCF-based TP of Rp5,700
We maintain our Buy rating on INCO with a slightly lower SOTP-based TP of Rp5,700 as we have included the valuation of its growth projects in our SOTP. Key risks to our call include lower nickel prices, a lower utilization rate, and project execution delays.
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