Indonesia Coal Mining
4Q10 demurrage charge and 4Q10 earnings preview of Indonesian coal mining firms
Downside surprise likely to 4Q10 and FY10 earnings due to demurrage charge: 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(Indo Tambangraya Megah), ADRO (Adaro) and BUMI (Bumi Resources) are affected: According to our industry comparison, 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
INDYs 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%).
4Q10 earnings preview below expectations: Due to the bad weather in 4Q10 which led to lower production volume and higher cost, we believe that Indonesian coal firms will report below-forecasted 4Q10 earnings.
Operations are improving; we maintain our positive view on the sector: We observe that operations are improving across the board for coal 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.
analysis by : JPMorgan