Indonesia Metal & Mining: Upgrading to Overweight
Supportive fundamentals for gold. World Gold Council (WGC) recorded a strong recovery in jewellery and bar & coin demand of 32% q-q and 44% q-q in 3Q20, respectively. We forecast that gold demand will continue to grow by 11% y-y to c.4.5k tonnes in 2021E, driven by 1) further gains in jewellery demand, 2) higher appetite of retail investors towards gold, and 3) sustained investment in gold-backed ETF. We also believe that investors will prefer diverse assets given the low interest rate environment and weak USD, although promising vaccine development may partly jeopardize gold’s safe haven status. Meanwhile, we expect the gold supply to grow by 5% y-y to c.4.8k tonnes in 2021E, slower than the demand growth despite the resumption in mining activities and higher supply of gold scrap. As such, we expect a slimmer gold balance surplus of c.300 tonnes (vs c.500 tonnes in 2020E) next year, which could potentially increase the gold price to USD2,000/toz, on average, in 2021E.
Potential deficit in copper market. Copper price has increased by 24% ytd to c.USD7,600/tonne, driven by 1) resumption in China’s economic activities, 2) infrastructure stimulus and 3) concerns over copper supply. We expect the demand trend to sustain in 2021E, where we expect copper demand to grow by 5.4% y-y to c.24.7mn tonnes in 2021E, in line with global GDP growth forecast. Meanwhile, we forecast copper production to grow by 4.5% y-y to c.24.4mn tonnes in 2021E, given the resumption in copper mining and refinery activities that may ease the supply concern. However, we believe that copper production is less likely to catch up with the demand growth, due to 1) fewer manpower in mining sites, 2) lower exploration budget, and 3) delay in copper projects. Thus, we expect the copper balance market to be in deficit by c.290k tonnes (vs.80k tonnes in 2020E), prompting high copper prices to hover at USD6,700/tonne, on average, in 2021E.
Cautiously optimistic outlook for Nickel. Nickel price has increased by 15% ytd to c.USD16,000/tonne, due to 1) 84% ytd increase in mid-grade nickel ore price to c.USD70/tonne and 2) boost from EV batteries stories. We forecast nickel demand will grow by 7% y-y to 2.4mn tonnes in 2021E, driven by growing demand for stainless steel amidst economic recovery and infrastructure-related stimulus, while we see minimal short-term impact from EV battery segment. On the supply side, we expect refined nickel production will reach 2.5mn tonnes in 2021E (+6% y-y), mainly driven by ramp-up in production of Indonesian smelters that potentially produces c.800k tonnes of nickel (c.33% of global supply). Against this backdrop, we forecast nickel price to contract to USD14,500/tonne in 2021E, on average, given 1) a potential surplus in nickel market by c.100k tonnes, and 2) normalization of nickel ore price to USD40-USD45/tonne.
Overweight: ANTM is top pick. We upgrade our view on Indonesia metal & mining sector to Overweight (from Neutral), as we expect global economic recovery to create a tighter balance in metal markets. Our pecking order is ANTM > MDKA > INCO, given ANTM’s 1) healthier gold segment margin amidst its focus on domestic markets, 2) product diversification, and 3) position as the main beneficiary of the government’s plan to develop nickel downstream industry. As such, we adjust our TP for ANTM (BUY) to IDR1,450 (from IDR1,200) with a higher 2021E EV/EBITDA multiple at 18.7x (from 16.1x), equal to +1SD from its 3-year mean, and for INCO (HOLD) to IDR4,550 (from IDR3,900), with a higher 2021E EV/EBITDA multiple at 13.6x (from 11.7x), equal to +0.5SD from its 3-year mean, given our Overweight stance towards the sector. As for MDKA, we maintain our TP of IDR2,250, as we have yet to see the impact of the mining incident and the progress of strategic review on its 3Q20 earnings. Downside risks: 1) weaker-than-expected demand recovery, and 2) stronger-than-expected supply growth.