Sakari

Sakari: Key Co. update/presentation to investors regarding recent concerns and drop in share price. Some key pts mentioned are as follow: 1) Export tax? - The new tax applies to other bulk materials, metals and minerals but not coal (yet – position still under review). 2) Export ban? - Regulations have been introduced requiring upgrading of other metals & minerals but not coal yet. Indications are that the upgrade rules are being considered to affect coal with CV of 5000 and below. Note that Sakari’s coals are higher than 5000CV (Calorific Values). 3) Divestment? - The new law requires PMA companies (not PMDN companies) to divest 51% 10 yrs after production starts. The sell down starts at 20% after 5 years & increases each year. Sakari’s mines are held through PMDN companies. 4) Regulatory uncertainty? - Resources nationalism is a political topic worldwide. Indonesia is in the spotlight because of abundant resources. The transparent process where Ministers & Officials discuss regulations before implementation process causes rumours & uncertainty. 5) Why recent price drop? – Supply > demand. Indo Q1 production increased 9% to 101Mt. Distressed coal is reaching Asia, helped by low freight rates. Demand is solid. Surplus product from Americas / Europe / South Africa / Russia can currently target Asia. 6) China deliveries? - None of Sakari’s deliveries have declined. China < 10% of Sakari’s portfolio. Contract problems often occur – the supply side (when prices rise) & the buy side (when prices fall). 7) India? - None of Sakari’s deliveries have been declined. The problems of Rupee depreciation, cash flow & profit issues for power providers remain to be resolved. Key Guidance on Co as follow: 1) Jembayan’s production is on an upward trend now that new pits are open. Sebuku’s ramp-up continues to outperform the mine plan. Grp targets at least 9mt of coal output for Jembayan and at least 2.5mt at Sebuku. 2) Group ASP Guidance is based on a 2012 NEWC average of $115/t. Despite recent prices & forecasts, Sakari’s guidance is unchanged. 3) Cash Costs would range at $62-25/t for Jembayan and $40/t for Sebuku due to pressure from higher oil prices & inflation. Sebuku’s margins are among the highest in Indonesia (high grade coal, short logistics, low strip ratio). 4) Shallower new pits & shorter dumping will lead to cost containment going forward 5) Jembayan’s new pits are open and will supplement work from older pits in the North. Results of efficiency review will show through in costs in H2 and beyond. 6) Positive reaction to proposals for Western Leases from local & regional discussions. 2014 is the window for submitting the license applications (3-5 year process). We note that overall, grp’s guidance appear positive for sentiments, and do not rule out a further play up in share prices, on back of the severe recent sell-off on share price. Mkt consensus has 7 Buy Calls and 5 Holds with $2.26.