Indonesian coal miner to kick off $697 million IPO

High-growth company Bayan Resources aims to take advantage of the fact that coal is one of the few remaining "hot" sectors.
IndonesiaÆs eight largest coal producer, Bayan Resources, will go ahead with its initial public offering despite the cancelation of several other Asian listings over the past few days and will kick off its international roadshow on Monday.

The company is setting a high target for itself as it seeks to raise between Rp4.67 trillion and Rp6.42 trillion ($507 million to $697 million), which would make this the largest private sector IPO from Indonesia to be marketed to international investors. The deal size could increase to as much as $800 million if the 15% greenshoe is exercised in full and to $870 million if an option to sell an additional 10% in the form of secondary shares is also put to use.

While ambitious, observers say it may well pull this off as coal remains one of the few sectors that continues to capture the attention of investors. This is especially true for thermal coal, which is used as fuel in power plants and is quickly becoming the preferred energy alternative as oil prices continue to go through the roof. Most of the established Indonesian coal producers, including Bumi Resources and Tambang Batubara Bukit Asam, are trading at near record highs and Indika Energy, which listed on June 11 after raising $298 million from a well-received IPO, is currently trading 11% above its IPO price. This compares with a 5% drop in the Jakarta Composite Index in the same period.

Compared with Indika, which complements its core coal production with other activities, including an engineering, procurement and construction business that focuses on the oil & gas industry and a 20% stake in a power plant that is still under construction, Bayan is a purer play on coal. Because of its small size, it is also expected to be one the fastest growing coal producers in Indonesia in the near future with a plan to increase its annual production volumes to close to 8 million tonnes this year from 4.7 million tonnes in 2007, and to about 13 million tonnes in 2009. According to people who have been briefed on the upcoming listing, analysts also view it as a market leader in terms of the quality of its coal

The company is offering 25% of its enlarged share capital in the form of 833.3 million shares. About 40% of the total, or 333.3 million shares, are new, while the remaining 500 million will be sold by the three founding shareholders who currently own 100% of the company. The shares are offered at a wide price range of Rp5,600 to Rp7,700, which is likely an attempt to give the bookrunners additional flexibility amid a still highly volatile market. About 90% of the deal will be offered to international investors, while the rest will be split between domestic institutions and Indonesian retail investors.

The final price will be set on July 22 with the trading debut expected in early August.

According to sources, the company has received strong interest from potential cornerstone investors and while there is no confirmation as yet whether the company will take them up on their offer, it would seem logical to pre-place a portion of the deal, given the large size. This would be especially true since the deal will have only one bookrunner - Merrill Lynch - which could be a challenge in the current market environment no matter what sector the company is in.

According to a banker, if priced towards the mid-point, this could be the largest IPO from Southeast Asia done on a sole book basis. Local firm PT Trimegah Securities is a joint lead and will be in charge of the domestic tranche.

Aside from its high quality coal and growth prospects, which are backed by 477 million tonnes of reserves (resulting from the exploitation of only 50% of its mining concessions), Bayan also stands out because it exports 100% of its coal. Its key customers include high profile power producers like ItalyÆs Enel, US-based Constellation Energy, JapanyÆs Misui Group, MalyasiaÆs Tenaga and Taiwan Power. It also owns and operates its own coal terminal and floating transfer station, which allows for efficient and low-cost blending and loading of its coal onto bulk ships.

Amid the current scepticism about IPOs, perhaps even more important, however, will be the fact that it is being offered at a competitive valuation versus its peers. Based on the indicated price range, Bayan is offered at 7 to 9.4 times its projected 2009 earnings. This compares with 12 times for Bumi Resources, 12.6 times for BT Bukit Asam and 11.6 times for Thailand-based Banpu. Indika, which came to market at 8 times its 2009 earnings is currently trading at 8.9 times.

Against this, investors will have to weigh the risk of regulatory changes in Indonesia that may impact its concessions negatively, volatility in thermal coal and oil prices and the potential for a slowdown in the demand for coal û an asset that notwithstanding its usefulness is viewed by many developed countries as a less desirable energy source because of its impact on the environment.
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