Our analyst Olie looked at Adaro (ADRO IJ). BHP is forming a JV with ADRO to develop Indonesia’s first coking coal project. ADRO would pay US$350mn for the 25% interest in the JV. This translates to US$1.8EV/tonne resources, compared favorably to an average valuation of Indonesian coal companies at US$2.0/tonne. ADRO would be the only Indonesian coal company with metallurgical coal exposure while confirming its strategic direction to acquire world class deposit rather than operating mine. ADRO remains our preferred pick in the sector. BUY.
We understand that the EV/resources comparison is not really apple to apple. The multiple for the listed Indonesian coal companies have incorporated investments on the mine site with production while ICP is still in development. However, it is important to note that coking coal is (1) much harder to discover (2) priced higher and thus higher margin (3) has stronger demand growth potential. Our back of envelope estimate, assuming current contract price for hard coking coal of US$200/t, total costs of US$70/t, and tax of 30%, would translate to US$25m in earnings contribution for ADRO, around 4% of forecasted 2011 earnings.
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