+ Growth in production amid flat coal prices: Revenue from coal mining segment accounted for 90.5% of total revenue in 2Q18. Coal sales volume in 1H18 totalled at 9.1mn tonnes (45.5% of 20mn tonnes of FY18 sales target).
HBA (Indonesia Coal Price Reference) had in fact risen by 22.1% YoY to US$96.9/tonne in 2Q18. However, ASP for GEAR dipped YoY slightly due to the price cap on the coal supply to PLN.
According to the new Domestic Market Obligation, the coal sale price is fixed at US$70/tonne with standard specification of 6,322 GAR, total moisture 8%, total sulphur 0.8%, and ash 15%, and it was c.30% discount to the average market price in 2Q18. In 1H18, the total volume of coal supplied to PLN amounted to 1.5mn tonnes (16% of 1H18 production).
– Multiple factors led to a higher cash cost: In 1H18, cash cost jumped 24% YoY to US$26/tonne. The increase in the strip ratio of BIB mine (1H18:4.4 vs 1H17:3.8) accounted for US$1.5/tonne out of US$5 of increment in cash cost. The increase in fuel price, the distance between mining field and overburden dumping site, and coal hauling lifted the cost by US$0.8/tonne, US$0.9/tonne, and US$1.2/tonne respectively. There is little room to lower the cash cost since GEAR started to extract coal from the north and northwest part of BIB mine, which is relatively further away from the Bunati port located at the south region. It is expected that full-year cash cost to be US$26/tonne.
The primary driver of performance is the growth of production volume, which remain on track. Our expectations are for production to expand 28.2% this year to 20mn tonnes. We kept our FY18 forecast for coal price range (4,200 GAR) unchanged at around US$40/tonne. The acquisition of BSL mine is expected to be completed by 3Q18. We are positive on FY18 performance given the healthy spread between ASP and cash cost and the expanding growth of sales volume moving forward.
Maintained BUY with a lower TP of S$0.42 (previously S$0.48)
We lower FY18e EPS to 3.1 US cents (previously 3.5 US cents) due to a higher than expected cash cost. Based on unchanged peer average forward PER of 10x and the FX rate (USD/SGD) of 1.36x, we reiterate our BUY recommendation with a lower target price of S$0.42 for FY18.