Old king coal finds new markets

Indonesian coal miners are planning to raise capital for expansion to meet the global demand for fuel.
Merrill Lynch has been active during the past 36 months, arranging several privately placed structured deals and public market takeouts of some of those financings. But this year, says Roger Suyama, head of Indonesia investment banking at Merrill Lynch, ôit will be quite a difficult market, especially for debt capital markets, so we have to look for deals that are certain to get doneö. For equity, there has to be a strong story, and that normally means natural resources. ôOil and gas, gold, copper, iron ore and palm oil fit that criteria, but there are probably more opportunities in the (thermal) coal industry than any of the others,ö he adds.

There is huge demand for coal from China and India, where power generation needs to expand at twice the GDP growth rate. China is now a net importer, while India prefers coal as a fuel for strategic reasons. Vietnam will also soon need to import coal. This secular demand drives the equity story û not Indonesia per se, says Suyama. ôAlso, bear in mind that coal always has intrinsic value û even if production stops, unlike manufacturing,ö he adds.

IndonesiaÆs coal exports û largely from vast deposits in East Kalimantan and Sumatra - have been growing at an annualised rate of 11% for the past four years, while AustraliaÆs have grown at a mere 3%-4%, so Indonesia should soon û maybe within two years û be the worldÆs premier coal exporter.

Four or five medium-sized coal mines are likely to go public this year, reckons Suyama, without naming them. Rajiv Louis, executive director in the investment banking division at UBS Securities Indonesia, whose bank managed three out of the four largest IPOs last year, also thinks activity will be focused on natural resources, and his bank has been tipped in the local press as already being mandated by two mining companies.

Raising money
Suresh Narang, managing director and chief country officer & head of global markets at Deutsche Bank, says his firm is currently bidding for the largest public bond issue by an Indonesian resources company û while he also expects the coal mining sector and ancillary businesses, for instance excavators, to be active.

One reason why coal mine owners are keen to list their companies is a result of the tax office and the stock exchange having joined forces to offer incentives for companies to go public. Any company which lists 40% or more of its equity on the exchange (that is, providing a free float) will get its corporate tax rate reduced from 30% to 25%.

In January, Macquarie Research forecast the coal price would increase to $88 per tonne, up from $55 per tonne last year, and raised their longer-term assumptions from $58 to $70 per tonne in 2012. A month later, the bankÆs global commodities group raised its benchmark coal forecast to $125 per tonne in 2008 and 2009. Supply disruptions in Australia and South Africa, and increasing barriers to entry due to higher infrastructure costs will combine with sustained Chinese and Indian demand to push the price higher.

One well-established beneficiary that has suffered a volatile couple of years is likely to be Bumi Resources because only 35% of its 2008 production has been locked into fixed prices. It also has an advantageous geographic location, a large reserve base and plans to double its production. The largest subsidiary of the Bakrie group, a diversified conglomerate, Bumi continues to suffer by association with another of BakrieÆs (indirect) subsidiaries, Lapido Brantas, which has û to public anger and ridicule û been trying to avoid responsibility for a gas blowout which continues to send waves of hot, smelly mud over large tracts of East Java. On the other hand, the conglomerateÆs current patriarch, Aburizal Bakrie, is a cabinet minister and widely regarded as the countryÆs leading ôgodfatherö.

This story is part of an Indonesia Report that was published in the April issue of FinanceAsia magazine.
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media