Dec 1, 2010

Small but attractive, Resource Alam

Thermal coal mining company PT Resources Alam Indonesia Tbk (KKGI) estimates to reach 2.2 million tons coal production for the full year of 2010. As of September 2010, KKGI produced 1.6 million tons coal.
KKGI plans to jack up its production from 2.2 million tons this year to 3.55 million tons next year in line the addition of total mine to 11 sites. The company sold 97% of its coal to import market (58% to China and
the rest 36% to Asian countries
In a company report issued by Phillip Securities Indonesia recently,  KKGI started its coal mining operation in 2006 with initial production of 105,569 tons of coal from its three mining sites: Simpang Pasir, Gunung
Pinang and Bayur in East Kalimantan.  
Based on its internal estimate, KKGI is blessed with 1.2 billion tons in coal resources and 481 million tons in reserves. It produces coal with a calorific value (CV) of 4,850-6,500 kcal GAR. 
The company is also seeking permit to conduct mining activities in protected forest area to boost its coal production for next couple of years. Although it is still at initial stage, KKGI has signed joint corporation with an oil & gas company to start study and exploration of coal bed methane (CBM)
in its mining areas.
Annualising its 9M10 EPS, KKGI the company is trading at 2010 PER of 8.9x. This is much attractive compared to average PER of coal sector ex-BUMI of 24x (annualizing 9M10 EPS of ADRO, ITMG and PTBA). 
The company will start pricing its coal based on coal price index set by Indonesian Ministry of Energy and Resources (ESDM) next year, which is higher than current ASP of US$48/ton based on spot price . 
The planned 60% production increase will not require huge capex as KKGI has its infrastucture in place to boost larger volume. 
"Despite recent strong 107% jump in the share price over one month , we believe KKGI is still attractive based on its valuation and earnings visibility," the report said. 
Asumming production estimate will materialise , ASP of only US$50/ton and applying net margin of 18%, 2011F EPS will be Rp296 or KKGI is trading at PER of only 6.9x. However, lack of trading liquidity may negatively affect stock trading movement

Disclosure: No position at the stock mentioned above.  

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