NISP Reinitiating Coverage on Adaro Energy

An Overlooked Giant
Adaro Energy is an integrated coal mining company with the largest single open pit mine in Indonesia with around 40mn coal production capacity. Adaro has managed to re-price up its coal selling price as compared to the previous pricing scheme that less benefited from price increase. Going forward, Adaro aims to double its production capacity within five years, hence has begun to prepare several infrastructures development to achieve such target. As such, this giant is currently ready to compete with other coal producers in Indonesia and we reinitiate our coverage on Adaro with a Buy recommendation.

Largest single pit coal producer with low strip ratio
Adaro operates the single largest open pit coal mining in Indonesia with resources reaching 3.5bn tons and coal reserves of 930mn tons. The company’s production capacity grew 13.4% CAGR over the past 10 years to 38.5mn tons in 2008 from 10.9mn tons back in 1998. In addition, Adaro also has a competitive cost structure as its stripping ratio was as low as 4.25x in 2008 or way below domestic average of 8.1x. This is possible due to the company’s unique platform mining site where its coal seam lies on a wide and shallow platform and forming like a huge river instead of a deep and crater formed coalmine.

Envirocoal, not just an ordinary coal
The company produces a unique low sulphur and low ash coal, named Envirocoal that managed to pass the very strict emission regulation of the European market without the need of further blending. This will provide company with access and opportunities to serve countries that have strict environmental concerns.

New projects will provide strong growth
Adaro aims for 80mn tons of coal production in 2014F by boosting its production both at Tutupan and Wara sites. To support such target, Adaro plans for additional infrastructures such as building 68km of overland conveyor that will connect the company’s site with Kelanis barge loading port. This conveyor is electric based, thus, Adaro also plans for 2x30 MW power plant that will run the conveyor. So far, Adaro has a proven track record for increasing its production volume by constructing new facility without any meaningful obstacle. In 2006, the company’s hauling road facility managed to boost the production volume by 28.8% YoY as it sped up transportation from mining site to loading port..

Reinitiate with a Buy
Earlier this year, Adaro managed to solve its locked selling price issue, which was reflected in the company’s higher ASP at US$61.7/ton in 1H09, 29.1% YoY higher from US$47.8/ton in 1H08. In the mean time, Adaro’s low emission coal characteristic will provide opportunity to expand its customer base to countries with strict emission regulations. This should bode well for the company’s production expansion plan where we foresee Adaro’s production to grow by 12.0% CAGR to 76.9mn tons in 2015F from 39.0mn tons in 2009F. In addition, the possibility for higher domestic demand should also benefit Adaro given its position as the largest domestic coal contributor with 18.5% market share. As such, we reinitiate our coverage on Adaro with a Buy recommendation with a DCF-based target price of Rp2,000/share.