Vale Indonesia: Unlocking Its True Potential

Reported by UOB Kay Hian on December 6, 2024

Introduction

Vale Indonesia, a leading producer of nickel in matte, is on the cusp of unlocking its true potential with strategic expansions and a focus on optimizing its operations. This comprehensive analysis dives deep into the company’s financial health, strategic initiatives, and market performance as reported by UOB Kay Hian.

Company Overview

Vale Indonesia is renowned for producing nickel in matte, an intermediate product derived from lateritic ores. The company operates integrated mining and processing facilities near Soroako, Sulawesi. As of the report, the company maintains a “HOLD” recommendation with a target price of Rp3,800, suggesting an upside potential of 4.4% from its current share price of Rp3,640.

Stock and Market Performance

Listed under the materials sector with the Bloomberg ticker INCO IJ, Vale Indonesia has a market capitalization of approximately Rp38,364 billion or US\$2,418 million. Despite a challenging year, with the stock experiencing a 14.5% decline over the past year, the company remains focused on growth and expansion. Major shareholders include Vale Canada Limited, Mineral Industri Indonesia, and Sumitomo Metal Mining.

Growth Drivers and Financial Projections

The growth outlook for Vale Indonesia is promising, with 2025 expected to benefit from initial saprolite ore sales ranging between 1.2 million to 1.3 million wet metric tonnes (wmt) from their new Bahadopi and Pomalaa projects. The company’s earnings are projected to grow by 18% year-over-year to US\$73 million, supported by a higher EBIT, although tempered by increased interest costs from substantial capital expenditures (capex) approximating US\$700 million.

Strategic Initiatives and Investments

Vale Indonesia is focusing on several strategic projects to enhance its production capabilities. The Bahadopi mine is set to commence operations in the fourth quarter of 2024, while the Pomalaa mine is expected to begin by the second quarter of 2026, leading to an annual saprolite production of 6 million wmt. Additionally, the Sorowako limonite mine is projected to start production in the third quarter of 2026, with expectations to reach 21 million wmt by 2027.

HPAL Projects and Collaborations

Vale Indonesia has secured two major High Pressure Acid Leach (HPAL) projects in Sorowako and Pomalaa, with a combined production capacity of 180,000 tonnes of mixed hydroxide precipitate (MHP). These projects are slated to commence production in the first half of 2027 under a call option scheme, enabling Vale Indonesia to prioritize high-margin investments. Furthermore, a strategic collaboration with GEM Co. aims to develop a 60,000-tonne capacity HPAL smelter in Morowali.

Financial Health and Projections

Examining the company’s financials reveals a mixed bag of challenges and opportunities. The net turnover is projected to increase from US\$987 million in 2025 to US\$1,186 million in 2026, with EBITDA also climbing significantly. However, the company will face a high capex cycle with substantial investments in its mining projects. Despite this, Vale Indonesia’s commitment to growth through strategic investments remains unwavering.

Sensitivity to Market Changes

The company’s profitability is sensitive to changes in nickel prices and sales volumes. A 5% increase in nickel matte prices or sales volume can significantly boost net profit by 36.8% and 49.4% respectively. Conversely, changes in saprolite volume or average selling price have a negligible impact on net profit growth, indicating a strategic focus on nickel matte as a primary revenue driver.

Conclusion and Recommendation

Vale Indonesia is poised for growth with its strategic initiatives and expansion into new mining projects. Despite facing challenges like increased interest costs and a high capex cycle, the company’s strong production outlook and strategic collaborations are expected to drive future growth. The maintained “HOLD” recommendation with a target price of Rp3,800 reflects confidence in the company’s long-term potential.