Sakari Resources

DBS Group Research on 2 Jul 2012

WITH the revision in our average coal price assumptions for FY2012/2013 by about 10-15 per cent to US$100/ton, we cut our FY2012/2013 earnings estimates by 25-28 per cent, given the high sensitivity of SAR's earnings to coal prices.

However, spot coal prices should find a floor at US$80/ton and we expect a mild recovery in coal prices in H2 2012 from current lows, as government policies spur growth in China and as high-cost coal producers in countries like Australia, US and South Africa limit their exports.

Increasing production is not the priority, producing smartly is more important. Given finite coal reserves, producing more in a low price environment may not be ideal over the long term.

Hence, management should retain flexibility in managing production levels, especially at Jembayan, where margins will be tight at current spot prices owing to high cash costs. Production can be increased if coal prices rebound. Sebuku mine, with its higher-grade coals and low cash costs, remains very profitable even at current prices and should be the key driver for SAR's profitability in the near term.

SAR's share price has declined close to 50 per cent from its peak in 2012 and has priced in much of the impact of coal price weaknesses on earnings. At current share price of $1.35, we reckon the market is already pricing in another US$5/ton decline in coal prices from the current level of US$83/ton. Hence downside risk is limited at the current share price, and we expect a short-term rebound in share prices in anticipation of coal prices bouncing off current lows.

Cut TP to S$1.80 but maintain "buy".
BUY