Mining shares expected to weather rupiah decline

Rendi A. Witular, The Jakarta Post, Jakarta

Despite the ongoing controversy over a lack of legal certainty in the country's mining sector, the shares of most local mining companies are forecast to retain their luster in the second semester of this year, analysts said.

Volatility in the rupiah and an expected surge in the price of several mining commodities on the international market will likely keep up investor interest in mining shares amid otherwise uninspiring trading on the stock market in the second half.

"The revenues of mining companies are mostly in U.S. dollars. The rupiah's problems will lower their operating costs and widen their profit margins," said Mandiri Sekuritas' mining analyst Achmad Solichin on Thursday.

He also explained that most mining shares, especially those owned by companies engaged in the production of metal-based commodities, such as state-owned PT Aneka Tambang and PT Timah, and privately owned PT International Nickel Indonesian, would likely stand their ground.

Achmad said that this was because the international prices of several commodities, such as nickel, tin and copper, which were the core commodities produced by the three companies, were improving.

The price of nickel on the London Metal Exchange stood at Rp US$8,835 per metric ton on Thursday, up from $7,210 in the first week of January; tin at $4,735 per metric ton, up from $4,260; and copper at $1,695, up from $1,550.

As for the shares of energy-based mining companies, Achmad feared that the bulls would remain at home as the price of oil had been declining since the end of the Iraq war in May. The decline in oil prices would reduce the profit margin of oil companies.

The price of international benchmark Brent crude stood at $27.85 per barrel on Friday, down from nearly $40 before the Iraq war broke out.

Regarding the impact of the unexpected exit of Anglo-American oil company BP PLC and Anglo-Australian mining group Rio Tinto from the world's most profitable coal mine, run by PT Kaltim Prima Coal, Achmad said that it would not significantly affect the performance of mining shares.

"As long as local mining companies put in good performances and produce healthy profits, financial investors will not let go of their shares," said Achmad.

Meanwhile, Erwan Teguh from Danareksa Securities concurred with Achmad, saying that the withdrawal of BP and Rio Tinto would not cast a shadow over mining shares as investors could not see any legal violations in the case.

"The case is specific and there have been no legal violations. It's just business," said Erwan.

The pulling out of BP and Rio Tinto was reportedly due to the fact that they could no longer tolerate the uncertainties of doing business in Indonesia, especially in the mining sector.

Over the last five years the country's mining industry has been left bewildered by a spate of new government policies, opposition from environmentalists, and hostility from local communities.

Regarding the performance of mining shares in the second semester, Erwan said that they would still be promising because of the possibility of higher net profits being earned by mining companies.

He explained that such higher profits would result mostly from greater efficiencies in their operations resulting from lower international oil prices. Fuel usually accounts for up to 50 percent of operating expenses.