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Mines oh Mine

The Indonesian Nickel Miners Association (APNI) is eagerly anticipating the implementation of the Indonesia Nickel Price Index (INPI).

Announced to be effective on December 1, 2023, INPI aims to accurately reflect the domestic nickel price index, overcoming the reliance on London Metal Exchange (LME) prices for Mineral Benchmark Prices (HPM).

While the implementation is still waiting for further details, INPI would make nickel pricing more stable and regulated. If we check on SMM, the current price difference between the regular NPI and FOB NPI can be around USD15-18/MTU.

Source: SMM

This marks a significant achievement for the Indonesian Nickel Industry, particularly given Indonesia's known status as the world's largest nickel reserves. It is fitting for Indonesia to wield substantial influence over the global nickel index, serving as a key reference from our nickel sales.

Indonesia stands to gain from the intense competition in EV race between China and the US, as both nations vie to secure nickel reserves within Indonesia.

President Joe Biden has recently implemented a regulation aimed at limiting China's influence in the US EV supply chain. According to this regulation, US-manufactured EVs that incorporate Chinese-made battery components will not qualify for the full subsidies provided under President Biden's USD369 bn landmark climate law.

NCKL is to benefit as one of the leading player in Indonesia's nickel industry, being the first to successfully produce HPAL in Indonesia. NCKL leverages expertise and secured demand from its JV partner, Lygend Resources Technology.

Last week’s NCKL’s 9M23 investors briefing did not disappoint, surpassing both our estimate and consensus, with a profit reaching IDR 4.5 tn. This marks a notable ~24% growth compared to the same period last year. The profit growth is attributed to a remarkable sales performance, soaring by 135% to reach IDR 17.3 tn despite the lower nickel price compared to 2022.

The stellar sales is supported by the additional 18k capacity of MHP in PT HPL and 95k new capacity of RKEF in PT HJF, both run at its maximum capacity. NCKL also maintain the highest cash margin among its peers, attributed to its vertically integrated production.

The proximity of the mine and smelter, located within ~20 km of each other, enhances operational efficiency. This allows NCKL’ ferronickel margin reached US$3.2k/ton in 3Q23 despite 10% QoQ decline of ferronickel price. This achievement topped domestic peers which realized only US$2.5k/ton of cash margin in the same quarter.

Source: Company

Therefore despite the low nickel prices, NCKL's efficient production process allows robust cash margin, providing ample room for profitability.

Furthermore, NCKL has bolstered its position by acquiring 99% ownership in its affiliated companies, PT Gane Tambang Sentosa (GTS) and PT Gane Permai Sentosa (GPS). This move, with a modest transaction value of IDR 56.7 bn, has raised NCKL's nickel capacity to 301.9 mn WMT, representing an ~80% yoy increase in nickel reserves.

Leveraging the valuation derived from the cash cost in the 3Q23, the acquisition of the new mines is deemed exceptionally cheap, as the anticipated potential resource value is expected to reach IDR 20 tn—significantly surpassing the acquisition cost.

Source: Company

This addresses previous investors' apprehensions about NCKL's mine life and the uncertainty surrounding the investment required to obtain additional capacity. Moreover, NCKL has target to increase the reserve up to 305 mn WMT in 2025.

Source: Company, Sucor Sekuritas

We continue to like NCKL for its huge cash flow, robust balance sheet and maintained capex. Andre maintains his buy rating for NCKL with TP 1,220; implies 9.5x 2024F PE, much lower than peers’ average of 12.8x PE.

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