ANTAM�s net sales increased Rp794 billion, or 61%, to Rp2,104 billion (US$229 million), largely due to increased production and sales volumes of nickel contained in ferronickel and slightly to moderately higher average selling prices for all of ANTAM�s products. As in past years, the bulk of sales were generated by exports and from the nickel division. Rp1,949 billion, or 93% of sales, were exports and Rp1,779 billion, or 84% of sales, were from the nickel division.
Ferronickel production increased by 151% to 6,859 tonnes as output from FeNi II continued strongly following an overhaul completed in October 2005. Sales volumes rose along with production increases by 175% to 6,329 tonnes, due to the continuing strong demand for nickel from ANTAM�s customers. In combination with a 10% higher sales price of US$7.54 per pound, ferronickel sales rose 241% to Rp967 billion, or 46% of total sales and contributed an additional Rp684 billion compared to the first half of 2005, or 86% of the increase of total sales.
Increased production and sales volumes and prices of high grade (saprolite) and low grade (limonite) nickel ores contributed to the first half of 2006 net sales increase, although to a lesser degree. ANTAM produced 1.63 million tonnes of saprolite, a 38% increase while sales increased 15% to 1.57 million tonnes. ANTAM produced 0.38 million tonnes of limonite, a 19% decrease while sales decreased 13% to 0.36 million tonnes. Combined, nickel ore sales of Rp812 billion, or 38% of total sales, contributed an additional Rp133.5 billion, which amounts to 17% of the increase. High grade nickel ore prices rose by 2% to an average of US$46.02 per wet metric ton (wmt) and low grade prices rose by 74% to US$28.29 per wmt.
Due to the implementation of a redesign of ANTAM�s Pongkor gold mine, brought about by lower than expected grades and softer than expected tunnel wall conditions, production of gold and silver fell in the first half of 2006 to 1,280kg and 10,631kg, respectively. In line with these decreases, sales volumes dropped by 33% to 1,178kg for gold and by 9% to 10,236kg for silver. Although the gold price increased by 38% to US$590.48 per troy ounce, the contribution of gold sales decreased Rp31 billion, or 13%, to Rp206 billion and represented a 10% share of net sales. The reduction of silver sales volumes was less pronounced than with gold, and together with a 13% higher sales price of US$8.01 per troy ounce, the contribution of silver rose by 1% to Rp24 billion. Also part of the gold division, the services provided by Logam Mulia, Indonesia�s only precious metals refinery, rose 8% to Rp6.6 billion. Together the contribution of the gold division decreased 11% to Rp237 billion, or 11% of ANTAM's net sales.
ANTAM's bauxite division sales increased Rp9 billion, or 11% more, in the first half of 2006. Total sales rose to Rp88 billion, despite lower production and sales volumes, as the average bauxite price rose 27% to US$13.45 per wmt.{mospagebreak}
Customers
ANTAM�s four largest buyers in the first half of 2006 accounted for nearly two thirds of all sales; Avarus at Rp400 billion (19% of total sales) which is ANTAM�s nickel agent for European sales, and deals with long term customers such as Thyssen Krupp Nirosta and AvestaPolaris; Posco at Rp379 billion (18% of total sales); Mitsui & Co at Rp346 billion (16% of total sales); and Yieh United Steel Corp at Rp229 billion (11% of total sales).
Substantially all of ANTAM sales contracts are volume-based and the price is determined by the international spot market. For nickel ore the price is determined using an average on the London Metal Exchange of the spot price for nickel over the previous quarter. Based on medium term contracts, high grade ore (usually grading 2.2-2.4% of nickel) is sold to Japanese ferronickel smelters such as Pamco and Sumitomo Metals Mining Co and low grade ore (usually grading 1.2 � 1.5%) and low grade saprolite ore (usually grading 1.6-2.0%) is sold to QNI in Australia. For nickel contained in ferronickel, which is substantially all sold in medium to long term contracts to customers in Europe and North Asia, the price is determined using an average on the LME of the previous month�s spot price for nickel. ANTAM�s nickel ore is shipped FOB (free on board) while nickel contained in ferronickel is shipped CIF (cost, insurance and freight).
ANTAM�s internationally accredited gold bars, as well as silver, are priced by spot prices determined by the London Bullion Market Association, although only 35% of sales revenues were from exports.
ANTAM�s bauxite is sold to high quality alumina producers in China and Japan with prices negotiated in recognition of the high silica-containing bauxite that was never intended for sale. Due to the high demand for bauxite ANTAM has prolonged the mine life of the Kijang bauxite mine, which will eventually be shut down and together with Chinese partners converted into a smelter grade alumina facility.
Costs of Sales/Gross Profit
ANTAM�s cost of sales increased Rp469 billion, or 71%, Rp1,129 billion (US$123 million). The increase is largely attributed to increased production of ferronickel and nickel ore, together with increasing prices for materials and mining services. The 151% increase of ferronickel production to 6,859 tonnes was the largest contributor to ANTAM higher costs. Ferronickel is energy-intensive, with 44% of the cash costs in the first half of 2006 attributed to fuel used to create the power to heat the smelters. ANTAM increased nickel ore production, the cost of which is largely reflected in the higher ore mining fees, but the production of the other products decreased. Due to the fast pace of demand growth and the industry�s attempts to catch up by ramping up supply, the prices of substantially all inputs in the mining sector, from transportation to spare parts to equipment to raw materials increased. This is reflected in ANTAM�s results, where only 4 cost items decreased while 17 cost items increased.
The impact of ramping up ferronickel production in the first half of 2006, and higher non-subsidized fuel prices, is also reflected in fuel becoming ANTAM�s top expense. Accounting for 85% of the cost of sales, the top five costs in descending order (and percentage of cost of sales) were: fuel (22%), materials (22%), ore mining fees (20%), labour (12%) and depreciation (9%). Last year, the top cost was ore mining fees (19%), materials (14%), labour (14%), depreciation (11%) and fuel (9%).
ANTAM�s fuel cost rose 331% to Rp250 billion of which substantially all was used to produce ferronickel. Fuel is a variable cost, such that when FeNi II was under repairs last year, and despite the full removal of subsidies by mid-2005, fuel was only the fifth largest cost. In the first half of 2006, the fuel cost rose at a faster pace than the increase in production volumes as the price of fuel rose as well. The price per litre for fuel rose 114% from Rp1,768 per litre to Rp3,791 per litre. ANTAM�s Pomalaa nickel facility used power generated at its 102 mega watt power plant, which is operated by Wartsila of Finland. The new and more efficient power plant is able to operate using the less expensive marine fuel oil.
ANTAM�s materials cost increased 170% to Rp248 billion and maintained its position as the number two largest expense. Materials are also typically
variable costs such as raw materials (excavated by ANTAM) and consumables such as limestone and anthracite. It mostly consists of materials for ferronickel production. Unlike in 2005, a large component of this cost, and the cost increase, is the amount spent on the 518,353 wmt of saprolite ore from PT Inco to feed FeNi III smelter.
The cost of nickel and bauxite ores that are mined by ANTAM�s contractors makes up the third largest cost, which increased 77% to Rp221 billion. The rate of increase of the ore mining fees exceeded that of the increase of ore production volumes due to higher operating costs, which are passed on to ANTAM. Ore mining fees dropped down from the number one cost as ANTAM did not conduct any toll smelting in the first half of 2006, whereas in 2005 ANTAM conducted close to 300 tonnes of toll smelting with Pamco of Japan. ANTAM will carry out toll smelting with other ferronickel producers to offset production decreases from repairs or unexpected shutdowns.
The cost of labour is ANTAM�s fourth largest cost, down from the third position last year. It rose 49% to Rp134 billion. It is best characterized as a fixed cost although ANTAM is continuing to find appropriate ways to link performance to compensation. The increase is attributed to one-time early retirement payments and higher compensation levels agreed to by management in recognition of the company�s improved financial performance. The increase would have been far greater had ANTAM not reduced the work force through the closure of the Gebe nickel mine at the end of 2005 and the early retirement of non-permanent daily contractors at the Pongkor gold mine during the first quarter of 2006.
ANTAM�s depreciation charges, the fifth largest cost, increased by 42% to Rp103.5 billion, as ANTAM began to depreciate the FeNi III smelter. Although commercial operations of FeNi III had not been achieved, construction of the smelter was completed when the smelter was switched on in February 2006 and operations began soon thereafter. Upon commencing operations at the end of March, ANTAM began to depreciate the value of the smelter.
As the 71% increase of the cost of sales exceed the 61% net sales growth, ANTAM�s gross profit increased by the lesser 50% to Rp976 billion (US$106 million) and the gross margin decreased to 46% from 50%.
Operating Expenses/Income
Unlike the cost of sales, ANTAM decreased operating expenses by 9% to Rp122 billion (US$13 million). General and administrative costs decreased 6.5% to Rp114 billion, largely due to lower mine closure cost, which decreased 62% to Rp15 billion. The labour expense, the largest operating expense, increased 9% to Rp55 billion. ANTAM lowered its operating expenses by spending less on office supplies, post and telecommunications, as well as less on the representative office in Tokyo and on exploration.
ANTAM's operating income increased at a faster pace than gross profit due to lower operating expenses, jumping 65% to Rp854 billion (US$93 million). ANTAM�s operating margin, unlike the gross margin, widened slightly to 41% from 39%. The nickel division was the largest contributor, as operating income rose 71% to Rp900 billion although operating margins squeezed slightly from 55% to 51%. The gold division generated 31% less operating income of Rp46 billion as the operating margin contracted slightly from 25% to 19%. ANTAM�s other division, which is mostly bauxite, generated Rp10 billion, with an operating margin of 11%, a substantial improvement over last year. ANTAM�s head office, which does not generate any income, incurred a 31% larger operating loss of Rp102 billion. Not including the operating loss from head office, ANTAM�s operations generated income of Rp956 billion, 95% of which was generated by the nickel division followed by 5% from the gold division.
Cash Costs
The cash cost of production of ferronickel rose from US$3.80 per pound (lb) at the end of the first half of 2005 to US$4.00 per lb at the end of the first half of 2006. The 5% increase is largely attributed to higher fuel prices. In the first half of 2006, fuel accounted for 44% half of the cash cost of producing ferronickel. Meanwhile, the cash cost of saprolite increased 34% to US$18.88 per wmt as the limonite cash cost amounted to US$6.01 per wmt. ANTAM is currently planning to reduce the cash cost of its energy-intensive ferronickel operations by switching to less expensive natural gas by mid-2008 from the more costly diesel. ANTAM is also exploring the possibility of hydropower in the medium to long term.
Inline with the sharp reduction in gold production, during the first half of the year, the cash cost of producing gold rose 47% to US$292.07 per t.oz.
During 1H06 the cash cost of producing bauxite was 31% higher compared to the same period last year at US$9.55 per wmt.
Other Income/Expenses
Due to larger interest expenses and foreign exchange losses, and other one-off losses, ANTAM incurred Rp118 billion of Other Expenses, compared to Rp74 billion of Other Income last year. ANTAM�s interest expense increased 433% to Rp48 billion as ANTAM began to expense, rather than capitalize, the interest associated with the funding of the FeNi III smelter. Prior to the completion of construction and operation in February/March (which is not the same as achieving commercial operations), ANTAM capitalized the FeNi III interest. As well due to the stronger Rupiah, ANTAM incurred a foreign exchange loss of Rp75 billion, compared to a foreign exchange gain of Rp19 billion in 2005.
Net Income
As a result of incurring Other Expenses rather than income, ANTAM�s net income grew at a slower pace than operating income, increasing 24% to Rp515 billion (US$56 million) as the net margin contracted to 24% from 32%.
Total Assets
ANTAM�s total assets grew by 14% to Rp6,640 billion (US$714 million), largely due to increased third party trade receivables, higher inventories and increased fixed assets.
Current Assets
ANTAM�s current assets increased by 25% to Rp2,523 billion (US$271 million) due to a 267% increase of third party trade receivables to Rp579 billion and a 49% increase of inventories to Rp664 billion. ANTAM�s cash and cash equivalents decreased 10% to Rp900 billion. Although less than the 5.1 times of the end of the first half of 2005, ANTAM�s liquidity remained satisfactory at 2.8 times, with working capital remaining the same at Rp1,615 billion.
ANTAM�s Rp900 billion of cash and cash equivalents remained held largely as cash and time deposits in over a dozen domestic and international banks. The amount of cash in banks increased to Rp550 billion, or 61% of total cash and cash equivalents, up from Rp170 billion or 17% of total cash and cash equivalents. Concurrently, ANTAM held Rp348 billion in time deposits or 39% of total cash and cash equivalents, down from 83% or Rp1,001 billion at the end of the first half of 2005. The interest rates on the time deposits had increased for US Dollar deposits to a range of 3.90% - 5.00% and for Rupiah deposits to 12.00% - 13.00%. As last year, most of the cash and cash equivalents were held as US Dollars. The equivalent of Rp659.5 billion, or 73% of the total, was held as US Dollars.
ANTAM�s trade receivables jumped nearly fourfold to Rp579 billion mostly due to higher ferronickel sales and prices. ANTAM has reviewed the individual accounts and believes all are collectible.
ANTAM�s inventories increased 49% to Rp664 billion due mostly to higher value work in process and spare parts and supplies, which increased 500% to Rp66 billion and 125% to Rp250 billion respectively. Most of the values of product inventories, stated at the lower of cost or net realisable value, remained stable.
Non-Current Assets
ANTAM�s non current assets increased 9% to Rp4,117 billion (US$443 million) due to the 7% increase in fixed assets to Rp3,611 billion, mostly due to the new FeNi III smelter and the 39% increase of deferred exploration and development expenditures to Rp318 billion.
Total Liabilities
ANTAM�s total liabilities increased 6% to Rp3,396 billion (US$36 million) due to higher current liabilities, such as third party trade payables, accrued expenses, taxes payable and dividend payable.
Due to prudent financial management, ANTAM improved its financial structure by reducing its debt to equity to 58%, and debt to assets to 28%. ANTAM�s capital was funded (liabilities: equity) 51:49 compared to the 55:45 at the end of the first half of 2005.
Non-current Liabilities
ANTAM�s non-current liabilities decreased 11% to Rp2,488 billion, with the largest portion attributed to the Rp1,592 billion owed for the corporate bond, followed by the Rp597 billion pension and other post-retirement obligation, which increased by 8%.
Total Debt
ANTAM�s total debt, which did not include any short term borrowings, decreased 16% to Rp1,871 billion (US$201 million) and included the Rp1,591 billion still owed for the ANTAM Finance Ltd (Mauritius) US Dollar bond which was issued September 30, 2003 and must be repaid by September 30, 2010, although early redemption is possible on each coupon payment date from September 30, 2007. ANTAM bought and cancelled some of the outstanding bonds and thereby, together with a stronger Rupiah, reduced the value of the bond by 14% to Rp1,592 billion. ANTAM�s only other borrowing included the Rp223 billion owed to BCA, a local bank, for an investment credit facility used to partially fund the FeNi III project. The value of the BCA debt decreased by 30% to Rp223 billon.
Equity
ANTAM�s equity increased 25% to Rp3,244 billion (US$349 million), as total retained earnings increased 39%, due to higher income, to Rp2,267 billion.
Cash Flows From Operating Activities
ANTAM�s cash flows from operating activities increased 59% to Rp476 billion, due to higher receipts from customers on the back of increased ferronickel sales and higher prices. Customer receipts increased 43% to Rp2,019 billion, which was reduced by the payments to suppliers, which rose 111% to Rp1,111 billion due mostly to higher fuel costs and more expensive materials. Payment for labour decreased by 9% to Rp212 billion, as did payments of tax, which decreased 10% to Rp316 billion. Unlike in 2005, ANTAM received Rp112 billion in receipts from tax restitution related to purchases made for the parts and equipment of the FeNi III project.
Cash Flows Used In Investing Activities
ANTAM�s cash used in investing activities decreased to 73% to Rp304 billion as capital expenditures on the FeNi III project came to an end. Payments for fixed assets decreased 78% to Rp229 billion.
In combination with higher operating cash and lower capital expenditures, ANTAM returned to a free cash flow positive position.
Cash Flow Used In Financing Activities
Unlike in the first half of 2005, ANTAM had no cash flows used in, or from, financing activities, when ANTAM repaid some long term debt and paid a dividend of Rp246 billion.
Hedging
ANTAM has engaged in nickel hedging through the use of an instrument called a �zero-cost collar�. Under this arrangement, which ANTAM made with three counterparties (banks), ANTAM buys a put option (which gives ANTAM the right to sell a quantity of nickel at a pre-determined price) and sells a call option (which obliges ANTAM to sell nickel at a pre-determined price) both of equal value. If the average spot price of nickel during the previous month does not fall below the price on the put option, nor exceeds the price on the call option, no trading occurs and there is no cost to ANTAM.
ANTAM has 3,100 tonnes of nickel hedged, with an average put price at US$9.65 per pound and an average call price of US$13.19 per pound. The period runs from August to December of 2006, with 600 tonnes of options maturing every month.
ANTAM had no other commodities hedging.
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