There was an article in the newspaper stating that the government is preparing a presidential decree that would allow mining companies to engage in underground mining operations. According to the newspaper, latest draft of the decree has been submitted to the cabinet secretary, pending on presidential signing.
The news bodes well for Bumi’s Herald Resources (HER AU) that own an underground zinc and lead project, Dairy prima in North Sumatra. Development of this project has been delayed for years due to difficulties in securing forestry permit as the project overlap with protected forest area.
We have, arguably, been conservative as we have not assigned any value to Herald while have incorporated the added debt when calculating our NPV for Bumi Resources. Note that Bumi Resources bought Herald back for US$505m back in Jul08, using US$355m debt. Nonetheless, Herald value has fallen since acquisition the company, along with the collapse in zinc price that fell from US$2,800/t in early 2008 to US$1,500/t recently as market cap now stood at US$60m only. We show on table below how much the value of Herald per share of Bumi Resources assuming a number of scenarios. This could then be added to our base case DEC estimate or Rp1,300/share. Note that the current share price seems to have factored in potential value from herald following recent rally.
Bumi Resources parent company, Bakrie and Brothers (BNBR IJ), announced that it has signed a new restructuring agreement on Rp4.26tn debt with Northstar Pacific, an Indonesian private equity firm. Under the new arrangement, BNBR would make bullet payment of Rp3.95tn in 2012, and remaining Rp310bn payable this year. As we have mentioned in our last note (April 14, 2009), we think investors have massively reduced their positions on the counter while debt problem at parent company has gradually been resolved hence there is less selling pressure.
We continue to see significant balance sheet risk and there has been no change on the corporate governance issue. We retain our SELL rating.
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