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Edited Transcript of INCO.JK earnings conference call or presentation 30-Jul-20 8:00am GMT

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Half Year 2020 Vale Indonesia Tbk PT Earnings Call Jakarta Sep 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Vale Indonesia Tbk PT earnings conference call or presentation Thursday, July 30, 2020 at 8:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Bernardus Irmanto PT Vale Indonesia Tbk - CFO & Director * Nicolaas D. Kanter PT Vale Indonesia Tbk - President Director & CEO ================================================================================ Conference Call Participants ================================================================================ * Eun Young Lee DBS Bank Ltd., Research Division - VP * Jayden Vantarakis Macquarie Research - Head of Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, welcome to PT Vale Indonesia Second Quarter 2020 Results and Outlook Conference Call. Pak Nico, over to you. -------------------------------------------------------------------------------- Nicolaas D. Kanter, PT Vale Indonesia Tbk - President Director & CEO [2] -------------------------------------------------------------------------------- Thank you, Aaron. Good afternoon, ladies and gentlemen. This is Nico Kanter speaking, the President Director of PT Vale Indonesia Tbk. I'm glad that I can discuss our second quarter 2020 results with you all today. Despite having to focus on anticipating possible impact of COVID-19 on our operations, we were still able to achieve good results in this quarter. I and the other Board of Directors member with the other senior management of PT Vale are joining from home. During this pandemic situations, we were applied to home office to all of our employees, contractors and schools. This presentation and discussion will comprise assumptions and forward-looking statements that involve risks and uncertainties. In addition, all opinions and assumptions constitute our judgment and are subject to change without prior notice. Please refer to the following cautionary note and disclaimer. As you may see in the graph, unfortunately, our TRIFR, Total Recordable Injury Frequency Rate, and our LWCFR, Lost Work Case Frequency Rate, were -- had changes due to several accidents in our operational area during April and June period. We recognize the need to continuously work harder to lower our injury rate, and we are committed to create a zero-harm working environment for our employees as well as contractor... (technical difficulty) I'm sorry, please, let me repeat that again. We recognize that the need to continuously work harder to lower our injury rate, and we are committed to create zero-harm working environment for our employees as well as contractor, which is in line with our company's value, Life Matters Most. We registered accident record injury -- 3 accidents, have medical treatment injury category, one restricted work-case injury and one lost-time injury. Please turn to the next page. On June 19, 2020, PT Vale was informed that its shareholders, Vale Canada Ltd. and Sumitomo Metal Mining Co. Ltd., have signed definitive agreements for the sale of 20% stake in PT Vale to PT Indonesia Asahan Aluminium (Persero) Inalum in compliance with PT Vale divestment obligations under the contract of work dated January 15, 1996, with the government of Indonesia as amended CoW. The signing of the agreement is a continuation of agreement, which was previously signed on October 11, 2019. Based on the CoW, divestment is one of the requirements for PT Vale's continuity of operations beyond 2025. Please turn to the next page. The production volume in 2Q 2020 was about 6% higher than the production volume realized in the first quarter 2020, while production in the first half of 2020 was 18% higher than production in the first half of 2019 due to a shorter shutdown period in first half of 2020. In first half 2019, the company executed a longer plant shutdown for activities related to the Larona Canal Lining. Looking at these achievements, we are confident in our ability to maintain our production level in 2020. Now I would like to ask Bernardus Irmanto, our Chief Financial Officer, to continue the presentations with our financial results. -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [3] -------------------------------------------------------------------------------- Thank you, Pak Nico. So the group recorded EBITDA of USD 59.4 million in second quarter of 2020, higher than the first quarter of 2020 of $54.9 million, mainly driven by higher sales in the second quarter. The group also recorded positive earnings of $24 million in second quarter, a decrease from earnings of $29 million in the first quarter, mainly due to lower finance income and income tax benefits. However, it was significantly higher than the same period last year where the group recorded net loss of $26.2 million in the first half of 2019. The group's cost of revenue in second quarter of 2020 increased by 7% to $165.6 million from $154.1 million in the first quarter. PT Vale disbursed approximately $44.3 million in capital expenditures this quarter, increased from $33 million in the first quarter. So next to the cost computation, the graph source comparison between our average realized price, nickel price, and unit cash cost of revenue. As you may see in the graph, our margin is still positive as we were able to manage our cost prudently. So as you can see, the first quarter, second quarter 2020, I think the margin is still solid. Next, when compared to the first quarter 2020, High Sulphur Fuel Oil and diesel consumption per metric ton of nickel in matte decreased by 5% and 9%, respectively, while coal consumption increased by 18% in second quarter 2020. The increase in coal consumption was in line with the higher nickel in matte production in first -- in second quarter and better coal conversion rate. High Sulphur Fuel Oil and diesel price decreased significantly by 22% and 29%, respectively, so it is really positive for the company, while coal price sadly decreased to 3%. So if you look at the major commodity price, all of the decrease in the price is now [in our favor]. So next, in early 2018, we launched a 3 years program with $50 million cost reduction target. Since then, we implemented series of initiatives to eliminate operational waste and improve efficiencies. So as you can see, here up to June, we could actually realize around $15 million cost saving. We are continuing the execution of strategic initiatives and also looking continuously on new initiatives so that we can actually improve our costs. So as I mentioned before, we were able to realize the saving of $15 million this quarter. Our target for this year is actually, based on our review recently, is $34 million for 2020. So next, the company's cash and cash equivalent slightly decreased to $289 million as of June 30, 2020, from previously $293 million on March 31, 2020, mainly due to lower receipt from customer as an impact of lower nickel price in the second quarter of 2020, but it was compensated with lower fuel price. So PT Vale continued to exercise prudent control of its spending to preserve the cash. Next on the development project. The progress up to now, we received the AMDAL license for Pomalaa in January 2020, and now we are in the process of getting the forestry permit. While for Bahodopi, we're still waiting for the AMDAL and other license to be approved. We expect to have the final investment decision, the FID, with the partners, both Pomalaa and Bahodopi by the first half of 2021. So I will -- that's end of my presentation. I will hand over to Pak Nico again. Or we can continue with the question and answer. We should go with -- we should return to Aaron for question and answers, please. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- [Operator Instruction] Our first question, [Ingrid] from [Sudharna]. -------------------------------------------------------------------------------- Unidentified Analyst, [2] -------------------------------------------------------------------------------- Congratulations for your good results. I have several questions. The first one is I noticed that in your presentation, you had to revise up your guidance. I think the previous guidance was around 71,000, Pak Nico, for the production. Can you elaborate more on that? And then the second one is on the tax benefit. I recall that in the last earnings call, there was a tax benefit, and it was supposed to be a one-off in first quarter, but I saw it happen again in the second quarter. Could you give us guidance on that, whether there will be more tax benefits for the rest of the year? And what is that -- what is causing the tax benefit? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [3] -------------------------------------------------------------------------------- Thank you, Ibu Ingrid. So to answer your question, yes, we revised our production target. Previously, we announced that we will produce 71-point-something kiloton in this slide in the presentation, and Pak Nico mentioned about that, our new target is 73 kiloton. This is related to the decision that we made recently to defer the Furnace #4 rebuild from quarter 4 this year to May next year. There are a couple of reasons why we decided to defer the Furnace #4 rebuild execution. It is related to the COVID situation. As you know that during the execution of the project rebuild, we will involve a lot of people, massive amount of people, more than 1,000 people in one location. So due to the situation that we are facing today, like this COVID situation, the need for the social distancing. And also, we continue to search for material and services that, that probably it is challenging to get during this period. We decided to defer the execution of Furnace #4 rebuild to next year. Then the consequences of it is 2 basically. First is that we can expect to have higher production for this year and definitely for next year because all of the rebuild will be done next year, there will be a revision for our next year target. That's the first thing. Second thing is that we need to carefully look at the performance of the Furnace #4 itself because as you probably aware, that last year, we have incident with the Furnace #4, the integrity of the asset needs to be carefully monitored. So the consequences of running Furnace #4 until next year is probably -- we need to lower down the power supply to the Furnace #4, which as a consequence, it means probably lower the production for that particular furnace. So that's the answer for your first question. On the second question, regarding the tax benefit, it is actually related to the tax incentive that the government of Indonesia provided in relation to the COVID as well. So the tax benefit booked in the first quarter and second quarter was related to the new CIT rate. And in first quarter, we knew that the new CIT rate was 22% as regulated in the Perppu Number 1/2020. So that actually affect the future deferred tax in the first quarter. At that time, we actually knew that there would be further CIT rate reduction to 20% in 2022. But due to "uncertainty" that we have, like we are not really -- we were not really confident that, that would actually be happening. So in the second quarter, the Perppu was "upgraded" into undang-undang into Nomor 2/2020. So we actually, again, further adjust the future deferred tax by applying the CIT rate of 20% starting 2020 -- '22. So that is why you still see the tax benefit in the second quarter because we only applied the 20% CIT risk in the second quarter after the termination of the undang-undang Nomor [2/2020]. So that's the answer to your question, Ingrid. -------------------------------------------------------------------------------- Unidentified Analyst, [4] -------------------------------------------------------------------------------- So going forward, in the third quarter and fourth quarter, should we expect any more adjustments? Or that will be it? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [5] -------------------------------------------------------------------------------- I think there's no new regulation changes from the government. There should be no more adjustment from it. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question, Jayden from Macquarie. -------------------------------------------------------------------------------- Jayden Vantarakis, Macquarie Research - Head of Research [7] -------------------------------------------------------------------------------- I just have a couple of questions. The first is, I guess, similarly under the accounting, it looks like there was a reversal for some of the overheads, like the SG&A. Can you talk us through that? What was the reason? The second question relates to the recent stake sale. So obviously, the deal with -- what was done, which is good. Does this make it more likely that there will be an extension of the contract beyond 2025? How does that sort of dynamic play out now that the sale is done? And then following on from that, does this now make the expansion of the existing plant to 90,000 tons per annum feasible? If you just wouldn't mind talking through the thinking on some of those issues. -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [8] -------------------------------------------------------------------------------- So thanks, Jayden. I need to look at in detail on SG&A. My guess it is related to the COVID expenses that was reclassified on -- between SG&A and cost of goods sold, especially those who -- which are consumed internally by PT Vale. So previously, it was categorized as non-product expenses, and then it's like we decided because it's part of the operation, part of the production expenses we classified to that. But I need to check again, Jayden, I will come back to you later on. On the divestment extension, like whether the divestment will increase our chance to get the expansion, for example, like the short answer is probably, yes, we expect that this divestment will basically help us in the discussion with the government, having minority in the Board will -- at least will help us in better aligning the understanding and interaction with the government. And like there are a couple of things. I mean it does not mean that having minority will prevent us from executing all of the commitments that we have. We still need to execute several commitment that we have, including the commitment in 90 kiloton that you mentioned for that question. But at least with better alignment, better understanding, with their help -- with their best -- they're part of the government. So we expect the processes at least to get the extension will be more productive, right? So that's the expectation. Certainly, on the 90 kiloton, it is really a good question. Right now again, if we're talking about running rate, right, running production rate, and we can see since last year, actually, since April of last year after we completed the Larona Canal Lining, our running rate annualized is actually at the 80, 81 kiloton per year. So basically, what I meant that if everything goes well, if all of the asset actually available for production, and if we can actually utilize that asset and the nickel grid for mining is as expected, we can get the 80, 81 kiloton. So we still need to have additional 10, 12 kiloton to meet that commitment. So at this point of time, we're reviewing this new production line in Sorowako. So there would be like new furnaces in Sorowako. It is under trial 2 right now. We are finalizing, optimizing the numbers. So yes, I mean, depending on the outcome of the trial 2, I think we are still optimistic that we can achieve it. Definitely, the project team still needs to do a lot of things to finalize the study. It is still at trial 2. Currently, it's to be completed by this year. So by the end of this year, we will have better picture on how to achieve that 90 kiloton target. So hope that answers your question, Jayden. -------------------------------------------------------------------------------- Jayden Vantarakis, Macquarie Research - Head of Research [9] -------------------------------------------------------------------------------- Yes. That's very helpful. Maybe just one follow-up, which is related to the point that Ingrid raised earlier about the maintenance for Furnace #4. So how do we think about the impact for 2021? Is it just that we take 1/4 of capacity out for, I don't know, a couple of months? Like what does it do to the overall projected production, if we think, for next year, noting that the 90,000 tons probably won't be done next year, we're going to have to wait a bit longer? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [10] -------------------------------------------------------------------------------- Yes. So thanks, Jayden, for your question. Yes. I mean, literally, if you talk about the Furnace #4 alone, yes, it is as simple as shifting the production that are supposed to be realized next year to this year, right? But as I mentioned before, the Furnace #4 needs to be run with a very careful attention, meaning that there's a possibility that we need to run Furnace #4 with lower power. That would affect as well. So if you remember this year, the original plan is for this year to produce 71,000, right? So now we revised the target to 73,000. So that 2 -- additional 2 kilotons is what we actually supposed to produce next year, right? So that's one factor. Definitely, there's other factors like the mining grid and the other things. But if we're talking about the Furnace #4 action, then yes, that will be the equation. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- There are currently no questions in queue. (Operator Instruction] Next question, [Shen Shin] from HSBC. -------------------------------------------------------------------------------- Unidentified Analyst, [12] -------------------------------------------------------------------------------- I just have a question. Because the new agreement signed starting from this year, we're supposed to be receiving the cobalt by-product credit. I know it's a miniature amount. Can I ask you, did we actually book something in Q1? Or everything has been booking into Q2 in your sales revenues? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [13] -------------------------------------------------------------------------------- Sorry, come again, [Shen Shin]? -------------------------------------------------------------------------------- Unidentified Analyst, [14] -------------------------------------------------------------------------------- The cobalt by-product credit we're supposed to be receiving at the beginning of this year, right? I checked the net average price and also the revenue number. Seems to me the cobalt by-product revenue only coming in second quarter. Is that true? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [15] -------------------------------------------------------------------------------- No. So we -- so just to probably to clarify. So we are not considering cobalt as by-product. The nickel matte is actually containing nickel and cobalt, correct? So we actually implement new offtake agreements starting 2020 with Sumitomo and Vale Canada Ltd. So previously, in 2019, for example, so whatever volume of nickel matte that we deliver, then we will multiply that volume with 78% of LME nickel. So that was the old agreement. In the new agreement, so we actually spread it between -- not spread the product, but just for the inflating purposes, we spread between volume of nickel and volume of cobalt in the nickel matte. So the product itself is still nickel matte containing nickel and cobalt. So we actually divide it -- the volume into, okay, nickel volume and cobalt volume. For the nickel volume, we still multiply that with 78% LME nickel, and for the cobalt, we multiply that with 25% cobalt Metal Bulletin. So now in terms of calculation of the pricing, that's the (inaudible) that we use. And it is already effective starting quarter 1. So I'm not sure we can check, but that pricing, the new pricing is effective starting quarter 1 as well. -------------------------------------------------------------------------------- Unidentified Analyst, [16] -------------------------------------------------------------------------------- So in that case, just for clarity, right, the first -- our reported average realized price for nickel matte that is still pure LME nickel at 78%, right? It doesn't include any cobalt prices? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [17] -------------------------------------------------------------------------------- Yes, yes. So the average nickel realized price, that's only nickel. So probably on the next call, then we need to include the average cobalt price probably. Just to be clear. -------------------------------------------------------------------------------- Unidentified Analyst, [18] -------------------------------------------------------------------------------- Okay. So in that case, on a per quarter basis, we probably, at the current cobalt price, we're receiving additional $2 million to $3 million revenues from the cobalt? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [19] -------------------------------------------------------------------------------- Yes. Cobalt now is flat, right? So it's not moving. It's 31,000 all the way. That's my belief. So comparing to like whether -- for example, the volume of like whether the 78% of nickel multiply the volume of cobalt compared to 25% of cobalt Metal Bulletin by volume of cobalt. So we need to compare that. Definitely, we cannot use that as a reference, as we know that the price is fluctuating. But at this point of time, like 75 -- 78% of nickel LME compared to the 25% of cobalt MB is probably almost similar. There's not much different on it. -------------------------------------------------------------------------------- Unidentified Analyst, [20] -------------------------------------------------------------------------------- Okay. My last question is regarding the dividend, right? Because since now the major projects are now being deferred to next year, but actual funding is -- probably won't arise 2 years later, probably starting in 2022. So between now and then, given the new shareholder coming in, do we have any dividend policy at least for this year and the next years? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [21] -------------------------------------------------------------------------------- Yes. The dividend policy is part of the discussion with the new shareholders. That's kind of a new approach on the dividend policy. I could not disclose that yet. But then for this year, in recent -- like yesterday, we had the Annual General Shareholders' meeting and we announced to the shareholders that we are not going to pay the dividends. Although the project like -- the project that I mentioned is Furnace #4 rebuild, which will be deferred to next year, this -- I would say, there is a [saving capable]. But for all of the growth projects, the target is to have the final investment decision first half next year. So we can expect that we should spend already some of the pre-FID cost, right, before that. Because in order to take the FID, we need to meet some requirements. For example, we need to buy the land, we need to buy some asset like port so that require some costs, and that needs to be spend before the FID. And after the FID, there will be construction ongoing. And the equity injection for the GP Co will need to be done. So we need -- we are discussing with a partner now, like how are we going to raise that cash call. How -- we try to agree on the cash disbursement. So basically, I would say that starting 2021, the cash requirement will be there, not only for the sustaining. Sustaining itself, as I mentioned before, will be quite significant next year because we execute Furnace #4 rebuild, which require probably in order of $70 million to $80 million alone for that individual project next year. But also, we need to consider the pre-FID costs and also some activity that we need to execute post the FID in 2021. So there will be cash, definitely cash requirement starting next year. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question, Eun Young from DBS. -------------------------------------------------------------------------------- Eun Young Lee, DBS Bank Ltd., Research Division - VP [23] -------------------------------------------------------------------------------- So regarding to the sales of your shares from PT to Inalum, what would be the selling share price to Inalum? And when will this transaction complete? That is the first question. And second question, I realize that the financial income declines in second quarter compared to the first quarter. What was the reason for that? And the #3 question, so you just mentioned about the cobalt, what is your production and sales volume of cobalt in this quarter? And what is the target for this year and next year, probably? And the final question is, I would like to ask your outlook on the -- in nickel prices in second half. So that is the number four question. -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [24] -------------------------------------------------------------------------------- So okay. So let me just -- okay. Number one question is related to the divestment, right? Number two question is the finance income. Number -- what is your third question, sorry? -------------------------------------------------------------------------------- Eun Young Lee, DBS Bank Ltd., Research Division - VP [25] -------------------------------------------------------------------------------- Third question is what's the production and sales volume of cobalt. And then your outlook on nickel prices going forward. -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [26] -------------------------------------------------------------------------------- Okay. So I will probably answer your first question on the divestment. The divestment is actually shareholder matters. I mean it is business-to-business agreement between Vale Canada, Sumitomo and also MIND ID/Inalum. So what was sold is actually the asset and shares owned by Vale Canada and also Sumitomo, okay? So after the closing of the transaction Inalum we'll have all the -- we will acquire 20% of PT Vale shares. And then 20% is -- 14.9% is coming from [PT Vale] shares and 5.1% is coming from SMM. So in total, it is 20%. So after the transaction, Vale and Sumitomo will have stake like Vale is 44.3%, that would be the Vale shares after the transaction; and 15% is owned by Sumitomo, totaling 59.3% participation. So both of Sumitomo and -- sorry, Sumitomo and Vale Canada Ltd. And the transaction itself has not been concluded. So there are a couple of things that needs to be done before the transaction is completed. So MIND ID, for example, they need to report to the state auditors about the transaction, legal opinion from the attorney general of Republic of Indonesia because they are a state-owned company, right? So all of this government processes need to be passed first, right? And we need also to get the approval from MEMR with respect to the change of shareholders of PT Vale. We have sent that letter to MEMR. And definitely approval from PT Vale shareholders. So there are a couple of things that need to be completed. So we will consider the transaction completed after the amount is paid by Inalum, right? So the total amount that will be paid to Sumitomo and Vale Canada total is $371 million with the exchange rate of like $1 is IDR 14,900-something. So that's the rough calculation. So that's the answer to your first question. I will probably jump to the third question first. And [Sigit], please check the finance income, if you can probably. But I will come back to that. For the cobalt, as I mentioned before, the cobalt is part of the -- part of the nickel matte, right? It is not like 2 different products, right? We are not producing cobalt. We're producing nickel matte. But in the nickel matte, it contains cobalt. And then the -- yes, the percentage of cobalt in the nickel matte is very minimum. It's 1% to 2% only, right? So whatever number that we will produce, you can actually extrapolate that and then get a rough estimate of the volume of cobalt. And if you look at the market, really to extract a product with 1% to 2% cobalt is quite challenging economically, right? So that's why probably the cobalt payable is not what we expect, right? Why -- some of you might question why 25%, why not 60%, right? Because it is not economically -- it is -- economically, it is challenging. It is hard to justify somebody to extract that cobalt to get the benefit of it, right? So the third question -- I mean the last question is related to nickel price for -- like kind of projection, right? Yes. So as you probably know, the nickel price for July is in the range of 1,200 -- $12,600 to $13,600. Yesterday price was actually 6.2% higher than the level at the beginning of the month. So the trend was positive. And I believe the trend was driven by several news that you probably heard as well. And the statement made by Elon Musk, the Tesla -- that will -- they need a huge amount of nickel to support their business plan. And that was accepted quite positively by the market. And second news is related to the statement of the government that the government will not compromise on the nickel orders -- nickel export ban. So you probably heard about, well, there's a couple of requests in Indonesia, so we lack the -- or export again. Recently, I think on July 27, the government, the Ministry of Maritime and Investment mentioned -- made a very strong statement that the government will not compromise on nickel export ban. So that's also positive for the market. The other thing is for the -- you also know that the recent weakness of the USD has added upward pressures to [nearly] commodities, including nickel. And it's a common phenomena, I think. And now USD just keep weakening, right? So that's also helped. It's positive news. So the other things, although COVID-19 pandemic is still putting downward pressures on the price, but we also heard news about the progress of the vaccine and [medicine]. So it's a kind of balancing the pressures, right? And on the demand/supply side, I would say that the electric vehicle is bouncing. We can expect a soft rebound in the EV sales, particularly in China in the second half. And as we know as well, Europe passed emission rules and subsidies will stimulate the growth as well in Europe. I heard that Germany, for example, has agreed to increase the subsidies for EV buyers and extend the program to 2025. And in China, it's actually extended to 2022. I mean the original plan is to stop it in 2020. So all of these are good news to me. I mean it's actually giving a positive sentiment to the market. Although in other hand, the stainless steel is quite looming. We can see that the destocking trend in stainless steel has slowed -- slowing down. And the domestic stainless steel inventory may even begin to pile up in China as consumption will not be strong enough to sustain the continued decline in China. So that's good news. That's bad news, I would say, that we can expect the nickel price of $13,500 to $14,000 is something reasonable, right? So that's my personal view on that. So -- yes. So Sigit, have you found the explanation for the finance income? -------------------------------------------------------------------------------- Unidentified Company Representative, [27] -------------------------------------------------------------------------------- Yes, sure. For the finance income, it's correct that in the second quarter, it's lower compared to the first quarter, mainly due to the interest rate for the term deposit and our bank account is lower compared to the first quarter, consistent with the most recent interest rate development recently that it tends to lower. That's the first cause why it reduced compared to the previous quarter. And the second reason is related to the accounting treatment. In the previous quarter that we booked quite a significant other income related to the asset retirement obligation that we apply a lower discount rate for the assessment. So it's actually back to normal again. So the benefit is not -- is no longer applied in the -- in this quarter. So basically, that's 2 main reasons. So it's the interest on capital and also the accounting treatment. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Our next question, [Alisa] from [Cerdas]. -------------------------------------------------------------------------------- Unidentified Analyst, [29] -------------------------------------------------------------------------------- Yes. I'm Alisa from [Cerdas]. I would like to ask 2 questions. First, a little bit news in this part. So for the Pomalaa project, have you got environmental license or AMDAL? Because I hear that the other HPAL project has issue in the -- to get the environmental license. And also, is there any other license that you still need for the new projects? And the third question is related to your 2021 CapEx because there seems a lot of upcoming projects. So how much CapEx budget for 2021? And will you be start to be net debt because [you are] still net cash, but with lots of projects in 2021, you will become net debt. -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [30] -------------------------------------------------------------------------------- Yes. Thank you, Alisa. So to answer your question, so yes, we obtained our AMDAL for Pomalaa project, as I mentioned in the presentation as well. So the next step after we're obtaining the AMDAL is to obtain the forestry permit. I think forestry permit is one of the most important permit that we have to obtain because without the forestry permit, we could not start the activity basically, the full activities on the ground because majority of the mining area and probably some of the area that we allocate for the smelters is within the forestry area. So that's definitely an important permit that we need to watch out closely. We are pursuing that closely. We coordinate the effort with BKPM, the Indonesian Investment Board because Pomalaa is one of the important projects that will bring the economic development for Indonesia. So it is something important. So for any other project, for Bahodopi, the AMDAL process is still ongoing. We haven't obtained AMDAL for Bahodopi. So yes. I mean it is actually very important to track. This pandemic, the COVID-19 pandemic, is actually slowing down our process a little bit because in order to obtain the AMDAL, we need to have the public consultation, probably some field visit, and due to this COVID, we could not do that. But we are pursuing all the things that we can do in order to get the permit on time. On the third question, on the CapEx, I could not disclose the number yet. We are still in the budgeting process. But definitely, the numbers would be quite significant even compared to this year. As I mentioned before, the Furnace #4 rebuild alone is -- will be requiring a significant amount of CapEx, it's around $70 million, not to mention other projects. However, we will be closing this year strongly in terms of the cash balance. So our cash will be close to $400 million this year. If everything goes fine, nickel price is in the current state. So we will be ending this year very, very strongly. So I could still see that we can fund all of the sustaining projects and probably pre-FID activities by ourselves. And just for your information that these 2 projects, the Pomalaa project and Bahodopi projects, we'll be partnering with third party, right? In Pomalaa case, we'll be partnering with Sumitomo. In Bahodopi case, we'll be partnering with a Chinese company. I could not disclose the name yet. So we will be establishing a GP Co company. So if we -- definitely because the significant amount of investment that needs to be put in place, definitely, GP Co will need to raise some debt. But the debt is in GP Co level. It's not in Vale level. Definitely, PT Vale will need to be the sponsor of that loan at GP Co level. But that's not -- it's not our loan. It's not PT Vale loan, it's GP Co loan to fund the project. PT Vale will definitely need to inject some cash for our equity participation for that. But in term of loan, it is going to be at the GP Co level. So -- and cash injection for the equity, we need to also understand the cash profile requirement from the project. I would believe that it will not be onetime cash injection. So we still have time and then we can [manage] that, hopefully. -------------------------------------------------------------------------------- Unidentified Analyst, [31] -------------------------------------------------------------------------------- Also, for the other 3 HPAL projects like the Harita and also Morowali, do you know that they have issues because it's related with the deep sea tailing? How [it tells you about the other projects]? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [32] -------------------------------------------------------------------------------- So yes. I mean -- so the deep sea tailing is related to the HPAL. So we have 2 projects, right, the Pomalaa and Bahodopi. Pomalaa is one project. It's similar to the project that is ongoing in Bahodopi. Unlike the Bahodopi that they probably will be using deep sea tailing, the Pomalaa project will not be using deep sea tailing. It will be using land tailing. That's why there would be a lot of things. And in terms of capital, some of the explanation why the capital required for Pomalaa is higher is because we are using land tailing instead of the deep sea tailing. Definitely, the environmental risk will be lower compared to the deep sea tailing, although we need to spend more. But this is showing the strong commitment of the company on the environmental protection. So we believe that because we understand that there will be -- there are some issues with deep sea tailing, I hope that we will not face the same problem because we are using different approach. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- The next follow-up question, Ingrid from [Sudharna]. -------------------------------------------------------------------------------- Unidentified Analyst, [34] -------------------------------------------------------------------------------- So I have some follow-up questions regarding the production. So is it possible that next year's production will be below 71,000 ton nickel? And then the next question is, can you give some new time line on your new projects like the Sorowako ferronickel line and then the Bahodopi and Pomalaa? It seems that the FID is kind of a push to first half next year. And then also, can you give more color on why your depreciation cost in second quarter was up? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [35] -------------------------------------------------------------------------------- Okay. Thanks, Ingrid. On the production, I think I have touched that a little bit due to the 5 months of Furnace #4 rebuild. If your question is, is it possible to be below 71,000, then the answer is yes. So that's the consequences of having that Furnace #4 rebuild to be executed. (inaudible) basically, like, it is going to be lower than 71,000, right, because it's 5 months without one furnace. On the second question, the time line of the project, you're right that previously, we announced, it will be in the first quarter, we're probably kind of pushing in the first half. But I don't expect that it will affect the whole time line of the project significantly. For Pomalaa, we're still aiming to have the mechanical completion by the end of 2025. For Sorowako, as I mentioned before, we are in trial 2. We should be able to complete the trial 2 this year. Again, the time line of completion is 2020 to 2024. For Bahodopi, this is something that's interesting, and I think it's worth to mention. And I would like to send this message strongly to the market as well that one of the things that's becoming a hot button for Vale in relation to Bahodopi project is on the energy sources, right? So as you know, there are other smelter project in Indonesia, they're using coal power plant, CPP, right? And Vale is very committed to this greenhouse emission. And we are aiming to use more emission-friendly energy sources. So we are talking about natural gas at this point of time. We are working with a third party to look at the feasibility, technical feasibility and economical feasibility of the project. And it is promising, right? But the consequences are that, if we use that natural gas, definitely, we will not build all of the infrastructure ourselves. So we need to engage the third party. Probably they will build that, they operate that, probably transfer that to PT Vale at the end. That will affect in a certain degree the schedule. So it is still ongoing now. I would say that 2024 is probably the reasonable time line for Bahodopi project. On the -- your last question is related to depreciation. Yes. In quarter 2, depreciation is quite high. It is actually related to the accounting treatment of in-process inventory, as -- like if we actually go in detail, there's a spike of in-process inventory used in quarter 2 compared to quarter 1. And accounting treatment-wise, the depreciation is also reflected to that. So you see higher depreciation. But that's -- we don't expect to have that kind of treatment every month. Once we stabilize the reliability of the asset and there's no fluctuation on the in-process inventory movement, then the number will come back to normal. So that's my answer. -------------------------------------------------------------------------------- Unidentified Analyst, [36] -------------------------------------------------------------------------------- If I may have a little follow-up question. So you mentioned that the production will be below 71,000 ton nickel. Can you give us a range maybe, is it possible to reach to like 65,000 or some kind of growth range? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [37] -------------------------------------------------------------------------------- I would prefer to defer that discussion until we finish our budget because it is now -- the budget discussion is still ongoing. We assess several technical matters. So it is not only the smelters availability or the furnace availability. As I mentioned before, there is a contribution from nickel grid from mining and all other things. So please be patient. Now we will probably give you a hint when we have the numbers. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Our next question, Jayden from Macquarie. -------------------------------------------------------------------------------- Jayden Vantarakis, Macquarie Research - Head of Research [39] -------------------------------------------------------------------------------- Just a quick follow-up just on the mechanics of the cobalt credit. Sorry, just to be clear. So if it's 1% to 2% cobalt, times that by 35%. So that's like 0.5% say, on average. And then times that by $31,000. So it's about $160. Is that about right? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [40] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Jayden Vantarakis, Macquarie Research - Head of Research [41] -------------------------------------------------------------------------------- Okay. Great. That was all, just to clarify. So it sounds like it's quite small, but at least it's an addition that you didn't get before, right? -------------------------------------------------------------------------------- Bernardus Irmanto, PT Vale Indonesia Tbk - CFO & Director [42] -------------------------------------------------------------------------------- Yes. Jayden, just to probably -- because we got it, right? The volume of cobalt is actually split, right? In the -- so if you get -- please correct me if I'm wrong, I just -- we fairly did the calculation. But in the previous contract, the cobalt is also paid by -- paid using nickel price reference instead of cobalt price reference. So all of the volume is multiplied by -- so all of the volume, nickel matte, is multiplied by 78% nickel. So -- and we receive a lot of challenge from the government like as to why we don't actually value cobalt. And we did a study last year during the negotiation with the offtaker, Vale Canada Ltd. and Sumitomo, about the fair value of cobalt and fair value of nickel, looking at the industry, looking at the TCRC kind of methodology. And as I mentioned before, for cobalt, it's really difficult to justify what is the fair payable for cobalt. Because in the market, if you actually sell a product with only 1% to 2% cobalt, it's really difficult to economically extract that and gain the value, right? So you probably know that probably SMM can extract that. I don't know whether Vale has the technology to extract that. But with the driver, the challenges from the government, we negotiate that, and we kind of agree to price cobalt differently, partly. Now it's 35% cobalt from the Metal Bulletin reference, multiplied by the volume of cobalt in the nickel matte. So basically, just to clarify, because you mentioned that, well, cobalt is not paid. It is paid, but using nickel price reference. Now it is paid using cobalt price reference. That's the difference. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- There are currently no questions in queue. (Operator Instruction]. As there are no further questions, I will now hand the session back to Pak Nico. Please go ahead. -------------------------------------------------------------------------------- Nicolaas D. Kanter, PT Vale Indonesia Tbk - President Director & CEO [44] -------------------------------------------------------------------------------- Okay. Let me on behalf of the BOD, Board of Directors, and the senior management of PT Vale, again, express our sincere gratitude for all of your attendance and all questions that you have asked. And we are looking forward to seeing you in the next. Thank you very much. Thank you, Aaron. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. -------------------------------------------------------------------------------- Nicolaas D. Kanter, PT Vale Indonesia Tbk - President Director & CEO [46] -------------------------------------------------------------------------------- Thank you.