THE FALL OF COAL ISSUERS

Decline in the selling price of coal in the international market has eroded the financial performance of coal mining companies. Some coal stocks listed in the Indonesia stock exchange (IDX) ended up on the red line, along with the deteriorating financial performance.

This condition is triggered by global factors where coal price in the international market is not yet free from pressure and still at the level of $90 per ton, compared to the previous year at approximately $100 per ton. Decline in coal prices of approximately 10 percent was coupled with increase in the operating costs which finally presses financial performance of coal companies.

Based on data from the directorate general of mineral and coal of the ministry of energy and mineral resources, the benchmark prices of coal since January was experiencing a hike. January 2013 benchmark price is set at USD 87.55 per ton. The prices rose 0.91 percent in the next month and in March rose to USD 90.09 per ton. In April 2013 the price was valued at USD 88.56 per ton.

Look at some renowned coal companies which are now getting worse along the first quarter of 2013. This is revealed in the investor day held in IDX building in May 1-2.

PT Adaro Energy, Tbk booked a decline in revenues during the first quarter of 2013 by 6.6 percent. Operating revenues earned by the company were only USD 3.72 billion. The company’s profit for the year fell 30 percent to USD 385.35 million.

Adaro’s President Director, Garibaldi Tohir, explained that the decline was caused by lower sales volume and average selling price which is lower than the previous year. “Coal market conditions have not been conducive”, said Garibaldi last weekend. At the close of the first trading session, Adaro shares fell 3.25 percent to Rp1, 190.

David Tendian, Finance Director of Adaro, was sure that the performance of the company this year will be closed with positive results. This optimism emerged based on management estimates regarding improvement of coal price in the fourth quarter of this year. “The price will be stable again at the end of this year. The price could reach USD 100 million per metric ton”, he said in the investor Day.

It is estimated that the price of coal is based on comparison of price if coal in Australia amounted to USD 95 million to USD 100 million per metric ton. “Now the price is USD 88 million to USD 92 million per metric ton”, said David.

For your information, Adaro’s net income year-on-year fell 19% to USD 740.6 million. For comparison, in the first quarter last year, Adaro’s net revenue reached USD 915.9 million.

Decline also occurred in the net profit post of this coal company. Adaro recorded a decrease in net income of 66% to USD 41.6 million from USD121.8 million.

PT Bukit Asam, Tbk also experienced the same thing. The company posted a decline in earnings and revenue. The company’s revenue fell approximately 7 percent to Rp2.78 trillion. In the first quarter of 2012, the state-owned company gained a profit of Rp3.02 trillion.

The company’s net profit fell to Rp493.18 billion. Whereas in the same period of the previous year, the company made a profit of Rp867.34 billion. “The acquisition of profit was influenced by volume of coal sales, average price of coal, and ending coal inventory”, said PT Bukit Asam’s corporate secretary, Joko Pramono.

The same thing is felt by PT Toba Bara Sejahtera, Tbk. Profit for the period attributable to the owner of the parent company fell 37.9 percent to USD 3.21 million. The company’s sales fell 2.68 percent to USD 94.94 million. Cost of sales rose five percent to USD 80.55 million.

The same thing was experienced by PT Bumi Resources, Tbk (BUMI). In the first quarter of 2013, BUMI booked revenues worth USD 942.53 million, down 6.48% from the same period in 2012 at USD 1 billion. BUMI still suffers from net loss of USD 62.91 million at the end of March 2013, from USD 100.36 million.

Decline in losses is not as result of operational improvements, but because of BUMI’s derivative transactions in the first quarter of 2013, which made a profit of USD 1.42 million, where previously the company suffered a loss of USD 16.22 million.

In the first quarter of 2012, for example, BUMI suffered losses from derivative transactions at USD 16.2 million. The losses grow to USD 129.6 million in the second quarter of 2012. At the end of September 2012, derivative losses increased to USD 276.2 million. However, in the fourth quarter of 2012, this value turns into profit of USD 77.2 million. “Derivatives are calculated each quarter based on stock prices and bond trading in each quarter”, said Dileep.

PT Medco Energy International, Tbk (MEDC) recorded a decline in net profit by 89 percent to USD 22.19 million. The decline is due to cost of sales and other direct costs which reached USD 512.8 million, increased 9.85 percent compared to the previous amount of USD 466.8 million.

Finance Director of MEDC, Syamsurizal Munaf, said that in addition to the gross profit, MEDC’s gross profit was also eroded by selling, general, and administrative expenses reaching USD 140.04 million, up 9.56 percent from 2011 amounting to USD 130.55 million. “In addition, MEDC’s income tax expense increased from USD 129.77 million in 2011 to USD 156.34 million last year”, he explained.

Coal company, PT Harum Energy, Tbk (HRUM) recorded a net profit during the first quarter of 2012 amounted to USD 8.26 million, fell 85% from the same period last year amounted to USD 55.25 million.

Revenue was recorded at USD 223.67 million, down 24.38% from USD 295.82 million. However, cost of revenues was successfully reduced to USD 184.65 million, down 7.5% from USD 199.62 million.

Head of investor’s relations of PT Harum Energy, Veronica Jordan, said that the decline in revenue was primarily triggered by the weakening of the average sale price of coal. The average sale price of coal in the first quarter of 2013 amounted to USD 68.7 ton, down 7.6% from the fourth quarter of 2012 amounted to USD 74.4 per ton. Unfortunately, there is no information on how much the selling price of coal is in the first quarter of 2012.

“Although the average selling price of coal in the first quarter of 2013 decreased, but revenue rose 7.4% to USD 223.67 million from the fourth quarter of 2012 amounted to USD 208.2 million”, said Veronica.

               

Analyst’s point of view

Head of research division of PT Universal Broker Indonesia (UBI), Satrio Utomo, said that fall of profits of mining companies was due to declining international that coal prices, such as in Newcastle where the price is only about USD 90 per ton, while price of coal in the local market reached USD 50-60 million per ton.

This figure is much lower than the price of coal in the previous year which was well above USD 100 per ton. In addition to weakening coal prices, production coasts also increased which led to declining revenues.

“Now the price of commodities, such as coal, remains low. In fact, in 2011 coal prices are still above USD 100 in Newcastle, but in 2012 commodity prices declines, this makes prices of other commodities fell as china’s economy weakened, even the price of oil, such as fuel, also fell”, he said.

As a result of the decline in earnings, Satrio predicts that currently mining stocks are not good to be collected for investment. “For the medium to long term, the trend declines so it is difficult to be used as investment instruments. “We could not expect much for the long term”, said Satrio.

But, according to Satrio, it has not been necessary for mining issuers to diversify business as long as selling prices of coal are still able to get profit. Expect for issuers who have a lot of dept, such as BUMI and its friends, they have to find additional revenue to cover their debts.

“Unless if suddenly coal price is less than USD 80, it needs diversification. Currently the price is still above production figures, we can still get profit”, he said.

However for the short term, mining stocks still have support potential. In the short term, there is a potential increase in support, especially ITMG, but technically the rebound cannot be predicted. Trading position is still safe, but it is difficult for investment”, he said.

Universal Broker Indonesia’s analyst, Satrio Utomo, was pessimistic about the performance achievement of coal companies at the end of the of the year. According to him, currently coal prices continue to fall, but operating expenses increased. “So it is difficult for investors to decide to buy coal shares”, said Satrio.

On the other hand, trust securities analyst, Reza Priyambada, said that coal prices offered by the company are usually bargained lower than the contract price. So it erodes profits of the company engaged in the sector. If the selling price to the company is not increased, the operating costs cannot be covered so that profit decreased.

He considered that with the current global economic condition which continues to improve, prices of coal will increase. However, please note that coal issuers are expected no to set performance targets too high. “The economic condition supports the increase, but companies need to be realistic”, said Reza.

Senior analyst of harvest international futures, Ibrahim, said that coal is within a reasonable price level. The decline in price is caused by several things. First, there are indications of slowing of china’s industrial sector, which is indicated by china’s trade deficit in March. Coal prices could fall further if the Chinese industry, which is the largest coal consumer, slowed down.

Second, the crisis in the Korean peninsula raised fears of a more serious conflict. The use of electrical energy in Korea joint industrial estate largely uses coal. As a result, the political turmoil could weaken demand.

Third, the preparation of coal regulation in India. The use of coal as an energy source so far has caused some negative effects, namely waste problem. India is one of the largest coal consumers in the world. Information from India also influenced price movement.

Discussion on coal regulator is sparking the assumption that India will reduce the use of coal. “Currently, there is only indication that emerged, but if later India reduces demand, coal price could drop sharply”, said Ibrahim.

In fact, coal production in the major producing countries, such as Indonesia and Australia, is greater. Coal stock in the global market is still quite high. Both of these will depress the price of coal. “The increase in coal prices which may occur is only limited gains and strengthening trend. That too, with a note, that there is increase in china’s industrial sector performance and clarity of the conflict on the Korea peninsula”, said Ibrahim.

Until this weekend, Ibrahim predicts that coal prices could still experience a limited strengthening, in the range of USD 84.80 – USD 89.90 per metric ton. (E)         

   

Business News - May 10, 2013