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Rabu, 22 Juni 2011

Sentiment continues to be on the soft side - CLSA

Some sort of rebound is on the cards today. However, sentiment continues to be on the soft side. Without a clear catalyst and likely binary outcome of QE3 (or no QE3) on its way, most not willing to take the risk and swing the bat at the moment. Lightening exposure to resources space is the ongoing theme.

Despite weakness in the coal names, thermal coal prices have been holding up very well. Interesting to note that Itochu has announced a deal to purchase 20% of privately owned US based Drummond Coal's Columbian coal interests for US$1.52bn. The transaction highlights increasing coal demand in Japan which is likely to keep regional markets buoyant. And at the same time, we expect Chinese buyers to come back to the market in a big way in the 2H.

A few key takeaways on the deal:

· The deal includes marketing rights for coal sold into Japan.

· Drummond is one of the top 2 producers in Columbia with 27Mt produced in 2010.

· Columbia is the world's 5th largest coal exporter, with production mainly to Europe and some to the USA. 2010 saw first sizeable exports to Asia with the 2 largest producers including Drummond exporting 15% of production. Prior year was close to 0.

· A transaction in May by Australian listed New Age Exploration (NAE AU) values an open cut reserve base at US$0.5/t - US$1/t with a future royalty of US$1.5/t payable on production. The asset acquired by NAE is in the same region as the one Itochu is acquiring a stake in, although it is not yet in production.

· Columbian coal energy content is higher than typical Indonesian producers with 6,000+ kcal/kg but has similar low pollutant properties. The coal is particularly suited to Japanese power generators, however the Japanese are searching far afield as the 14,000km freight distance is approximately twice that from Australia.

Here in Indonesia, our weather condition has substantially improved last few months. Two biggest contractor both reported good May operation figures. UT's Pama coal production rose 14% MoM to 7m tonnes in May (5M11 was 32.4m tonnes (+3% YoY), 40% of our FY11E of 82m tonnes) and Dulta Dunia Coal production rose 3.7% MoM to 2.8m tonnes in May (Total 5M11 production was 13.3m tonnes) – seel below for more details. We expect acceleration in production in the 2H as we head into the dry season.

BUY Borneo (BORN IJ), Harum (HRUM IJ), and Bumi Resources (BUMI IJ).

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