VALE INDONESIA - INCO

VALE INDONESIA

Background

The economic growth of Indonesia is expected at range 5-6 % in 2014 and 2015. Although the growth of 2013 was lower, at 5.8 % compared to 2012 which was at 6.2%. OECD at October of 2013 forecasted economic growth of Indonesia will be at 6 % during 2014 – 2018, so investment in Indonesia is still prospective. Meanwhile the elected president has higher target of growth, which is at 7 % in 2014-2015 with concentrated in agriculture, infrastructure and energy and more concern in village, the economic condition in 2015 will be still difficult to reach target.

The economic condition will be also influenced stability of politics, mainly in parliament. If the government is unable to negotiate with stringer opposition side the development of economy may possibly be interrupted.

Accordance to national statistic bureau, the mining sector in indonesia is still prospective, its average growth is at 10% (at current price) during 2008-2014.

Accordance to the Mineral and coal act of 2009, the government implemented to ban export of raw material for mining company include ore. The Mining Company should make smelter construction and export non raw material in order to increase its value added. The small to medium miner who are not able to establish smelter will stop to produce ore if the government will still implement the regulation.

The following table describes Increase in value added processing of minerals. (LME in 2011).

Bauxite	Bauxite	Alumina	Aluminum	148
	$ 17 / ton	$350/ton	$2500/ton
Nickel	Ni. Ore	FeNi	Stainless steel	105
	$25/ton	$2574/ton	$2637/ton
Iron	Iron Ore	Sponge Iron	Slab /Billet	12
	$60/ton	$350 / ton	$700 / ton
Copper	Cu.ore	Concentrate	Ingot	100
	$80 / ton	$3000/ton	$8000/ton

The regulation is reducing mining production and reducing employment. The biggest increase of value added of the four ores is bauxite which could be 148 times more valuable if it is exported in aluminum product.

Vale Indonesia

The company run sits business in nickel mining and it produces nickel and exports it in matte form. The largest share holder of the company is Vale Canada limited with 58.73 % of total share. The rest are Sumitomo metal mining, Sumitomo corp, vale japan limited and public.

Based on its annual report the clients are its self share holder, Vale Canada limited and Sumitomo Metal Mining. The price is determined by the formula of London Metal Exchange cash price for Nickel and Vale Canada Limited.

Vale Indonesia has mining field in several places at North Sulawesi, South Sulawesi and South East Sulawesi. The total area is 190,150 Hectare with total proven reserve at 94.2 Mt.

		31/12/13		31/12/12
Mineral reserve	Mt	% Ni grade	Mt	% Ni grade
Proven	94.2	1.81	65.8	1.84
Probable	33.3	1.74	39.1	1.7

Province	Block	Hectare
Central Sulawesi	Kolonodale	4,512
	Bahodopi	32,123
	Sorowako	108,377
South Sulawesi	Matano	6,176
	Bulubalang	2,250
	Lingke	1,584
	Latao	3,148
Southeast Sulawesi	Matarape	1,680
	Pomalaa	20,286
	Suasua	10,372
Total		190,510

The Global demand of nickel grows at 9 % year on year in 2012-2013 despite the market value of Nickel is relatively decline since 2009. The company could increase its production of nickel matte 6.7 % up in spite of the decline of its revenue at 5 % lower during period of 2012 – 2013. The decline is caused by the decrease of average realized price during 2012 -2013 which is determined by London Metal Exchange Rate for nickel price.

Based on annual report, the pig iron and ferro nickel demand of china still increase, the supply of nickel matte is expected will be higher at next year. Another challenge of the company is highly cost of fuel for production and mining at the field. The company uses HSFO for production and uses HSD for operational vehicle for mining. The Gross profit margin in 2013 decline 15.2 % compared to gross profit margin in 2012 due to higher cost of revenue which comprises fuel cost as the biggest part of the cost of revenue.

The company has already started coal conversion project to reduce cost in production section. The company already owned a waterfall electric power plant in its Mining field.

And it causes the net profit margin of 2013 decrease compared to net profit margin in 2012, from 7.0 % falls in to 4.2 %.

My expectation the company will be able to increase its sales at 3 % up  compared to recent year due to the increase of nickel’s global demand include demand of Ferro nickel and pig iron in China. The cash cycle of 2013 is also better than cash cycle in 2012, the company is expected at the same cycle at next year to result the revenue growth.

Accordance to the World Bank, the economic growth of china is still high at range 7 – 10 percent in 2004 – 2012, the economic growth on 2013 may possibly be high at that range. And the steel industry will be expected continue to grow.

	2008	2009	2010	2011	2012
China	9.6	9.2	10.4	9.3	7.8

The fundamental condition of the company seems to be better at the future. It depends on the related industries growth such as steel, automotive, infrastructure, food packaging and etc. it is also influenced by market value of Nickel at London Metal Exchange.

Event the Ban ore – export was done by Indonesian government the nickel price at London Metal exchange was at bear market. Accordance to local media, Vale Indonesia has just signed new amendment contract. The contract will end at 2025, accordance to agreement Vale should to do divestment of 40 % of its share.

Ratio analysis
ROE	2012	2013	2014	2015	2016
Net Profit margin	7.0	4.2	4.3	4.8	5.1
Asset Turn Over	41.5	40.4	40.2	39.8	39.5
ROA	2.9	1.7	1.7	1.9	2.0
Financial Leverage	135.5	133.1	134.6	136.2	137.7
ROE	3.9	2.3	2.3	2.6	2.8
Revenue	967,327.0	921,638.0	949,287.1	977,765.8	1,007,098.7
CFO		8,071.0	10,254.8	10,425.7	10,580.5
Net Add Fixed Asset		3,087.0	4,208.4	4,292.5	4,378.4
Free Cash Flow		4,984.0	6,046.4	6,133.2	6,202.1