UBS Indo Tambangraya Pricing Power

Indo Tambangraya Pricing Power

(Buy; ITMG IJ; Rp9,700; TP Rp13,400, prev Rp14,552) In spite of the recent downturn in coal prices (-11% YTD), Indo Tambangraya (ITMG) has successfully priced 57% of its 2009 coal sales volume (c.11mn tons) at c.US$80/ton. The price is better than FY08 average of US$74/ton. ITMG has also announced a reserves and resources upgrade to 312mn tons (+31%) and 1,675mn tons (+12%), thus extending its mine life to 15 years. Under the premise of this positive update, we maintain our BUY recommendation for ITMG with TP of
Rp13,400.

Average sales price (ASP) still improving. As ITMG already priced in 57% of its FY09 coal sales at c.US$80/ton, we believe the ASP will achieve US$78/ton for FY09 despite recent downturn in coal price. Barlow Jonker Index now stands at US$69/ton, already down 11% for the year and 63% from its peak in 2008.

Production cost will stabilise. We raised our production cash cost estimate for FY09 and FY10 by 6% on the back of higher mining contractors’ fee and higher strip ratio amid declining fuel price. However, as ASP is still improving, margin will remain robust.

Mine life extended. ITMG has just upgraded its coal reserves and resources to 312mn tons (+31%) and 1,675mn tons (+12%), thus extending its mine life to 15 years, assuming p.a. production of 20mn tons. Increase in reserves is mostly from Indominco mine (+66mn tons) which contains relatively high quality coal with CV of c.6,300. The reserves and resources evaluation was conducted by independent mineral specialist from UK and Australia and already complied with “The Australasian Code for Reporting Mineral Resources and Ore Reserves” (JORC Code).

BUY, TP Rp13,400. We revised our target price to 13,400 as we assumed higher production cost that reduces our earnings forecasts for FY09-10 by 10% and 14% each respectively. We derived our target price using DCF methodology with WACC assumption of 15.5%. We reiterate our BUY call.