Indo Coal Outlook, Earnings Buffer by analyst Jayden Vantarakis - CLSA

Jayden revisits the coal sector post recent market correction and has come out favouring coal miners with less leverage to spot for short term. There has been volatility of the Newcastle benchmark and spot prices. However ASPs for Indo coal producers remained relatively stable in 2009

From this perspective, Jayden favours ITMG (TP 56k) as top pick on good cost management and high dividend yield. No changes in TP nor earnings.

Key Points from the report:

· The 2 largest export destinations of Indonesia’s thermal coal are China and India. They represented 27% and 15% of exports respectively in 2010.
· Bukit Asam (PTBA IJ), Kideco (46% owned by Indika Energy (INDY IJ)) and Adaro Energy (ADRO IJ) are the key suppliers to domestic power plants.
· During the 2009 coal price reduction EBITDA margins remained stable. Only Bumi Resources’ (BUMI IJ) EBITDA margin contracted.
· ADRO and ITMG are the listed coal players least leveraged to spot prices under our coverage.
· Spot Newcastle thermal coal is highly correlated with oil prices. Both are key regional and global energy commodities.
· As 25% to 30% of Indo coal producers’ cost is diesel, this correlation provides a buffer to coal price volatility.
· ITMG offers high dividend yield of 6% to 7% over 2011CL to 2013CL. The company hedges diesel and coal on an annual basis, removing spot exposure.