CLSA Indo Tambang (ITMG IJ), Healthy Choice

Research Today: Indo Tambang (ITMG IJ), healthy choice

Our resource analyst Olie looked at Indo Tambang Raya (ITMG IJ) and believes that it is a healthy choice. To be on the conservative side, we cut earnings forecast by 20%and 17% in 2009 and 2010 respectively, taking into account higher cost assumptions. We have raised cost assumptions after we learn that ITMG will re-start mining in Kitadin using own mining fleet rather than contractors. BUT ITMG is our top pick in the coal space. We have a BUY rating with TP of Rp13,900 (lowered from previously Rp16,600).

Reasons why ITMG is good for your health:
Dividend play. ITMG has a policy to distribute 60%, of earnings as dividend. Parent Banpu relies on dividend from ITMG. Expect 15% yield this year.
Corp governance: parent ranks near top of our CG survey.
Defensive nature: (1) portion of contracted tonnage, around 54% now, at around US$80/t (2) strong cash flows (3) strong cash balance.
Lower fuel cost: ITMG would be key beneficiary. Expect total cash cost, incl. royalty, to fall from US$53/t in 08 to US$48/t this year.
Upward adjustment on reserves? ITMG uses US$45/t for reserve statement. This is conservative. ITMG has total resource of 1.5bn tonnes and portion of this can be converted into reserves.

Key catalyst for the stock: (1) dividend announcement (2) fixing the price of remaining tonnage (3) result announcement (4) achieving production assumptions (5) new reserve estimates, possibly announced end of 1Q09.