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Selasa, 29 Januari 2013

Indonesian coal Low rank ban proposal scrapped


Event
§ Indonesia's Energy and Minerals Resources Ministry (ESDM) has scrapped its proposed 2014 ban on low rank coal, according to a Bloomberg report (24 January, 2013), quoting ESDM's coal-business director, Edi Prasodjo. The key reasons cited for the scrapping of the proposal were: 1) the lack of
commercially viable technology for upgrading low rank coal; and 2) lack of domestic demand to absorb excess (low rank production.

Impact

§ Outcome consistent with expectations. The outcome is consistent with our (and market) expectations; however an actual decision was not flagged prior
to the announcement. The ruling is consistent with our view the government is looking to restore confidence in the sector from a regulatory perspective and
that proposed regulations are typically either watered down or fail to be implemented altogether - the proposed coal export tax a key example.

§ Nationalistic regulatory concerns to remain ahead of 2014 election. We expect regulatory concerns to remain leading up to the 2014 election, given rising resource nationalism reflected by the 2012 foreign divestment regulation. Another area of uncertainty remains the terms for converting CCoW concessions to IUP concessions in relation to royalties, tax rates and other key operational requirements for coal producers.
§ Listed coal sector mostly locally-owned. We note most of the listed coal producers are locally owned, limiting the direct impact of nationalistic policy
changes. ITMG is the only major foreign-owned coal producer (65% owned by BANPU), however its local listing and local investor (PMDN) status further
adds to confusion of whether it is actually deemed a foreign entity for the purposes of the foreign divestment regulation.

§ Decision positive for sentiment, but investor focus still on pricing.
Naturally, we expect the market to react incrementally positively to the news; however, the primary focus we believe will remain on the pricing outlook for
seaborne coal, and more specifically China demand. We maintain a cautious view on the sector given supply remains strong relative to demand growth as reflected in our US$90/t 2013 Newcastle Benchmark price (v US$94/t on the forward curve).

§ Buy low cost producers, PTBA top pick. We continue to prefer low cost producers with strong balance sheets given the potential for prices to remain
rangebound. PTBA is therefore our top pick, trading at 11.3x FY13E PER (ex cash), benefitting from strong 3yr production CAGR of 20%, strong domestic
exposure (~55%), 2bt reserves, strong balance sheet and M&A potential. Importantly, recent visits to Indonesian coal mines earlier this week suggest inventories have declined sharply since 4Q12, helping to restore a tighter
supply/demand balance heading into 2013.


me @ LOTS Trading Club (LTC)

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