BORN Not a bullish takeaway, but still within target - BOAML

Having met management at our 2011 Asian Stars Conference in Singapore, these are some of our takeaways.

Volume ramp-up slower than expected
BORN is still guiding for 3.6mt coal production/sales for 2011, though output in May was only 285,000t (vs. 0.532mt in 1Q). BORN claimed this was mainly due to sub-optimal mine site productivity (e.g., equipment utilization not at full capacity), and not barging issue. Our FY sales estimate of 3.24mt still looks achievable.

Coking coal prices seen trending down
BORN expects prices to trend down in 2H (consistent with our view) as more Queensland coal hits the market. We understand it has not made any sales to China in 1Q. It believes it can return to China if its price acceptance level improves (still no more than US$240/t). It guided for full-year ASP at US$220-240/t, which looks very conservative given 2Q saw ASPs settled at US$250-300/t.

We maintain our full-year estimate of US$260/t.
9-12% discount because of slightly higher VM and lower CSR While BORN products can be considered premium HCC, its Coke Strength after Reaction (CSR; ie, strength of coke while hot) is relatively low end at 60% (industry average 65%). Its Volatile Matter (the amount of material liberated at elevated temperatures) is mid-range at 26.5% (on average coke feeds seek to achieve 24% VM). BORN now gets a 9-12% discount to the index price for its coal, a much wider discounts amid rising prices – when index price was US$225/t, BORN’s was US$221/t; but when the index was US$330/t, its ASP was US$300/t.

Perhaps it was driven by buyers’ higher bargaining power or BORN’s relatively new products (commercial production only about 2 years). But we don’t think the 9-12% discount will stick when coal price potentially drop to US$200/t in 2012.

Retaining our NPV-derived PO of Rp1,750
The stock already trades at 11% discount to our NPV-derived PO. Given falling coking coal prices, while it is difficult for the stock to outperform, we see limited downside in share price. We reiterate our Buy and PO of Rp1,750.