World Mining Exploration News

Indonesian Coal Stocks’ Declines Offer Chance to Mine for Bargains

Indonesian coal-mining shares have fallen sharply in recent weeks in line with a drop in oil prices. But many analysts suggest the decline offers foreign investors a good chance to pick up stocks cheaply.

Southeast Asia’s largest economy is a major source of commodities such as coal, palm oil and nickel. As resource prices rose steeply last year, propelled by demand from China and India, commodity stocks also jumped. Prices for some coal-mining stocks more than tripled in 2007.

Until recently, Indonesia’s stock market outperformed other Asian markets that were hurt by concerns over a slowing U.S. economy. In early July, for instance, the Indonesia Stock Exchange composite index was down 13% since the start of the year, while India’s Sensex was 33% lower. Now, the Indonesia index is off 23% for the year and the Sensex is down 29%.

Indonesian exports account for only about 30% of gross domestic product — a much lower proportion of GDP than for most other Asian nations. That shelters the country from declining U.S. demand for manufactured goods.

What’s more, Indonesia’s exports are heavily weighted toward sales of huge amounts of commodities, especially coal, to India and China, where demand, until recently, has shown few signs of leveling off.

To take advantage of this, foreign institutional investors have piled into Indonesia’s resource sector, which accounts for about 40% of the Jakarta stock market’s overall $170 billion capitalization.

But as oil prices have tailed off in recent weeks, Indonesia’s commodity stocks also have taken a battering. Coal and palm oil are viewed as alternative fuels and tend to move in synch with oil prices.

The drop in commodity stocks has helped contribute to the decline in the Indonesia composite index. That has hurt foreign investors, who account for about 60% of market volume because of their large weightings in commodity-related stocks.

Shares of coal miner Bumi Resources are down 12% this year and 36% since their year’s high in June. Adaro Energy, which listed its shares in an initial public offering in mid-July, is down 14% since its first full day of trading.

Now, some analysts see an opportunity to pick up coal stocks at a discount. “We generally remain positive for the coal story,” says Joshua Tanja, head of research at UBS Securities in Jakarta.

The coal bulls reason that big Asian economies — including Indonesia itself — are likely to rely heavily on coal-fired power plants in the years ahead to meet increased demand for electricity as their economies grow. As a result, demand for coal should continue to grow next year, analysts say.

Indonesia, as the world’s largest exporter of thermal coal ahead of Australia, is set to benefit from this, says Nick Cashmore, head of research at CLSA Asia-Pacific Markets in Jakarta. Coal stocks are “not going to continue to fall forever,” he says.

CLSA favors coal producers such as state-owned Tambang Batubara Bukit Asam and Indo Tambangraya Megah, a unit of Banpu of Thailand, which have spare capacity to boost production in coming months.

The medium-term outlook for coal prices looks good despite recent declines, analysts say. Global thermal coal spot prices, quoted at the Australian port of Newcastle, have fallen 13% in the past month to about $165 per metric ton, tracking declines in oil.

Still, prices are about three times as high as a year ago and could rebound in the near term because of a number of factors. One is that China recently imposed a 10% tax on coal exports in a bid to ensure adequate domestic supply for electricity generation, a move that is likely to support global prices, ANZ Bank said in a report last week.

Indonesia is set to benefit from that upswing in the medium term, with plans to increase production to 300 million tons per year by 2012 from 240 million tons this year. About 80% of output in 2008 will be exported.

To be sure, there are risks associated with the sector. Indonesia still has to pass a new mining law because of bickering between the central government and outlying provinces about divvying up royalties. In some cases, mining permits issued by Jakarta have been revoked illegally by local government authorities.

The huge profits generated by the sector in recent years also have sparked a row between miners and the government, which wants a larger share of the profits to flow into state coffers in the form of taxes and royalties. Indonesian coal miners have typically sold their coal to wholly owned offshore units at below-market prices to reduce local tax liabilities, Mr. Cashmore says.

Last week, six major coal miners agreed to pay $770 million in royalties they had withheld from the government because of a disagreement over tax rates. Jakarta had slapped a travel ban on some of the mining executives until the companies agreed to pay up.

For investors not averse to risk, Indonesian mining stocks offer a cheaper alternative to regional peers. Bumi Resources is trading at seven times 2009 forecast earnings compared with 12 times for Shenhua Energy of China — even though Bumi Resources’ stock price rose more than 600% in 2007.

Bumi Resources closed Friday up 2.8% at 5,450 rupiah (60 U.S. cents). Laksono Widodo, head of equities at Mandiri Sekuritas, has a 12-month price target of 7,200 rupiah on the stock.

Mr. Cashmore, of CLSA, says one of the concerns about Bumi Resources is that it has failed to meet output targets. The company is likely to produce 58 million tons of coal this year, below earlier guidance of 60 million to 65 million, because of supply bottlenecks related to procuring enough equipment and getting it to remote areas where mines are located.

CLSA prefers mining companies with spare capacity. It has a 12-month price target on Bukit Asam of 19,800 rupiah, up 46% from Friday’s closing price of 13,600 rupiah. Its target for Indo Tambangraya is 40,700 rupiah, up 58% from 25,750 rupiah at the end of last week.