Macquarie Bumi Resources (BUMI IJ) (Outperform) - US$104/t settlement for JFY10

Event

Bumi Resources announced that its coal mine subsidiary, KPC (not listed - 70% owned) has concluded thermal coal settlement for JFY10 at an FOB price of US$104/t (up 44% YoY), which is a premium to Xstrata settlement of US$98/t. Further, it also highlights that it is on track to exceed its ASP guidance and our 2010 forecast of US$67/t FOB.

Impact

Benefiting from the freight differential. We believe that Bumi's US$6/t settlement premium over Xstrata represents the cheaper freight rates from Indonesia to Japan vs. Australia to Japan. We understand that typically freight rates from Indonesia are roughly about US$6-8/t cheaper than freight rates from Australia. It is also worth to noting that back in 2008, the company also managed to secure US$132/t Japanese settlement, a premium vs. Xstrata's settlement of US$125/t. Upside risks to our US$67/t forecast for 2010. We believe that the price settlement will represent a benchmark for the company's negotiation with other customers. Exports to Japan represent roughly 25% of the company's sales volumes historically. We therefore see upside risks to our 2010 ASP forecasts of US$67/t towards US$69-70/t and 10-12% potential upside to 2010 earnings. Improving execution. We believe that the company is on track to achieve our 2010 production forecast of 66.5mt, especially given the company achieved a 65–70mt run rate in 4Q09. Further, we forecast production to continue to increase to 75mt in 2011 and 89mt in 2012 and reach 100mt in 2014. Valuation also looks attractive, trading on 10.2x and 6.5x 2010/11 PER given the ASEAN sector trades on 13x in 2010E and 8x in 2011E. Further, the company's share price has also been lagging both the Indonesian market and its coal peers by about 20% and 20-25%, respectively.
Action and recommendation

We reiterate our Outperform recommendation on the stock with a Rp3,075 price target given its high leverage to coal price, robust production growth outlook, and attractive valuation. However, we continue to highlight the company's corporate governance risks and therefore think that Tata Power (TPWR IN, Rs1,382, OP, TP: Rs1,651) to be a better way to play coal price leverage.