CLSA Coal update

Coal update

Adaro Energy – 4Q operating activities: No surprise

The company reported a total production of 38.5m tonnes, up by 7% YoY, in line with our estimate. Sales volume was higher at 41.1m tonnes as there was some 1.3m tonnes third party coal sold by Coaltrade, a coal trading subsidiary while the company also sold more from inventory that was down by 75% YoY in 4Q08. Overburden removal in FY08 was up by 33% YoY to 159m bcm, while it was up by 29% YoY in 4Q08, suggesting additional capacity at the mine. The company maintained its guidance for 42-45m tonnes production in 2009. Our production forecast of 40m tonnes for this year is at the conservative then.

ASP for 2008 reached around US$39/t, just slight below our forecast of US$40/t. The company maintains its guidance of ASP of US$52-65/t in 2009 as compared to our estimate of US$58/t. The company stated that it has contracted and priced 70% of its volume in 2009.

We rate Adaro as Outperform with target price of Rp925. Adaro trades at par with domestic peers though it is at 25% discount to regional ones. Adaro, in our view, lacks the defensive traits such as cash-rich-debt-free balance sheet and high dividend yield that peers like ITM offers.

Thermal coal market - More Chinese imports?

As reported by National Business Daily, China Resources Power (0836 HK) plans to increase imports of coal as domestic coal-power negotiations remain in stalemate and spot prices in China are close to quotations on the international market. CEO China Resources Power was quoted saying that the company might increase imported coal to 50% of requirement. Note that compared with the other big five independent power producers, CRP has more power plants in coastal areas. Note that at the end of Jan09, domestic benchmark thermal coal price stood at HK$715/t at Qinghuangdao Port while Australian Newcastle was at US$82/t or HK$635/t plus US$8/t for freight.

CRP has about 10GW capacity, so annual coal demand is around 30m tonnes. If CRP imports half its requirement, would equate to 15Mt or around 2% of the seaborne thermal coal market, hence positive. However, it is probably too early to conclude as CRP did not do much import last year.