ITMG:No production uplift in April - Mandiri

Indotambang produced 5.3Mt of coal for 1Q11, 20.8% of its FY11 target with production expected to accelerate in the following quarters. However, as per latest Indonesian Coal Report (ICR), April production was still at a slow pace of 1.55Mt. To make up with the slow 4M production, ITMG has to produce an average of 2.3Mt per month in the next 8 months, or an increase of 32.3% from average monthly production in the last 4 months. Limited specific catalyst make ITMG share price performance to depend on industry sentiment i.e : coal price. We have a Buy rating, as we are bullish on coal price and relatively inexpensive PE compared with peers.

Cost eased on qoq basis. Cash cost (Mandiri calculations) fell 2.6% qoq to US$64.7/ton on lower stripping ratio in Indominco from 17.3 in 4Q10 to 12.0 in 1Q11. As ASP was up 12.5% qoq to US$87.3/ton, operating profit jumped 81.9% qoq despite 7.5% qoq lower production to 5.2Mt in 1Q11. Compared with our FY11 estimates, cost has risen faster than ASP, therefore despite 1Q11 production was 20.8% of FY11 estimates, 1Q11 operating profit was only 18.3% of our FY11 estimates. Unless we see easing oil prices vs 1Q11 which averaged US$35/ton (crude oil, CL1), we might see earning downgrades as ITMG FY11 ASP guidance was only US$87-88/ton.

Still no improvement seen in April. Based on Indonesian coal report, Indominco produced 1.2Mt in April (average monthly 1Q11: 1.3Mt), Jorong 0.5 Mt ((average monthly 1Q11: 0.5Mt), while Trubaindo 0.3 Mt ((average monthly 1Q11: 0.4Mt). Unless weather improves, 25.0Mt FY11 production guidance will be a target difficult to achieve.

On the flip side, coal price is firming. The State Grid, China’s state-owned power distributor, reportedly said this week that 10 of its provincial-level power grids were suffering from severe shortages due to the drought’s impact on hydroelectric generation, including Shanghai and the heavily populated southwestern Chongqing region. China could face a summer electricity shortage of 30 gigawatts — the most severe power shortfall since 2004, the company said

No company specific catalyst seen. With lack of progress in renewing their coal resources, ITMG share price performance depends on sentiments on the coal sector. Ytd, ITMG still suffered from -8.1% return, while JCI posted +2.1% return. Recently improved share prices performance of Bumi Resources, could be a drag to ITMG, as ITMG has been seen as an alternative coal proxy after Bumi was mired in tax and debt problems. We kept our Buy call on relatively inexpensive valuation to its coal peers. ITMG’s FY11F Bloomberg consensus PE is 13.2x, while BUMI 16.5x, ADRO 15.3x, and PTBA 13.8x.