Sector News Flash:
Coal Mining
Sector Has Mixed Expectations For 2017
Coal Mining
Sector Has Mixed Expectations For 2017
We visited four coal
miners recently, and got updates on their outlook for 2017. On production, only
Indo Tambang is aiming for flat growth while Harum Energy has the highest
target (+33% YoY). Up until now, none of the miners’ customers have locked in their
FY17 coal purchase prices. Meanwhile, all players expect their stripping ratios
to rise next year. We reiterate our BUY on United Tractors, as we expect
earnings to recover (mostly on a rise in mining contracting volume). It would
also benefit from a weakening IDR and is the safest play on the recovery in
coal prices.
¨ No customer has
locked in FY17 purchase prices. The increase in coal prices was faster than
what the coal miners’ customers had expected. As a result, no customer has
locked in their FY17 coal purchase prices yet. Some have only locked in their
2017 coal purchase volume, as they think coal prices may retreat from the
currently high levels.
¨ Higher stripping
ratios, but with unchanged mining contracting fees. Based on our
talks with the coal miners, all of them expect their stripping ratios to rise
next year. However, they still hope to see mining contracting fees remaining
unchanged. Up until now, most of the firms were still negotiating mining
contracting volumes and fees with their contractors. The miners’ expectations
for an unchanged mining contract fee in FY17 are different from United
Tractors. It expects less discounts in FY17 due to the recovery in coal prices.
¨ Harum Energy expects
to see the biggest production increase. Harum Energy expects its coal production to
hit 4m tonnes (vs its FY16 target of 3m tonnes) next year. In 2012, its
production peaked at 12m tonnes. In 2011-2016, it cut down on coal production
to preserve the long-term value of its assets, as coal prices fell. Meanwhile,
Indo Tambangraya Megah (Indo Tambang) expects production growth to stay flat
(Figure 1).
¨ Harum Energy is the
most exposed counter to the spot coal price. Among the four coal miners, Harum
Energy is the most exposed to spot coal price. This is as it sells its coal
using spot prices. Therefore, it should start benefiting from the increase in
prices from 4Q16 onwards. By contrast, its peers should fully benefit from the
current increase in prices from 2017 onwards, as most of their coal selling
prices for FY16 have been locked in.
¨ Indo Tambang has the
biggest exposure to the China market. China is the main driver behind the increase
in imported coal demand. Indo Tambang is the most exposed coal miner to this
market (25% of sales are made to Chinese customers), followed by Adaro Energy
(14% of sales) (Figure 1). As at 9M16, Harum Energy and Bukit Asam have not
sold coal to China. However, they said they would record sales to China from
4Q16 onwards.
¨ All coal miners are the beneficiaries of the weakening IDR. We expect the IDR to continue softening to reach an average of IDR13,700/USD in FY17 (YTD average: IDR13,286/USD). The coal miners’ revenues are mostly dominated in USD terms. Meanwhile, the contribution of USD to their costs is less than to their revenue (Figure 1), which should improve profit margins. Harum Energy and Indo Tambang are likely to benefit the most from a weakening IDR, considering that the difference between USD contributions to their revenue and total costs are the highest.
¨ Reiterate BUY on United Tractors with a IDR24,700 TP. We reiterate our BUY call on United Tractors, as its earnings are set to recover in FY17 from higher heavy equipment sales, and mining contracting and coal sales volumes. We think this has not been factored in by consensus yet. The company should also benefit from the weakening IDR in its mining contracting and coal sales businesses. Also, with consensus lifting its earnings estimate, this should also boost United Tractor’s share price performance. We consider this stock as the safest play on the recovery in coal prices.
¨ All coal miners are the beneficiaries of the weakening IDR. We expect the IDR to continue softening to reach an average of IDR13,700/USD in FY17 (YTD average: IDR13,286/USD). The coal miners’ revenues are mostly dominated in USD terms. Meanwhile, the contribution of USD to their costs is less than to their revenue (Figure 1), which should improve profit margins. Harum Energy and Indo Tambang are likely to benefit the most from a weakening IDR, considering that the difference between USD contributions to their revenue and total costs are the highest.
¨ Reiterate BUY on United Tractors with a IDR24,700 TP. We reiterate our BUY call on United Tractors, as its earnings are set to recover in FY17 from higher heavy equipment sales, and mining contracting and coal sales volumes. We think this has not been factored in by consensus yet. The company should also benefit from the weakening IDR in its mining contracting and coal sales businesses. Also, with consensus lifting its earnings estimate, this should also boost United Tractor’s share price performance. We consider this stock as the safest play on the recovery in coal prices.
Kindly click the following link for the full
report: Sector Has Mixed Expectations For 2017
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Plantation
PT. RHB Securities
Indonesia
