Having met management at our 2011 Asian Stars Conference in Singapore,
these are some of our takeaways.
these are some of our takeaways.
Volume ramp-up slower than expected
Borneo Lumbung Energy - BORN is still guiding for 3.6mt coal production/sales for 2011, though output in
May was only 285,000t (vs. 0.532mt in 1Q). BORN claimed this was mainly due to
sub-optimal mine site productivity (e.g., equipment utilization not at full capacity),
and not barging issue. Our FY sales estimate of 3.24mt still looks achievable.
Coking coal prices seen trending down
BORN expects prices to trend down in 2H (consistent with our view) as more
Queensland coal hits the market. We understand it has not made any sales to
China in 1Q. It believes it can return to China if its price acceptance level
improves (still no more than US$240/t). It guided for full-year ASP at US$220-
240/t, which looks very conservative given 2Q saw ASPs settled at US$250-300/t.
We maintain our full-year estimate of US$260/t.
9-12% discount because of slightly higher VM and lower CSR
While BORN products can be considered premium HCC, its Coke Strength after
Reaction (CSR; ie, strength of coke while hot) is relatively low end at 60%
(industry average 65%). Its Volatile Matter (the amount of material liberated at
elevated temperatures) is mid-range at 26.5% (on average coke feeds seek to
achieve 24% VM). BORN now gets a 9-12% discount to the index price for its
coal, a much wider discounts amid rising prices – when index price was US$225/t,
BORN’s was US$221/t; but when the index was US$330/t, its ASP was US$300/t.
Perhaps it was driven by buyers’ higher bargaining power or BORN’s relatively
new products (commercial production only about 2 years). But we don’t think the
9-12% discount will stick when coal price potentially drop to US$200/t in 2012.
Retaining our NPV-derived PO of Rp1,750
The stock already trades at 11% discount to our NPV-derived PO. Given falling
coking coal prices, while it is difficult for the stock to outperform, we see limited
downside in share price. We reiterate our Buy and PO of Rp1,750.
source: Merrill Lynch