Resource Alam Indonesia, Growth-Driven Business Strategy

The company’s long-term growth plan is further reinforced by recent JORC resource announcements and new mine concession acquisitions. We are also adjusting our earnings forecasts for 2012-2013, having increased our production volume forecasts in line with the company’s targets. As such, we raise our TP for KKGI to IDR8,950 while maintaining our BUY call.

JORC coal resources of 56.1m tonnes for 500ha area
On 30 Jan 2011, KKGI announced that its appointed consultant has completed the first Joint Ore Reserves Committee (JORC) report on its 500ha concession with coal resources of 56.1m tonnes and an average CV of 4,200-4,400 (AR base). The reserves figure will be released in the next 7-8 weeks. Note that the 500ha only accounts for 2% of KKGI’s total concession area and it will continue to undertake JORC surveys to improve its coal reserves and resources figures.

Two acquisitions announced recently
On 8 Feb 2012, the company announced two separate transactions to acquire: (i) a 75% stake in three coal concessions located in Kutai Timur, East Kalimantan with a total value of USD6.25m, and (ii) a 75% stake in a coal concession in Kutai Kartanegara, East Kalimantan with a total value of USD1.67m. These mines are still in green-field status currently, with the first acquisition expected to commence production in 2015, and 2013 for the second. While the value of these acquisitions cannot be determined at the moment, they will definitely enhance the company’s long-term sustainability.

Higher production estimates lead to higher earnings projections
With our channel check suggesting that the period between January and mid-February will have relatively favourable weather conditions for coal production, we are optimistic that the company will be able to meet its 6m tonnes volume target for 2012. Thus, we are revising our production volumes by 3% for 2012 and 14% for 2013 and thus, adjusting upward our earnings forecasts by 19% for 2012 and 32% for 2013.

Still our favourite for the sector
With coal prices continuing to remain stable and the current supply-demand dynamics tilting in favour of producers, we believe the coal sector will deliver a better y-o-y performance in 2012. Being the sector’s top pick, we continue to like KKGI for its strong volume growth and aggressive expansion plans. Following the revision to our earnings projection, we have also raised our TP to IDR8,950 based on a 2012f PER target of 9.8x – a 10% discount to the current industry average. Noted that any additional 500k tonnes of production volume will incrementally augment earnings and TP by 8.2%.