Adaro Energy: Key takeaways from site visit (ADRO, Rp2,500, Buy, TP: Rp2,800)

After analyst and lunch meeting session with Adaro’s top management on Wednesday, we directly joined the Site tour to Tutupan and Wara mine operations. Our site tour was led by Alastair Grant, Marketing Director of Adaro Energy. Some key takeaways are as follows:
According to senior operation mine key persons, Tutupan and Wara coal production on average have reached 120k tons and 45k tons per day respectively in 2Q11. This will translate into 11.5-12.0Mt coal production in 2Q11 (about 8.5%-13% qoq growth), higher than our previous expectation. Official operation figures will be announced end of this month.
Weather has been normal and dry. In June and July, Tutupan and Wara coal production were expected to reach 4.0-4.2Mt and 0.5-0.6Mt per month respectively. So it looks that 47-48Mt coal production target this year should be achieavable if weather remains good until end of year.
Despite of some delayed on new fleets deliveries from Komatsu and Hitachi (around 20-30 fleets) for 6 months, Adaro ensures that it will not affect its production target this year.
As of May – June 2011, fuel price has jumped more than US$90cent/litre. We expect it could reach US$1/litre. Following higher strip ratio, Adaro indicated that blended cash cost (excluding royalty) in 2Q11 will be around US$38-40/ton (Tutupan was about US$50/ton and Wara about US$20/ton), relatively in line with our FY11F of US$39.7/ton.
Kelanis port’s capacity is being upgraded from 55Mtpa to 80Mtpa and it is expected to complete by 2H12 with estimated capex of US$100mn.
Barito river capacity currently is about 70Mtpa where 46-48Mtpa alone come from Adaro. Alastair mentioned that Barito’s maximum capacity could reach 200Mtpa, so there would be no constraint for Adaro to reach its 80Mtpa target in the future.
Tutupan mine currently has reached around 200m depth elevation from surface while Wara mine is about 50m depth. Dumping distance in Tutupan is getting more challenging from currently about 4-5km will increase up to 6-7km (vs Wara currently about 2km) following the operation expansion to northern part. OPCC project is estimated could save US$0.5-US$1/ton.
Adaro’s Bio Diesel Fuel (BDF) pilot project with Komatsu and Uniter Tractor will take 2 years before it commences commercially. This project produces 1.2tons of Jatropha BDF per day (B-20: combination of 20% jatropha crude oil and 80% solar) which is used for 3 units of Komatsu dump truck. Currently most of the jatropha crude oil is bought from third party in Sumbawa, Sumatra. Its production cost is US$1.5/litre relatively more expensive than solar due to economic of scale. In the future, the project will expand up to about 30-40tons of BDF production per day and use it for 100 units of Komatsu dump truck.
Flying over to Taboneo, around 20vessels (Panamax-Capesize) were seen queuing for coal loading indicating export demand remains robust. Adaro ensure there is no more demurrage since March 2011. China and India demand will remain robust in 2H11F.
We maintain our Buy rating on ADRO. Currently ADRO is traded at 16.0x-12.1x PER11F-12F