Reserve upgrade leading to higher production. We believe that the boundary approval will lead to roughly 50mt upgrade to reserves (and further upside through additional exploration). We have therefore increased our 2010 production forecast from 12mt to 13.5mt and long-term production from 16mt to 20mt.
Higher ASP and lower costs. We have increased our estimated average selling price for the company by about 6–7% due to increasing production out of Sebuku, which is of a higher quality coal vs Jembayan. Further, given Sebuku’s lower strip ratio of around 4–5x, low transportation distances and excess capacity, we have also reduced our production cash cost estimate by 6% in 2010.
Short-term cautious, but medium-term upside risk to coal price forecasts in 2011+ towards US$85–90 due to a tightening supply/demand balance.
Valuation is attractive vs peers, as the stock trades at 2010E adjusted PER of 13x vs the sector’s 20x. We think it is appropriate to strip out amortisation for the company to be comparable with its peers.
Key risk – production delays beyond March 2010? Post the Cagar Alam boundary being approved, the company is required to get an environmental permit and borrow use permit. The company believes that this process is administrative and on-track. We highlight that should bureaucracy lead to further delays, there would be downside risk to our forecasts.
We downgrade our 2009 earnings estimate by 26% to reflect the one-off expenses, higher taxes and warrants dilution, but upgrade those for 2010-12 by 64%, 28% and 56% to factor in the impact of the boundary approval. We raise our target price to S$3.00 from S$2.25.
We reiterate our Outperform recommendation with a revised price target of S$3.00. We believe that the boundary approval is transformational, which should lead consensus to upgrade reserves, production, average selling price and lower costs.
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