Apr 11, 2016 09:42:44
Mining Sector

Trimegah Securities Mining Conference Takeaways

Mining conference: INCO, DOID, ADRO, HEXA, ELSA
We recently hosted a small Mining Conference on 4th April 2016, inviting 4 prominent mining-related companies (eg; INCO—nickel producer, DOID—mining services contractor, ADRO—coal producer, and HEXA—heavy equipment distributor) and ELSA, a strong player in the O&G related industry. Most of the attendees are from asset management and no representative of pension funds were present, which we think indicates the general positioning among locals: pension funds already own the sector while asset managements are underweight and looking for opportunities.

1) Investors are not sure where commodities prices are heading, and so are the corporates
Most of the questions revolve around commodities prices, which seem to be one question that corporates have difficulty on answering. This is not surprising, given recent volatility in commodities prices particularly crude oil. Most corporates seem to be assuming that coal and/or oil prices to hover around current prices in making their investment/operational decisions. The assumptions in our financial models are slightly more conservative. We assume coal price to decline from current level of USD51/ton to USD48.5/ton whereas oil price to USD40/barrel.

2) Corporates are focusing on cost efficiency
Given lack of faith in any commodity price forecast, corporates are focusing on cost efficiency instead. A mining consultant who attended our lunch event mentioned that there is plenty of interest on using technology to improve operational efficiency at mining companies these days. This ranges from replacing regular light bulbs with LED to installing GPS on all excavators. This should benefit the larger mining contractors i.e. UNTR and DOID, which have the economies of scale to invest in the higher-end technologies to improve efficiency.

3) Expect overall heavy equipment sale to remain sluggish
Coal miners and mining contractors are delaying purchase of new equipment. The impact is less on UNTR as it means higher maintenance activity which is normally a higher margin business, but likely to hurt the smaller heavy equipment sellers more.

ADRO remain our top pick in the sector
We have Buys on ADRO and ELSA, with ADRO as our top pick. We like ADRO for its good corporate governance and healthy balance sheet. We also view Batang power plant as a strong catalyst, with projected NAV of IDR104/share (~15% of ADRO’s market cap). Among others, we think INCO has a positive outlook on volume, albeit nickel price remains a risk.