Bumi Resources (Outperform) - US$134-135/t settlement for JFY11? - MACQUARIE RESEARCH

Event
§ Platts reports that certain Japanese Power Utilities (JPU) have agreed to a JFY11 settlement at US$134-135/t for Bumi's high-quality KPC coal, which is a premium to the Australian-Japanese settlement of US$129.85/t. This is consistent in that Indonesian premium coal will settle at a premium vs. Australian coal given a freight advantage.

Impact
§ Benefiting from the freight differential. We believe that Bumi's US$4-5/t settlement premium over Xstrata represents the cheaper freight rates from Indonesia to Japan vs. Australia to Japan. We understand that freight rates from Indonesia are typically roughly +/-US$5/t cheaper than freight rates from Australia. It is also worth noting that, in 2010, Bumi also managed to secure US$104/t pricing vs. Xstrata at US$98/t.
§ Relatively high Japanese exposure. We believe the company is well positioned given its relatively high exposure to Japan, with 20-25% of sales going to Japan vs. around +/-10% for the listed peers. Therefore, we remain relatively comfortable with our US$92/t ASP for 2011, leading us to be about 7-8% above consensus.
§ On-track to achieve 67mt production target. We understand that the company has produced 14.2mt (down 11% QoQ, especially given the relatively dry season period during 1Q10). We expect production to gradually ramp-up as we enter a dryer operating period.
§ Refinancing and deleveraging are the key catalysts. This is especially true given the upcoming US$600m repayment option of the first tranche of the CIC loan in October this year (followed by the second and third tranches in October 2012-13). We also believe that the company is looking into the possibility of converting the US$1.9bn debt into equity. Further, we believe that the recent rating outlook upgrades by Moody's (from negative to stable and a Ba3 rating) will enable the company to refinance its current 15-16% effective interest cost vs the market to 7-8% p.a.

Earnings and target price revision
§ No change.

Price catalyst
§ 12-month price target: Rp3,700.00 based on a Sum of Parts methodology.
§ Catalyst: Increasing production and coal price; refinancing of the high-cost CIC debt.

Action and recommendation
§ We see upside to the current share price (in line with our Outperform recommendation) given the company's high leverage to the coal price and attractive valuation (but beware of governance risks). It is currently trading at an 11x PER on our 2012 forecast vs. the historical sector average of 13x.