ADARO ENERGY – Another leg down
Higher-than-planned stripping cost may be expensed
We highlight the likelihood of Adaro choosing to expense its higher-than-planned strip ratio rather than capitalising as a deferred stripping cost. Adaro reported its actual full-year blended strip ratio at 7.0x, higher than its average planned stripping ratio of 6.4x. The option to expense is possible when the variance is still insignificant.
Favourable weather allowed for higher overburden removal
Adaro had a record high overburden removal of 97.75m bcm in 3Q12 as September rainfall volume was 83% below the five-year monthly average. This helped mining contractors achieve a record overburden removal of 331.48m bcm in FY12, higher than Adaro’s target of 302m bcm. Variances from plan are usually capitalized as deferred stripping costs.
Reiterate HOLD at a new DCF-based TP of IDR1620
We lower our DCF-based target price to IDR1620 from IDR1,750 on the assumption Adaro expenses its higher-than-planned stripping costs, although it has previously capitalised such costs. As a result, we estimate its FY13 cash costs increasing 7.5% to USD45.5/t, lowering gross profit by 14%. Key risks: stripping costs are capitalised and power project delays.