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Bahana | Bahana Securities Analysis: Indonesia Coal Update

Payments to increase by end of 1Q15

The Energy and Mineral Resources Ministry (ESDM) plans to raise coal royalties charged to mining operation permit (IUP) holders by the end of 1Q15. According to ESDM data, coal accounts for about 80% of Indonesia’s mining revenue, and about 25% of Indonesian coal companies are IUP license holders. The move is intended to help meet the revised 2015 state budget (APBNP) non-tax mineral revenue target of 31.7 trillion IDR, up 28.9% from the earlier budget due to a reduced oil and gas non-tax revenue target. The revised budget includes a sharp fall of 63.7% in oil and gas non-tax revenue, amounting to 81.4 trillion IDR, due to reductions in the oil price assumption ($60 USD/bbl) and oil-lifting target (825k b/d). The administration of former President Susilo Bambang Yudhoyono had planned to raise royalty payments, but implementation was delayed due to weakening coal prices. The Indonesia Coal Producer Association (APBI) had proposed that the increase be postponed as it felt royalty hikes would hurt coal miners and might not yield optimum state income in the weak coal environment, proposing instead for the government to focus on reducing illegal coal mining.

Coal price should remain weak on China environmental concerns

APBI had proposed raising royalties at a coal price of $100 USD/mt, and the Ministry of Finance had countered with an $80 USD/mt proposed threshold. However, the upcoming increase is not price-dependent. The royalties will be assessed ad valorem based on coal type. The coal price has risen 11.0% ytd but is down 9.8% y-y, to 69.2 USD/mt as of 18th February. The recent coal price increase is due to Glencore’s (not rated) plan to cut coal output by 50% at its South Africa operations. Glencore is the largest exporter of seaborne thermal coal. In addition, the latest EIA report indicates that US coal production is down 10% w-w to 18.1 million mt as of 12th February. That said, China’s plan to cut greenhouse-gas emissions by 30-50% could lead to continued weak coal prices. In 2014, only 8 of the 74 cities monitored by China’s ministry of environmental protection met national pollution standards.

Royalty increase to adversely affect PTBA most

We have conducted a sensitivity analysis on the effects of the royalty increase on our coverage group. We believe Tambang Batubara Bukit Asam (PTBA) will suffer the most, as all of its mines hold IUPs. Indo Tambangraya Megah (ITMG) should be the second hardest hit, as its Kitadin mine holds an IUP. Adaro Energy (ADRO) has only 1 IUP site, Balangan, of which its coal production should reach 1 million mt in 2015, as the site is still being developed. On Harum Energy (HRUM), the company suspended production early in 2015 at its IUP site, Tambang Batubara Harum, due to the lower benchmark coal price. PTBA’s average royalty payment will rise to about 9.8%, reducing overall 2015F earnings by 20.5%. ADRO’s 2015F earnings should fall by 0.6% and ITMG’s by 3.8%, while the increase should not affect HRUM and Bumi Resources (BUMI). We assume average Newcastle coal prices of $66 USD/mt in 2015 and $65 USD/mt in 2016. We thus lower PTBA’s 2015F net profit by 31% to 1.53 trillion IDR. Maintain UNDERWEIGHT sector call. Risks: higher coal prices and lower global coal production output amid global economic growth.

For a more comprehensive analysis including figures and the latest data, please see Bahana Securities Indonesia Coal Update.