Business as usual for Vale despite local anger

Publicly-listed nickel producer PT Vale Indonesia Tbk, previously known as PT International Nickel Indonesia (Inco), is stepping up an expansion agenda in its mining area in Sulawesi, even though the company was recently shocked by the burning of its camp by angry mobs.

“We will carry out our plans and won’t be influenced by the incident. However, we want to ensure our employees’ safety. We don’t’ want to see anarchist action in areas we want to develop,” Vale Indonesia president director Nicolaas “Nico” Kanter said on the sidelines of his company’s extraordinary shareholders’ meeting on Friday.

In early February, Vale’s camp in Bahomotefe, Morowali, Central Sulawesi was set ablaze by local residents, who were upset as the nickel miner had not yet realized its plan to build a nickel smelter in that area, as stipulated in the contract. Apparently, the company should have established the smelter in 2010.

Nico said that the company had asked local authorities to investigate the case.

The company is working on feasibility studies in its mining areas in Sulawesi for its development plans. Vale Indonesia finance director Fabio Becahara said that the company had allocated about US$50 million of a $150 million capital expenditure this year for feasibility studies.

“These feasibility studies are actually related to all areas of our contract of work. We are talking about Central Sulawesi, South Sulawesi and Southeast Sulawesi,” Bechara said.

He said that the feasibility studies were expected to be completed by the end of the year or in the first half next year. The company will start development projects after the studies are finished.

Nico said, however, that Vale might have performed well in supporting infrastructure projects while waiting for the results of the feasibility studies.

“We hope for early work, including land acquisition and early infrastructure, such as roads and harbors,” Nico said.

Bechara said that the feasibility studies were part of the company’s preparation to further increase processing capacity, so that it could reach its target to produce 120,000 tons a year.

The company is expecting to produce 72,000 tons of nickel in matte this year, increasing by about 7.6 percent from last year’s 66,900.

“We are still working on when we will achieve 120,000 tons per year. However, we are pretty much confident of reaching 90,000 tons per year in 2015,” Nico said.

The company is estimating that it will need about $2 billion to support the capacity upgrade.

The company took in $1.24 billion in revenue in its unaudited 2011 financial statement, declining by 2.6 percent from an audited revenue report of $1.28 billion in 2010. Increasing cost of goods by 12 percent to $728.64 million from $650.19 million became a major contributor to the decline in operating profit by about 19 percent to $484.94 million in 2011 from $598.43 million in 2010.

In line with those declines, the company’s net profit fell 23.86 percent to $332.99 million in net profit in 2011 from $437.36 million in 2010.

Lower production of nickel in matte to 66,900 tons in 2011 from 75,989 in 2010 contributed to declines in Vale’s financial statements.

“Production for nickel in matte in the third and fourth quarters of 2011 was 18,073 and 13,728 tons respectively. As expected, the company produced less nickel in matte in the fourth quarter due to the rebuilding of furnace #2 as part of the plan to increase production. While shutting it down, we had an incident that impacted furnace #1 and the company decided to utilize the situation to move forward scheduled maintenance work on this furnace initially scheduled for late 2012,” Vale said in a written statement available on the IDX’s website.

Vale Indonesia may see another hurdle in boosting its capacity. The company has yet to finalize renegotiations over mining contracts with the government, unlike another 15 companies, as part of adjustments to the new mining law.

The renegotiation covers the size of mining areas, the amount of royalties and obligation to process raw materials, divestment and utilization of local goods and services.

“We already stated that we are willing to discuss and consult with the government,” Nico said.

The local administration has been complaining that Vale only made a small contribution to the local economy, including a return of mining areas to the government and demands for a nickel processing plant and to cooperate with state-owned or regional enterprises in operating its mining sites. In early February, Vale’s camp in Bahomotefe, Morowali, Central Sulawesi was set ablaze by local residents.