Merdeka Copper Gold (MDKA IJ): 3Q20 review: better-than-expected; downgrading on valuation
Merdeka Copper Gold (MDKA IJ) reported 3Q20 net profit of USD19mn (-18.7% q-q, -20.9% y-y), mainly due to USD5.5mn (vs nil in 2Q20) additional tax expenses from prior-year tax adjustments. Operating profit increased by 5.4% q-q to USD36mn (-23.2% y-y) in 3Q20 due to lower salary expenses at 2.8% of revenue (vs. 5.1% in 2Q20). Meanwhile, MDKA also posted an increase in gross profit by 3.9% q-q to USD43mn (-15.4% y-y) in 3Q20 amidst lower processing and site costs at 19.8% of revenue (vs. 22.5% in 2Q20). Finally, MDKA’s revenue for 3Q20 stood at USD98mn (+2.8% q-q; -26.3% y-y), driven by an 11% q-q increase in gold and 23% q-q increase in copper ASPs, offsetting the 9% q-q decline in gold sales volume. For its 9M20 figures, MDKA recorded weaker results compared to the same period last year, mainly due to: 1) 68% lower copper production amidst the ongoing strategic review of the Wetar site, causing lower sales volume (-68% y-y) and higher AISC at c.USD4/lb (vs USD2/lb in 2019), and 2) lower gold production amidst a lower extracted gold ore grade at 0.9-1.0gr/tonne (vs 1.2gr/tonne in 2019), and the recent mining incident.
Better-than-expected sales figures. Overall, the 9M20 figures came in better than our and consensus full-year estimates, as we overly estimated the impact of the mining incident on MDKA’s gold sales volume, where MDKA was able to record 165k toz in gold sales over 9M20 (103% of our estimate). As such, we believe that the impact of the mining incident to MDKA’s sales volume in 2021 will be softer compare to our previous expectation. We therefore increase our sales volume expectation to 190k toz of gold (+8.5% y-y) for 2021E, from 180k toz previously. Meanwhile, for copper, we maintain our sales volume forecast at 16.5k tonnes (+104% y-y) in 2021, as MDKA is able to execute its plan to operate Partolang mining pit starting from 4Q20.
High copper price will potentially sustain. We revised up our copper price assumption to USD7,500/tonne (+25% y-y) for 2021, on average, as we believe that our previous price assumption of USD6,700/tonne is overly conservative, given a potential 290k tonne deficit in the copper market for 2021E (vs 80k tonnes in 2020E). We believe that our copper price assumption is fundamentally sound, supported by: 1) a global economic recovery amidst promising vaccine development, 2) China’s infrastructure investment, such as in high-speed rail, telco wire and EV charging stations, as outlined in its 14th 5-year plan (2021-25), 3) weak USD and 4) potential tight supply, indicated by low copper inventory in SHFE at only 86k tonnes (-30% y-y) in December 2020 and delay in some copper projects. Meanwhile, for gold, we remain optimistic that the gold price will reach USD2,000/toz (+11% y-y), on average, in 2021E (see: Indonesia Metal & Mining: upgrading to overweight).
HOLD with TP of IDR2,870. We revise up our 12-month TP to IDR2,870 for MDKA (from IDR2,250), derived from SOTP method, as we increase our earnings estimates by 15% for 2021E, mainly factoring in higher gold sales volume and copper prices. We also increase our EV/resource multiple for its TB underground project to USD120/tonne and USD85/toz for copper and gold resources (vs. USD83/tonne and USD68/toz previously), respectively. Given the company’s focus to work on upper high-grade zone (UHGZ) mining areas with higher copper and gold ore grades at 0.7-0.9% Cu and 0.7-0.9g/t Au (Exhibit 12), our previous multiples may prove too conservative. Nevertheless, given the limited upside (+5%), we downgrade our rating for MDKA to HOLD. Downside risk: 1) lower-than-expected gold and copper prices, and 2) delays or cancellation of upcoming projects. Upside risk: 1) higher-than-expected gold and copper price.