PT Vale Indonesia Tbk (INCO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to PT Vale Indonesia Tbk's Second Quarter 2022 Results and Outlook. I'm Lydia Yohana, and I will be the moderator of today's call. With me now we have Ibu Febriany Eddy, the CEO; and Bapak Bernardus Irmanto, the CFO of PT Vale Indonesia Tbk. The conference call today will be started with brief presentation by our Board of Directors and then followed by a Q&A session. Without further ado, I will now hand the session to Ibu Febriany Eddy to begin today's presentation. We will share the presentation. First, Ibu Febriany, hold a second. Please go ahead.

Good afternoon, ladies and gentlemen. This is Febriany Eddy speaking, the President and Director of Vale Indonesia. I'm glad that I can discuss with you our Q2 performance today. Please turn to next page. As usual, these presentations and discussions comprise of 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. I'd like to use this opportunity to share with you our one-pager that connect our purpose, our value, key behavior, levers and finally, our ambition. This one-pager is our compass that guides us in deciding our strategic directions, our planning and our decision-making. Our purpose is to improve life and transform the future together. And this purpose is even more relevant today as we play significant role in supporting the global decarbonization. The global decarbonization generates massive demand for base metals, including nickel. So as part of the solutions, nickel to back this decarbonization must come from a sustainable process. We believe PT Vale, who has abundant nickel reserve and has always embracing sustainable mining practices, is in the best and unique positions to tap on this tremendous opportunity. We are now focusing on expanding our business driven by our purpose. Before we talk about our future plan, let me start with our safety performance. Consistent with our company value and ambitions, we always start our meeting and discussions with safety. Please turn to next page. In relation with safety, there was no lost time injury accidents during Q2 and the numbers of recordable injury rate also decreased in line with the completions of Furnace 4 rebuild. We will continue to do our routine management agenda, such as intensifying leadership in the field, increasing safety supervisions and housekeeping at workplace. This month we are launching critical risk management, which is another pillar of our safety programs. We hope to continuously improve our safety performance. Please turn to the next page. The production volumes for Q2, as you may have seen, are lower than the previous quarter or the same time compared to last year. This was mainly because of Furnace 4 rebuild. It's a major shutdown, as you all know. We are glad to inform you that Furnace 4 rebuild has been completed. And we have started our own since June '18. Until now the ramp-up has gone pretty well and smooth. I think -- I believe today we have reached the normal power that we are required for the furnace. The construction was carried out for a total of 6 months or 187 days. And during the construction progress, we are glad to inform you there were no major injuries to the project team. Please turn to the next page. We have announced our carbon reduction roadmap and is working toward it. Our goal is to reduce Scope 1 and Scope 2 emissions by 1/3 in 2030 and achieve net zero by 2050. In brief, the following are the progress -- study on LNG is ongoing. Basic burner design has been completed. Live test for biomass to replace carbon as reductant on nickel processing plant will be conducted in Q4 this year. We had our first electric truck arrive in Sorowako at the beginning of this year. And very recently, we have the truck, electric truck arrive in Sorowako. We are in the process of inaugurating the electric truck. We hope that this is a pilot project to electrify all of our vehicle. Please turn to next page, and I'll pass this on to Anto. Anto, please go ahead. Thank you.

Okay. So the profit for the second quarter 2022 was $82.8 million or 22% higher than profit recorded in the previous quarter. Our profit has remained positive in this very tough commodity environment as we are focused our efforts to improve the efficiencies, to eliminate waste and also like reduce the cost. In addition, the company has been benefited from the favorable nickel price environment in second quarter as well. So the group realized 40% higher average selling price in second quarter, resulting in 40% higher revenue in the second quarter compared to the last quarter. The group cost of revenue increased from $142.3 million in the first quarter of 2022 to $213.9 million in second quarter 2022, primarily driven by higher commodity price and also royalties. So coal price and also fuel price contributed significantly in this increase of unit cost. PT Vale EBITDA in the second quarter was $163.4 million, which was higher than EBITDA recorded in the first quarter of $116.2 million. In the second quarter of 2022, PT Vale disbursed approximately $44.8 million in capital expenditures, which was about 6% higher compared to the capital expenditures spending in the first quarter 2022. Next slide, Lydia. So as usual, I mean, this chart shows comparison between our average-realized nickel price and unit cash cost of sales. As you may see in the chart, our margin is still positive despite there was increase in cash cost of revenue due to the higher commodity price and royalties as I explained before. However, we do need to anticipate further increase in the energy cost. I think the forecast for the coal and fuel price is not yet positive for us. The management of the company has been jointly pursuing productivity improvement initiative, focusing on, again, eliminating identified waste in our operation in order to partially offset the impact of the commodity price increase. Next slide. So this table shows a trend of decreasing fuels and coal consumption on a year-on-year basis to the execution of the Furnace 4 rebuild, so the production is lower. Therefore the consumption of the fuel and coal is also lower. The lower coal consumption in the second quarter 2022 was offset by the higher HSFO consumption. So coal and, as I said before, it's actually offsetting each other. In the second quarter 2022, HSFO, diesel and coal prices increased significantly by 21%, 22% and 49%, respectively, compared to first quarter 2022. As you know, fuel and coal represent some of the largest production cost items. Next. So the company's cash and cash equivalent as of June 30, 2022, and March 31, 2022, were $586 million and $518 million, respectively. As you know, very soon, the company will start disbursing the cash for the growth project. It is very important that the company can maximize the cash generation for the remaining of the year from the operation and also to exercise prudent control of expanding to preserve the cash. Next, I will invite Ibu Febri again to talk about the growth engine of the company.

Thank you, Anto. The slide here shows all the potential we have met today for our growth project, some of them you are quite familiar with. Basically in Bahadopi, as we have updated people, we are partnering with TISCO and Xinhai to develop RKEF with production capacity of 73,000 per annum. Right now I'm very happy to share with you, last Friday we have obtained final decision approval from our Board. So we have final investment decision approved by our Board. We're now ready to move to a construction stage. There will be an announcement, more detail, coming shortly within this week. In terms of Pomalaa, you know that we have also recently made an announcement. We have signed FCA Corporation's agreement with Huayou to develop Pomalaa project and recently global automakers, Ford Motors, also expressed interest to sign and in further discussions with them. We finally signed a nonbinding 3 parties, memorandum of corporations: PT Vale, Huayou and Ford to create a 3-party relationship in Indonesia to process nickel ore that we mine from Pomalaa block in Southeast Sulawesi. So this whole notion is to build based on the framework agreement that we have signed with Huayou back in April 27. There are other potential developments ongoing. As we mine Pomalaa orebody -- limonite orebody for the HPAL, we will then have the access naturally to the saprolite. And therefore the natural evolutions of that discussion was a potential corporations to also process the saprolite ore coming out of Pomalaa. However, we do agree with our partners that it is best to focus on HPAL. So soon after we finalize investment decisions on HPAL, we then will move on the pilot side. Total capacity that we target on is about 120,000 tonne of nickel. So ultimately we will mine both the limonite and saprolite. We are pursuing these discussions ongoing. So in Sorowako alone, we are already completing. We have recently, together with partner, also completing study for each power plant to process Sorowako limonite. Today our Sorowako RKEF plant consumes only the saprolite. And therefore the limonite is currently unutilized. So it's a natural evolution as well as you utilize the saprolite, you would want to utilize the limonite. So we are with our partners already completed the feasibility study with a positive conclusion. So we are now progressing with more detailed discussion. And we hope to be able to announce it very soon to the market. Next slide. Next slide, I'll talk specifically about the Bahadopi, as this was recently approved, last Friday, a final investment decision. So under this joint venture, we will own 49%. TISCO and Xinhai together they will form a China core company, which will own 51% of the JV Co The JV Co will own the smelter. The smelter will consist of not just the 8 lines RKEF unit, but also the natural gas power plant. As you know, we have made announcement previously that we will not use coal fired power plant. And then, of course, all the LNG storage broad facilities as well as the water reservoir required for the operations of the plant. So altogether we just want to sum up the investment in Bahadopi will consist of 2 area, the mining part and also the RKEF. The mining will be done 100% by PT Vale. It will consist of the mining staff plus support any infrastructure required. And only the smelter will be corporate under the JV Co. Currently some of the early construction works are already progressing as we finalize the agreement and very glad to share with you again, last Friday, we obtained the final decision -- investment decision. So with this, we hope to accelerate the progress. Discussions with the bank on the financing are still ongoing. This will take some time. However, the initial time, we will then fund with our existing cash and then followed by the bank financing once it's fully secured. So next slide, please. The next slide is just to show you where we are in terms of carbon. So basically we are partnering with Xinhai, will bring the technical expertise. They are a private company. However, they are also the largest and most efficient operator of NBI in China. They didn't have any plant yet outside China. So this will be the first one. We are mindful that Xinhai is a private company. Therefore there is some limitations in terms of financing. So we're very happy to welcome TISCO, who is part of the Baowu Group, one of the largest steel producers in the world, obviously, very strong financial and also politically have very strong position. So having Xinhai complemented by Baowu and TISCO will bring a strong partnership and PT Vale will bring our good mining practices and the ore supply. So together we are aiming to build this fund with the target of second lowest emissions intensity -- carbon emission intensity in Indonesia. You can see from the chart here, Sorowako today carbon intensity wise is only in the order of 28 because we are supported by hydropower. And then with Xinhai technology, Bahadopi, we're talking about 35 to 38 tonne of carbon emissions intensity. The reason why it can be so low is because Xinhai has an advanced technology. Then they fully recycle the off-gas from the furnace to dry the ore. Unlike in Sorowako today, we're still burning fuel and coal to dry the ore. Meanwhile, in this technology, we will use the off-gas from the furnaces, therefore make the process more efficient. We will still be using coal -- limited amount of coal in the kiln and burner. However, there is a commitment. So we sign it as part of the deal with the partners. In 3 years' time we will then do a pilot to basically convert to natural gas as well in the kiln and burner. Therefore we reduce further our emission. Eventually the partner also agreed with us that we will deliver a commitment of net zero by 2050. It is very important that this project highlights carbon emission, as it is our agenda and our ambitions to be the leader in carbon -- low-carbon mining operations. So that concludes the presentation. So I will then pass on to Lydia again.

Thank you for the presentation Febri and Irmanto. Okay. We will now begin the Q&A session. [Operator Instructions].

Lydia, I think Norman raised hand or Herman.

Please go ahead.

I think Norman raised his hand first, Lydia.

Okay. Thank you, Irmanto, sorry I didn't see it. Hello, Norman, please go ahead.

I only have 2 questions. First of all, congratulations on a very strong set of results. My first question is actually on HPAL viability. Because as you know, as the year progress, we have seen Vale changed partner from Sumitomo to Huayou. And I also noticed your Sorowako limonite ore initially, you were talking about wanting to sell the ore itself. Now you're changing to -- wanting to process it with HPAL. So I'm just wondering, have you -- your confidence in terms of HPAL has increased because of certain data that you have? Or apart from ligand that has maybe fully ramped up the HPAL plant, Have you heard any kind of breakthrough from maybe Huayou for that instance? That would be the first question. And I'll follow-up with the second one after this.

Yes. Thank you, Norman. So Anto, I'll give it a try. So feel free to add on any comments you may have. So thank you for the questions. Indeed, our partners, for Pomalaa is Huayou and the reason why we proceed with them. One of the reasons why we proceed with Huayou is because they already have a proven track record. So if they complete the Huayou project in the last year, late last year and completed on time, on schedule, despite COVID is quite impressive, to be honest. And on budget as well. And without COVID, you would expect that they would have completed it earlier and under budget. And lastly, I'd like to say that now they are already entering the 6 or 7 months of commissioning and they have reached nameplate capacity.

Nameplate capacity as in the full -- 80% of the full capacity, right, if not mistaken?

It's the 100% capacity. But, yes, on a monthly basis, yes. So the annual capacity divided by total they achieve it now, just recently, I think last couple of months, that's the information we got. And I have visited the plant for twice now. So you're more than welcome to check with them as well. I guess it's best to get information from the original source.

What is your opinion on net conversion at this point? Do you think that it will still work, so everyone would just go for hedge?

Yes. I'll give my comment, but Anto, welcome to -- you probably have more details on this topic. I think for the 2 routes, we choose to go for HPAL Vale. Other may choose other different route, but Vale we choose this route is I think we're concerned about the carbon. So HPAL definitely make sure we will then have much lower carbon emissions than the conversions of that, right? And then second, I think with the proven track record of 2 HPAL now in Indonesia region and Huayou, we are much more confident than before. So I think that's one of the main reasons. But Anto, feel free to add on any comments you may have.

Yes, I think just to complement what Febri mentioned, Norman. I think just to add there, I think on the first question, for Sorowako. Yes, I mean, in the past, we communicated that the possibilities to sell the ore from Sorowako limonite ore, whereas you know, limonite, our pricing is different from saprolite. So to sell, to ship the ore, limonite ore to the existing power plant, which is probably far away from Sorowako might not be economic, right? So even if we sell the ore, it should be to the HPAL plant in the surrounding area. And the question is like, why do we invest in the HPAL itself? Because as you know, the economy, region is not really in the mining, it's not really in the selling ore. The economic return maturity of it is in the HPAL itself, right, and it's just good. And the model that we build with Huayou is really good. I mean like we will only spend the money to exercise the participating right, once the HPAL is completed. Meaning that when we actually check in spending the cash, we will get written right away, right? So it's different when you're actually participating from day one. You need to wait like 3 years before getting the region. But with the participating right, you buy and you'll get the return right away, which will boost the economic region. The same with Sorowako. I think the reason as to why we are actually changing the platform, selling into building HPAL is for the same reason because we believe that the economic return is really the participating in the HPAL. And the second question on the contracting the nickel mine, the NPI, the nickel mine and then later on [indiscernible]. I think, if I'm not mistaken, I think recently, that import to the conversion has been stopped even from the Xinhai site because of different reasons. I don't know what's happening, probably is because of technology, technical matters of the others. But as Febri mentioned, I think the carbon footprint from that conversion, I mean, like at the end, if you convert it to nickel matte and producing nickel [indiscernible] to the battery industry, then the carbon footprint is something critical. And then all of the nickel thick iron produced in Indonesia right now is using coal. So there's a mismatch there between the demand and the supply in terms of the carbon footprint. So I think it's going to be the major challenges even if practically it is visible.

It's so encouraging to hear when that hedge power is coming up. My last question will be on your cash cost. So your second quarter cash costs showed up quite sharply to about $13,000 per tonne, single quarter basis, right? Just wondering how much of this is -- because of your Furnace 4 rebuild, then you have a higher unit cost versus the real energy costs that we are talking. So maybe some color on second half, what kind of cash costs are you expecting? And further to that, maybe in terms of your cash cost composition, in terms of per kilowatt basis, do you think now coal is more expensive than oil or gas or vice-versa, given that your coal price now is at $400, right?

Yes. I mean probably just to answer your second question first. I think the rule of thumb that we have been applying for years is that if the coal price is 3.5x of the fuel price, that's kind of the breakeven point, right? So like at that point, there's no difference between using coal and using fuel. And then if the proportion, the ratio is actually more than that, then using the coal is no longer giving us a benefit, right? So that's the parameters that the team is monitoring now. It is not easy to switch. Although the facility that we have with the operator in Sorowako, actually having the ability to be operated using coal and fuel. I think the challenge is really to skew the supply of like if we want to switch from coal into fuel, for example, and then we have to skew the supply. We need to probably change the parameters of the logistics a little bit. But this is something that we have -- we have been monitoring closely. So if things happen, like, okay, the coal price is increasing again and then fuel price probably stay as it is, then we can do switching. And to your first question, I think the majority of the driver as to why the unit cash cost is reaching $13,000 is because of the commodity price. It is hitting us quite a lot. I think compared to the production is probably very minimum. But the commodity price, i.e. fuel and coal is actually contributing significantly to the increasing of the unit cash cost. I think in the third and fourth quarter, we are expecting, I think July, actually July the ramping up period for the first 4. But starting August onwards until the end of the year, we expect that the Furnace will be operating with normal power. The production will be normal as well, so that in some of unit cash cost purely will be driven by commodity price. At the same time, as I mentioned before as well we try to compensate partially the impact of the commodity price from coal and also fuel by executing some of the productivity improvement initiative. So that at least we are not actually hit fully by the commodity price. In terms of exact proportion, I will come back to you later.

Next question we have from [indiscernible].

Congratulation on the strong result. Just a quick one, but actually, I have several questions. Related to any -- you might know about the value and the structure of the deal. [Foreign Language] So my first one is related on the structure of the deal with Huayou. Just wondering whether the way you structure the deal of the JV is similar with EBITDA standard with, let's say, in a gradual basis of option ownership or is it like a direct ownership of JV that you own certain amount or something like that? That's the first one. And can you remind me again the size of the capacity and the investment on Huayou JV? The second one related to the Xinhai, as Ibu Febri mentioned earlier that related on the off-gas, I missed your earlier discussion on the cash cost. Can you remind me again what is the cash cost? And what makes the technology different compared to [indiscernible]? I know it's a bit technical, but just wondering what made the difference, which one is more efficient between the Xinhai versus [indiscernible]? And the third one, what are the general cash costs if perhaps you have any insight from Vale group, typical in western part of the global non-Chinese steel producers? What are the current cash costs basically for them at the current energy cost? And the last one, I know it's a bit tricky. But related to in terms of priority, if you have to prioritize between monetizing the current strong nickel price or will you focus more on the cost efficiency part? Which one is your main priority currently?

So Anto, I'll try to answer a couple of the questions. But again, I think most of them you are better positioned to address them. So on the first one, if I pick up correctly, your question is in terms of how do we -- how does we setup our participating right within the Pomalaa projects with Huayou? So basically we have 3x call option. So we can call up to 3x with maximum up to 30% of equity participations in the HPAL. And we can call it right after the mechanical completions. And I'd like to highlight the reason why we do that, and I think this is a very good deal for PT Vale because it allow us also to structure the timing of our cash flow. As you know, now, we just received FID, final investment decision, approval from the Board for Bahadopi, which means from now onwards, right, things will move on. For the next 2 to 3 years, there will be a lot of significant cash outflow as we build the new plant. So with Pomalaa, it will roughly be the same too. The target FID there is also within this year, hopefully, finger crossed very, very soon. So which means Huayou will then have to build it themselves, right, together with Ford for the next 3 years. And by the time we complete Bahadopi, then, we can come in into Pomalaa. That way is also a way of structuring our cash flow so that it'd much better in terms of timing. And then I think we didn't specifically mention that, but the call options window can be up to 5 years after completion. So the window is very broad for PT Vale and that is a symbol that how much why you really want us to be part of the shareholders in HPAL. It's also showing a symbol how much we really want to be part of the HPAL. As Anto mentioned before, we have done the analysis. The value coming out of the selling the ore versus the value coming out of processing the nickel ore from the HPAL, there's tremendous value in the HPAL. So it's not even comparable. Therefore, for us, it's very important that we come in into the HPAL and becoming the shareholders. And I mean, as I mentioned before, it's after completions, and therefore it also reduce the risk, derisk us significantly from all the potential issues going forward, hopefully not. But if everything goes well, that's the plan, yes.

So Febri, just to clarify, so basically, it'd be 3x a call option, meaning that you have 10% for each stack?

It doesn't have to be 10%. It could be 5%, 10%, 15%. Basically it's very flexible, very flexible. And Ford also like us to be part of it. That's why when Ford come in, they looked at our deal and said, "Yes, no brainer by all mean," right, because this is really a 3-parties relationship. I mean, in the press release, as we mentioned also, right, the miners, the processors and ultimately the end customer be part of this deal as the entire supply chains connecting to one in the JV for the HPAL itself. The second question was about Xinhai technology versus [indiscernible]. I don't think we are in the position to comment about [indiscernible] technology. I mean we don't know them. We never did any due diligence. But I will welcome Anto to share with you what we know about Xinhai technology, obviously we know, as they are our partners, yes. Anto, please go ahead.

Yes. I think just to add to Febri explanation regarding the Huayou. Ibu Febri mentioned about the call option right, we'll start from the mechanical completion, right, until 5 years after that. So assuming that the completion will be in 2025, it will be up to 2050 to exercise the call option. As I mentioned previously, the economic region will be maximum when we actually exercise same call option. And at the same time, the production will be in the full capacity and the difficult and then the company is able to pay the dividend right away, right, to the shareholders. And then based on the current nickel assumption, it is actually -- the maximum value will be probably 2 years after completion, right? So that's the sweet point for us to exercise call option. So just to give you an idea. And again, this call option things, it really increase the economic region quite significantly. Related to the Xinhai technology, the off-gas, using the off-gas to drive the ore actually reduce the energy requirement for the plant, right? So that's one thing that's actually also providing benefit for the parties, right? So I think it's reducing the energy requirement. However, Ibu Febri also mentioned that the parties agreed as well to use LNG. The unit cash cost that we are mentioning in the facility to study is in the order of 9,000, 9,400 with the assumption of $7.6 per MMBtu LNG prices long-term, right? So that's what we are aiming. But again, I think the price might be look to adding. But the LNG cost is contributing probably 25% of the operating cost. So it's not that sensitive per se, the fluctuating LNG prices. It's something that we have to monitor as well. And again, the 9,400 is based on several assumptions that we have now. And then definitely the parties will be working to improve, to do fine tuning on the way we are operating. So that's kind of the maximum numbers that we are expecting with that LNG price assumption and fully when we can do some sanctioning it can be improved here.

Anto, related to my third one, do you have any insight on the... [Technical Difficulty]

Can you -- yes, I mean I could not hear you. I mean can you just speak...

Is it better now?

Yes, much better.

Okay. So yes, my third one related to the global for the year, perhaps do you have any insight from the funding group related to the main -- I mean, what are the main cash cost in term of order replacement costs currently at the current cost structure? Given that you are already one of the most efficient [indiscernible] close to 12,000 or 13,000 probably in the second half. Just wondering are they like, let's say, 18,000, something like that?

I mean it's depending. I mean I could not really comment on the operations of it. But it's really depending on -- and you know, we are talking about -- and we're talking about the nickel producers. It's depending on the technology that they're using. But just assuming that we are talking about pyrometallurgy, right, so energy intensive and the portion of the coal and fuel that they're still supplying. But if they are not using the hydro plan as we are using in Sorowako, then usually it's about 16,000. So that's the level that I can see, at least from some reports that I read, 16,000, 17,000 is what they spend in the current commodity price environment without hydro plan.

And last one, in terms of priority, which one will you prioritize in them of, let's say, because this is -- I know this is contract, when you want to monetize your current nickel prices and because you're more focused on the -- on the cost efficiency, it will limit your production ramp-up where you focus on this part, then you have to, okay, let's do the cash cost, the cash margin -- I mean, sorry, the cost part, which one will it be?

Yes. I think as I mentioned as well, when we talked about the cash balance, I think the -- we have to maximize the cash generation from the [indiscernible] operation, definitely productivity is the focus now. But I have to highlight it, productivity without sacrificing the health, safety and risk of operation. So on the current operation, we have been operating in Sorowako for 40-plus years. And then like we have to pay attention to productivity, how we can do things differently in order to improve the productivity of existing operation? At the same time, increasing the productivity is to fuel the growth, right? It's not that we are actually sacrificing the growth for cost efficiency or sacrificing the cost efficiency for the growth. I think both needs to be pursued, right? The growth definitely is important for the company. And we can only find the growth if we are actually productive enough, right? So I think it can be executed hand-in-hand, understand the importance of the growth. Understand that in order to grow, we have to be efficient, we have to be productive. And we are pursuing the 2 at the same time. Febri, if you want to add?

I just want to say, I guess, at the end of the day, whichever gave us the most value, may depends, ratio of the fuel price and the nickel price, if extra productions in certain initiative is better than saving the cost. Obviously, you go for it, yes.

Yes. It's about value generation.

No, I'm just saying that there is another one [indiscernible]. And then there are some questions on the chat room which I think to some extent already addressed, but maybe for easy reference, I'm talking go through them quickly.

Okay. Yes, I saw questions in the chat box from Eun Young Lee.

Yes. Eun Young Lee, so when do you expect Bahadopi plant to start operation? So we are estimating probably the end of 2025 for the completion of the construction. And then what do you expect? I think I have answered the question about production cost per tonne for Bahadopi. Regarding the Ford motor, will it participate in the project as shareholders? Yes, correct. What kind of cooperation you are planning with Ford Motor? So again, it is for the Pomalaa project. PT Vale is not cooperating with Ford Motor like as party to party. It's like Ford Motor will be entering as the new shareholders in the Pomalaa project. Yes. In the longer term, you will use gas as energy sources for HPAL. So for the HPAL, as Febri mentioned, I think the energy requirement is quite small compared to the pyro, yes. So it is small. And then for Pomalaa, for example, we are pursuing different alternatives. One of the alternatives is to work with the PLN and probably we can buy the renewable energy certificate from them. So it's going to help as well in terms of obtaining the green energy sources, but we are evaluating the other sources as well. But at this point of time, PT Vale and the partner is especially in safer option. And one of the options, as I mentioned, is using the PLN grid.

Just a follow-up question from Eun Young. What do you expect earnings for second half 2022 and compare with first half 2022?

It's tough. We don't know the price. Right now the price, as you know, is a bit under pressure here because of the concern around recession, because of the concern around pressures on the end-use demand, because of the high inflation. But the demand is still strong, actually. To manage the strong supply, is still strong, but I could not really comment on. Hopefully the nickel price stay as it is. And definitely the production in the second half will be higher compared to the first half because of the completion of the Furnace 4 rebuild. If that happens as expected, then probably the earning would be higher. But again, I mean, I could not really -- we could not really control the nickel price.

I saw Dony Setiady from Macquarie was raised hand. You still have questions, Pak Dony?

All good, Lydia. Thank you so much.

Next will be [indiscernible].

First of all, congratulations, Bu Febri, Pak Anto and Bu Lydia, for the great result and the new agreement that [indiscernible]. So I have 3 questions. The first question is related to the CapEx. Can you give me some color of what kind of CapEx trend you will see for the next 2 to 5 years? And my next question is related to the coal that you use. Where does the coal come from? Is it now getting harder to get it? And my last question is, is there a difference regarding the offtaker agreement within the current project and the existing one with Sumitomo? Thank you.

So your first question is related to what? Sorry, just remind me again.

To the CapEx trend for the next 2 to 5 years?

CapEx for the existing operation you mean?

Everything, and productivity also.

Yes. I think on the sustaining CapEx itself for Sorowako operation, it is really to maintain the capacity of our operation. So definitely the spending would be on the mining development, the asset integrity and also for major maintenance of the asset. That will be the major allocation for the CapEx for the next couple of years. I think when we are talking about true sustaining capital, really to maintain the existing operation to be operated and at the capacity. Current capacity, we are aiming for 100 -- between 100 million and 110 million. That's the rate that we are talking. In particular year, we'll be spending more. For example, during the Furnace 4 rebuild, definitely, we'll be spending more than that. But it is a project that we will execute once every 15, 20 years, right? We could not call it true sustaining because it's like the period you execute the same project, it's really a long time. And in addition to that, sustaining capital as we talk as well, we will be spending crude capital for Bahadopi to build the mining in Bahadopi. As I mentioned, the Bahadopi RKEF construction will be completed in 2025. So some of the mining activity will be started next year in order to match the schedule. And definitely it will -- we will spend the CapEx for the Bahadopi mining development. At the same time, we will need to also to inject equity to Bahadopi as well. As Febri mentioned, about 49% ownership on the RKEF, so we also need to inject the equity as well to Bahadopi. We are aiming for 70/30 debt equity ratio. So like it's probably the total CapEx multiply by 30%, multiplied by 49%. That's what we are going to inject as equity in the project. And at the same time, although we are actually only exercise the call option in Pomalaa once the HPAL is contracted, but we also need to develop mine in Pomalaa as well. Probably the timeline for mining development will be the same starting next year, hoping that it's ready when the HPAL is completed there. And then your second question? Your second question is -- sorry, remind me again.

Yes. It is related to the coal. Where does the coal come from? And is it now getting harder to get it?

The coal?

The coal, yes. Who is your seller?

No. The offtaker you mean?

No, no, the source of your coal that...

Do you mean coal supplier?

Yes. I mean, we purchase coal from several suppliers in Kalimantan, primarily. We are using high-calorie coal for our operation as published for the energy sources and the high energy high-calorie coal is only like -- it's about 6,000. It's only available in Kalimantan. We are securing long-term supply. It's not long-term, it's actually 2 years supply with our suppliers. And as for the reductant, so we're using coal in our operation for the 2 purposes. One is for the energy. Second is for the -- second is for the reductant in the kiln operation. For the reductant, we can actually use the lower calorie coal. And at this point of time, we are trying to do some trial to use low calorie coal with lower price in our kiln operation. And it is actually showing positive result. However, we need more time to confirm and to conclude that we can use that coal without any negative impact to the operation.

And do you think, is it getting harder to get the high [indiscernible]?

Yes, I think the complexity is that our demand is considered small, I mean, compared to the other demand from the market. And then probably most of the higher calorie coal is for export anyway. So I think the coal is available to get and actually the government of Indonesia applied the domestic market obligation, right? So supplying coal is part of the domestic market obligation. So as long as domestic market obligation is in place, I think we can always get high calorie coal for our operation.

And for my last question, regarding the offtaker agreement?

The offtaker agreement for the new project, you mean?

Yes, is there any difference between the project and the existing one?

I think the existing one is more or less similar. I mean, the existing operation, the offtaker is the shareholders for the 2 projects, Pomalaa and Bahadopi, we are adopting the same approach. The shareholders will be the offtaker.

And the price mechanism will be same?

The price mechanism will be following the market price. So I think there's a market price for the NPI of ferronickel. There's a market price for the MHP, for example. So the agreement that we have with the partner, we are going to follow the market price.

I think we have one last question from [indiscernible] before we conclude this call today. In the premier, is there a guidance on what will be the exercise price for the participating rights in the Huayou HPAL project? Will there be a cap as a percent of the project CapEx?

Yes, I'll share the burden of answering the question. So the last question, thank you for the questions. It's going to be -- we want it as simple as possible. I think a lot has been complicated enough, so we don't need to complicate stuff. So under this still weak dollar, fixed dollar per tonne of capacity build. So that way, it's very simple. Whatever the capacity build once they achieve the capacity, we pay them certain dollars of capital intensity. However, I'm not in the position to disclose exactly the numbers as we have the numbers, what we agreed on. But now we are in the middle of detailed negotiations of what that number entails. So I mean it's difficult to outline it now as we are still in the middle of negotiations. However, we do have great numbers. What we don't have is the details behind that numbers, what that entails. In principle, it will be all inclusive CapEx, but what is all inclusive are still to be defined. But that's basically the notion. That way it's also more simple and also less risky. So by the time they reach the capacity that we want, you pay certain dollars based on your due diligence and verifications. [Foreign Language] Okay. I think that's it, yes. I think we addressed the questions. Let us know if you need any further clarifications. Thank you.

As there are no further questions, I will now hand the session back to Ibu Febriany Eddy to give the closing remarks. Please go ahead, Ibu.

Thank you, Lydia, and thank you, everyone, for joining the call and I hope you get the information you required and need. And any time you need more information, feel free to reach us out and have a safe week and days for all of you. I hope to see you again in the next quarter call. Thank you. Take care.

Thank you, Ibu Febriany and Pak Anto. Ladies and gentlemen, this concludes our today's conference call. Thank you for your participation and you may now disconnect.