ITM (ITMG IJ): Cash cow – BUY – Tp56,000 - CLSA

There is lot of concern with ITM’s low reserve life. However, we feel that the issue has been a bit overblown as the company has plenty of resource. In fact, ITM is sitting on 61% of Indonesia’s known high calorific value coal resource. It is just a matter of cash mgmt as to when to convert to reserves. With high energy coal, a control on costs and no debt ITM is poised to continue generating strong cashflow. We expect higher dividends are here to stay as parent Banpu adds to its coal portfolio elsewhere. BUY

Costs conservatively controlled
ITM has a policy of hedging up to 50% of annual diesel requirements. We estimate it has locked in 45% of this year’s requirement at US$91/bbl oil translating to US$0.77/L diesel, saving 4% off our full year assumed average price. A decrease in the strip ratio and benefits from the completed captive power plant at largest production contributor Indominco will help to keep a lid on costs.

They don’t make ‘em like they used to
ITM is sitting on 61% of Indonesia’s high energy coal resources which it will continue to focus on monetising. Production growth will come from its new Bharinto project and mining at a 2nd block at its largest project, Indominco. The company has not executed on any acquisitions since listing and we don’t see this changing as parent Banpu focuses on acquisitions elsewhere. This is positive for ITM as it reduces the risk of overpaying in an environment of high coal asset prices.

Reserve life low but upside from resources
Accounting for 2011CL production, we expect ITM will have a mine life of 12 years at year end which is lower than other producers. Its 2 largest producing mines have a concession life to at least 2030 and also have the lion’s share of its 1.6bt resources. ITM reviews its mine plans and reserves every 2 years, meaning in 1Q13 reserve upgrades are likely.

Re-initiate with a Buy, target price of Rp56,000
ITM’s share price has lagged peers during 2011, in an underperforming sector. With its higher energy coal and thus higher average selling price, costs under control and 13% production growth, we expect ITM’s earnings to increase 147% in 2011CL. We base our target price on a 2012CL PE of 13x, in line with the recent average.