Wednesday, March 2, 2011

Indonesia Coal Mining

by JP Morgan

Indonesia Coal Mining4Q10 demurrage charge and 4Q10 earnings previewof Indonesian coal mining firms

• Downside surprise likely to 4Q10 and FY10 earnings due to demurragecharge: We believe that the demurrage charge could potentially affect 4Q10 and FY10 net incomes of Indonesian coal companies. ITMG reported US$10MM of demurrage charge in 4Q10, which amounted to 16% of 4Q10 operating profit. As bad weather had affected the operations of mines, our channel checks indicate that ships had been waiting for coal shipments at the ports across Kalimantan.

• ITMG, ADRO and BUMI are affected: According to our industrycomparison, the effect of the demurrage charge varies across companies,with Kalimantan producers being affected more than Sumatra producers.

We believe ITMG, ADRO, and BUMI are affected the most, while the demurrage charge is negligible for INDY and PTBA. ADRO is likely to suffer US$60MM of demurrage charge in FY10E vs. US$18MM(estimate) for BUMI and US$23.5MM (actual) for ITMG. INDY indicated that its demurrage charge is near zero, while PTBA indicated that its demurrage charge is only about US$1MM. The reason for INDY’s very good performance is the availability of excess capacity that has enabled the company to ramp up production to meet its target despite
unfavorable weather.

• 5%-7% downside risk likely to 4Q10 earnings: For companies that are affected, we expect the demurrage charge will result in a 5%-7% cut in consensus 4Q10 earnings forecasts. For full-year FY10, the most affected is likely to be ADRO (11%), followed by ITMG (6%).

• Operations are improving; we maintain our positive view on thesector: We observe that operations are improving across the board forcoal companies and believe that starting 2Q11, Indonesian coal companies could start reporting strong earnings. With this, we maintain our positive view on the Indonesian coal mining sector.

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