Ancora Indonesia Resources Company Visit (2011)

We visited OKAS this early week and met the president director, Mr. Dharma Djojonegoro. Below are some key takeaways:

1. Business. The manufacturing and trading segment are in ammonium nitrate (explosives raw material) business, while service segment is a combination of service in oil and gas drilling (~70%) and mine blasting (~30%). The company strategy in the future is to going upstream.

a. Mining explosives segment. OKAS exposure in the segment is through one of its subsidiary, MNK (50% ownership) the rest of the ownership is equally divided between Pupuk Kujang and Yayasan Dakab.

Demand. Indonesian domestic demand for ammonium nitrate was around 450k tonnes in 2010, while 2011 demand is estimated at around 500k tonnes. MNK sold 180k tonnes in 2010 (all to domestic market) which 37k tonnes come from own production and the rest come from import.

Supplier. MNK recently diversified its supplier; previously they mainly buy from Orica, largest ammonium nitrate producers.
Barriers to entry

Considering the dangerous product nature, the industry is highly regulated. There are only eight licensed distributors and three licensed producers (OKAS, Orica, and Dahana)

Expansion. The company is currently developing a 100k tonnes/year capacity plant which will start to operate in the 3Q 2011. It is expected to level up blended margin afterwards as manufacturing has higher margin than trading.

Competition. Orica is currently in the process of building their 300k tonnes capacity plant in Indonesia which will be start operating in the first quarter of 2012. As OKAS and ORICA open up a new plant within a close range, competition to fill up order book brought margin down in the last 6 months. However after orders are filled up, price is climbing up in recent time. As a far larger scale producer, Orica have more pricing power than OKAS. Set aside this special situation, OKAS usually could pass on their cost increase.

Blasting services. OKAS usually outsource the blasting services thus the company only get ~10% gross margin, however the company is currently gradually doing it on their own. OKAS expect gross margin of 30-50% from doing the blasting services internally.

b. Oil drilling segment
OKAS involve in the segment through its subsidiary Bormindo (60% ownerships) who owns 10 rigs. The current utilization rate is low at 50% as a numbers of new players entering the business in 2008 when oil price is high. OKAS expect the condition to improve in 6-9 months as it is currently undergoing 10 tenders. For comparison, in 2010, there was no tender at all.

c. Coal mining
OKAS plans to acquire a 8,000ha low calorie coal mining concessions (3400-4000kcal) from sister company, Ancora Capital Management. With only 500ha being explored, the current reserves under calculations are 9mln tonnes (JORC) and 15mln tonnes (non JORC). The mining has low stripping ratio of 1:6. Current production is 80k tonnes/month. The detail of the acquisition is still undisclosed.

2. Valuation
The company is currently traded at 25.8x trailing 4 quarters PE, above its global peers.