Maintain Overweight on the sector. A local newspaper reported yesterday that the Indonesian government might reduce royalty payments for lower-calorie coal production (less than 5,000 kcal/kg ADB), especially from the big producers(CCoW holders), quoting Mr Bambang Setiawan who is a Director General at the Ministry of Energy and Mineral Resources. These CCoW holders now pay 13.5% of their annual sales as royalties regardless of the quality of coal sold. This is higher than the 3% royalty paid by producers of low-quality coal with licences issued by local governments (KP or IUP), and even higher than the 7% royalty for high-quality coal by these KP or IUP licensees.
This royalty incentive, if implemented, should have little impact on coal producers in the next 1-2 years. However, such a measure would be positive on their long-term outlook, especially when DMO is in effect and the demand for low cal-coal domestically and in Asia grows. We are maintaining our forecasts and target prices for coal producers under our coverage. Adaro remains our top pick in the sector. New royalty. The new royalty would likely be divided into three tranches, according to the newspaper: 1) 9% for 4,600-5,000 kcal/kg ADB; 2) 7.5% for below 4,600 kcal/kg ADB; and 3) 8.5% for underground mining.
The current royalty structure leaves the larger producers with little ability to compete with miners with local (KP or IUP) licences in supplying low-calorie coal to domestic utilities, prompting the producers to focus only on high-quality coal production and exports.
Little impact in the near term. We emphasise that there would only be little impact from this incentive in the near term, if implemented, especially as there is very little production of low-cal coal in Indonesia currently. The positive impact would only be felt in the future, when there are more low-cal coal deliveries. Earnings accretion would be subject to future demand and producers’ output, as currently the big producers as well as consensus remain conservative in their projections for low-cal coal production.
Maintain Overweight on the sector. This royalty incentive, if implemented, should have little impact on coal producers in the next 1-2 years. However, the impact could be positive in the long term, especially when DMO is in effect and the demand for low cal-coal domestically and in Asia grows. We are maintaining our forecasts and target prices for coal producers under our coverage. Adaro remains our top pick in the sector.
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