by Trimegah Securities
Accelerated 3Q11 Production
As a result of lower than expected production level in 1H11, HRUM 9M11 coal production (including Santan Batubara) was only representing 71% of our 2011 estimate. Nevertheless, 3Q11 production has showed a significant improvement, which was mainly driven by the normalized weather, additional mining equipment arrived in 2Q11, and the installation of new crushing plant and interconnecting conveyor.MSJ managed to ramp up its average monthly production of 758k tons in 3Q11 and it is expected to sustain in 4Q11. This should offset the lower production from Santan and the TBH’s delays, in our view. We raise MSJ production by 9,7% to become 7.9mn tons in 2011, cut Santan production to 2.0mn tons (in line with management’s guidance), and nullify TBH’s production due to the permit issue.
Going forward in 2012,
we maintain our forecast on MSJ production, as we believe that most of the infrastructures developments are already in place. The management has allocated USD30mn to finance expansion initiative this year (around 50% has been realized until 9M11), which will be used for hauling road development, buy more barges and tug boats, develop port in TBH, and build 4th coal crusher. The completion of the crusher will bring MSJ’s inbound capacity to 20.0mn tons/annum. For Santan, management guides that the additional equipment needed to support the production increase would be deliver in early 2012. As such, we decide to cut our forecast on Santan production by 20% to become 2.8mn in 2012. We also cut TBH production to 1.2mn tons to reflect our conservative view as the Land Use-Borrow Permit has not yet been issued. As a result, we are currently expecting total HRUM’s production volume (MSJ+TBH+Santan) at 13.0mn tons in 2012, 6.9% lower than our initial estimate.
Santan’s Exploration to Continue
Management revealed that the exploration on Uskap Block is expected to finish by the end of this year, followed by an announcement of JORC resources and reserves in 1Q12. Based on Indonesian Coal Book data, the initial drilling program conducted in 2004 by Australian based, MineConsult, showed that Uskap Block owned 231.1mn tons of resources and 8.1mn tons reserves. Should it managed to comply with the JORC Code, it will increase Santan Batubara’s amount of reserve by 47.6%.
Maintain HOLD, TP of Rp8,000
We maintain our HOLD recommendation for the counter, as we believe that the market has fully pricing in the company’s superior growth. We incorporate our lower coal price assumption, reduce our coal production outlook in TBH and Santan Batubara, and raise our cash cost assumption. All of these resulted in 14.2% and 0.3% lower in FY12-FY13, respectively. We continue to use P/E methodology to derive HRUM’s price target in order to catch up its near term growth. Our price target now is based on lower multiple target of 11x vs. 13x previously, to reflect the current macro uncertainty.
Fluctuation of global coal prices, delays on TBH expansion due to the permit issue, and company’s low reserves live