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Rabu, 15 Juni 2011

ADRO Site visit: Tutupan and Wara coalmines - Bahana

36,000ha concession with total reserve close to 1b tons
We recently had the opportunity to visit Adaro Energy’s (ADRO) Tutupan and Wara coalmines (the only two producing coalmines at present) at Tanjung Wara (exhibit 6), South Kalimantan. Within the 36,000 ha concession area, we visited two open-cut pits of Tutupan with total reserve of 552m tons (Calorific value: 5,900) and Wara with total reserve of 386m tons (Calorific value: 4,950). Note that while the Tutupan site has been in operation since 1999, Wara just started its commercial operation in 2H10, contributing around 2.5m tons (5.9%) to 2010 sales volumes of 42.5m tons.

SIS controls 25% of 2010 production; low stripping ratio
During our visit, we saw contractors doing their work activities which involved overburden removal, extraction process and coal transportation with dump trucks to stockpiles. Almost 40% of 2010 mining activities (exhibit 12) were provided by Pama Persada, subsidiary of United Tractors (UNTR-BUY-IDR22,850-TP:IDR28,500). Other mining contractors are Sapta Indra Sejati (SIS; 25%) Bukit Makmur Mandiri Utama (BUMA; 19%), Rahman Abdijaya (RA; 14%) and two other small contractors (3%). According to Christopher Pitch, marketing contracts manager, ADRO plans to enlarge its SIS mining contracting unit in the future, allowing an optimum vertically integrated business model. Note that the current average stripping ratio for Tutupan pit was 5.5x, while Wara’s lower calorific value stripping ratio stood at 2.7x (Exhibit 10 & 13). ADRO’s low stripping ratio translated to 2010 stable production volumes of 42m tons (+4% y-y) despite heavy rainfalls.

Expansion on Kelanis Barge terminal capacity to 80m tons
From the stockpiles within the concession area, ADRO’s coal would be transported through 80km haul road (exhibit 17) to one of the largest inland river bulk ports in the world, Kelanis Barge Terminal, located by the busiest and largest Barito river (exhibit 20). At the Kelanis Barge Terminal, ADRO’s coal would be crushed, stockpiled and loaded through two conveyor systems onto the barges. Going forward, ADRO plans to enlarge its bulk terminal capacity by 60% to 80m tons, in line with the management’s plan to double its current production from around 40m tons to 80m tons.

2Q11 less rainfalls = improved production going forward; BUY
At the site, we learned that the area has been experiencing less rain in 2Q11, suggesting that production will improve going forward. Therefore, we retain our positive view that ADRO would be able to achieve our 2011 production target of 46.5m tons (1Q11 production volume: 10.6m, 22% of our full-year estimate). Additionally, ADRO has embarked on several projects in 2011 that would be supportive of its medium-term growth such as the acquisition of three potential coal deposits, development of 2x30MW mine-mouth power plant for internal use and increased capacity on the Kelanis Bulk Terminal. As such, we maintain our DCF-based target price of IDR2,950 on ADRO. BUY.

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