ITMG: Moderate growth in 2Q11, still wet - Mandiri

We feel that our forecast and consensus number for ITMG are on the conservative side, based on 2Q11 preview and company visit. South Kalimantan’s weather has been favorable for mining activities, drier than that of East Kalimantan. In 2Q11, the company indicated moderate production growth of 9.6%-11.5% QoQ to 5.7-5.8Mt, 300k-400k tons below internal target. But, the management appeared upbeat on coal price outlook for FY11F, seeing potential upside to US$94/ton versus current guidance of US$92/ton. Diesel and cash costs are running higher than our assumptions, but our earnings sensitivity analysis points to potential earnings upgrade of between 10-16% for FY11F, that would place ITMG on 11.3-12.0x P/E, looking attractive to its peers.

Below company’s target. Coal production in Indominco and Trubaindo were expected to reach 3.5Mt and 1.7Mt or 300k and 100k below company’s target respectively. April and May was still wet months and there was still lot of mud caused by heavy rainfall carried over from the 1Q11 in Indominco. But strip ratio has been stable at 12x. The company has indicated higher cash cost following higher fuel price that has reached US$1.08/litre (+16.2%qoq), 20% higher than our FY11F of US$0.9/litre.

Upbeat on coal price outlook. The company is upbeat on the coal price outlook in 2H11F. Company stated that strong demand from China and India will effectively take effect on seaborne coal price in 4Q11. However, currently ITMG only has around 20% exposure to spot and index-link pricing, so there will be less opportunity capturing any coal price hike in 4Q11. But it reiterated that there is still potential upside for its FY11F ASP up to US$92-94/ton, 7%-10% higher than our conservative FY11F ASP of US$85.6/ton.

Derivative losses in 2Q11. The company indicated it record profit on coal swap transaction but booked losses on fuel swap transaction. But overall, in 2Q11 the company will book a net derivative loss of around US$5mn. So cumulatively as of June 2011, the net result is net derivative gains of around US$4-5mn vs derivative gain in 1Q11 of US$9.3mn.

Potential attractive valuation- Maintain Buy. Based on our sensitivity, the net result of higher coal price and fuel price is positive for FY11F earnings with potential earnings upgrade up to 10 -16% which lead to attractive valuation (please see exhibit 2). However, we maintain our earning forecast and prefer to wait on the actual 2Q11 results that will be announced in mid August 2011. We still maintain our Buy rating and TP at Rp55,800 implying 15.4x-11.3xPER11F-12F.