Bayan Resources - Resourceful (BYAN-BUY-IDR17,000-TP:IDR19,500) - Bahana

ASP upgraded 7%; Minority interest adjustment with earnings +34%
ASP of USD97.2/ton achieved in 1Q11 is not only highest in the sector, but it was way above BYAN’s guidance of USD85-87/ton. Though BYAN has not revised their ASP guidance, the company has disclosed contracted sales of 14.5m tons (96% of production), of which 80% have been locked in at USD97.36/ton while 20% is based on floating rate. Thus, we feel comfortable raising our ASP 7% to USD95/ton. We also adjust our minority interest calculation with the net impact of 34% higher earnings in 2011 (exhibit 6).

2011-2013: Strong production growth
BYAN is currently producing at least 25% below its capacity, and in line with the management’s guidance we expect optimum capacity of 20m tons reached by 2013, representing a production CAGR of 21% per annum, the third highest in the sector (after PTBA and HRUM). Furthermore, in order to increase its capacity above 20m tons from 2014 onwards, BYAN plans 2011-12 capex of USD180-200m, having spent just USD8.5m in 1Q11.

Coal up-gradation to start: A key catalyst
BYAN currently supplies 1m tons (7% of production) of its 4,217kcal coal to “White Energy”, responsible for upgrading its coal to 5,900-6,000kcal coal. However, as White Energy’s coal up-gradation plant is the first of its kind in the world, there were some technical and engineering issues in dust extraction system and production, handling and cooling system. This failure to produce caused BYAN to book IDR117b (about USD13m) loss in 2010. Based on our conversation with White Energy, these engineering issues will be resolved by end of September 2011. However, we estimate loss of around IDR88b in 9M11 with about 200k tons of coal up-graded in full-year 2011. In 2012-2014, 1m tons or the plant’s optimal capacity should be up-graded. Thus, in 1H12, White Energy expects to construct 4 new coal up-gradation plants, which will take 2 years to complete and be operational latest by end 2014. Therefore, from 2015 onwards, we assume coal up-gradation to rise to 5m tons (22% of production).

Possible huge valuation upside on coal upgrades & new concessions
BYAN has an agreement with White energy for a maximum of 15m tons, which if it can occur post 2015 would translate to a huge upside potential for valuation. Separately, each coal up-gradation plant requires 1.5m tons to produce 1m tons of upgraded coal with a fixed operational cost of USD10-12m per annum, which have been taken into account in our model. While we do not have production guidance for the 9 new concessions to be acquired in June 2011 for about USD200m, we understand that some of these mines are already in production. Though production maybe small initially, we expect a gradual ramp up as the new mines have reserves of about 410m tons, doubling BYAN’s existing reserves. Thus, we provide 20% premium to our revised DCF equity value of IDR16,200 and arrive at TP of IDR19,500. BUY.