Deutsche Bank : Adaro Energy Alert : FY12: expensing mining cost; Maintain FY13 assumptions: FY12: expensing mining cost; Maint
Synopsis:
*We adjust FY12 to expense actual stripping cost
Company indicates that its policy is to generally have the actual strip ratio as close as possible to the planned strip ratio (def: ratio of overburden removal to coal extraction). We deduce, based on this, that the company is likely to expense any meaningful accumulation in deferred stripping cost as soon as possible. Therefore, we adjust upwards our cost assumption for FY12 to reflect a higher, expensed stripping cost of 7x ratio (equivalent to actual
FY12 strip ratio), vs. our previous assumption of 6.7x (and company’s original plan of 6.4x). This results in a 9% reduction in our 2012F NP forecast to USD392mn.
*Explaining the 3Q12 spike in actual strip ratio
The spike in 3Q12 to 9x, which resulted in a big jump in deferred stripping cost, may have resulted from the lag in overburden (OB) vol adjustment response to the sharp correction in coal price, which fell below $95/t in May’12.
Contractors may also have been more resistant to a sudden and drastic renegotiation of OB vol from the original contract, compared to a renegotiation in coal vol, because OB forms the bulk of the contractor’s business (8-9x coal). Indeed, we did see a general increase in strip ratio and deferred stripping cost trend in other coal companies and contractors in 3Q12, though Adaro recorded the biggest increase (see side chart)
*We maintain FY13 NP forecast and assumption of lower stripping cost
However, we maintain our FY13 expensed strip ratio assumption at 6.7x or 4% below the FY12 actual strip ratio (though this is still more conservative than company guidance of 5.8x). We remain comfortable with our assumption given the decline in actual strip ratio in 4Q12 to 5.8x, from 9x in 3Q12 (see side chart). We expect this lower level to be generally sustainable in 2013. The assertion supported by trend of combined strip ratios of two of Adaro’s main contractors, Pama & BUMA, where the combined Jan’13 strip ratio was 5% lower than FY12 and only about 2% higher than its 4Q12. We maintain Buy on Adaro, given the upside implied by our DCF-based TP (unchanged).