No skinny dipping allowed
Don’t get caught naked on coal price…. Stay defensive
Our global commodities team has downgraded its 2009–11 thermal and coking coal forecasts to US$70–75/t and US$110–140/t, respectively. Although this appears to be getting close to the cost curve, our coal traders believe the spot market could remain volatile. Consequently, we maintain our preference for the following.
Domestic or locked-in price plays over open book exporters.
Thermal over coking coal plays.
Low-cost producers with strong balance sheets.
Locked-in prices rule: China Coal and PTBA top picks
We prefer domestic defensive thermal plays such as China Coal, PTBA and Shenhua, as these companies seem to have less consensus earnings risk because domestic prices are less cyclical and trade off a lower base vs export prices. SAR is also defensive because roughly 80% of its 2009 production is priced at US$111/t.
But don’t forget about Banpu and UNTR
Consistent with our defensive thesis, we like Banpu (due to its 18.1% FCFE generation and 8.1% estimated dividend yield from power plants and liquidity for 2009) and UNTR (due to its strong pricing power, sensible management and attractive valuation of 6x PER 2009E).
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