There is limited option for market participants to go against the energy bull market. We can always make up list reasons on why are we bullish. This time, I think the best way to showcase our conviction is to show you the video below:
and this:
Whether we are constructive on coal? The simple answer is YES. Energy is desperately needed to fight draught and heat, and when you mix the ingredient of inflation and energy supply shortage, we get a perfect cocktail of bull market ahead of us.
We have had chats with a couple of coal players in Indonesia on what do they think of coal. Almost everyone is investing away from coal. Below are some of the comments we got:
TOBA = we are going for electric vehicles
INDY = also electric vehicles. We have let go PTRO and MBSS to show our commitment
HRUM = nickel! We don’t do coal investing in the future, yet
ADRO = going renewables, prefer to invest on aluminum and hydro, but we still increase production volume on coal
PTBA = we are eyeing for stake in Dimethyl ether (DME) project, downstream of coal
DOID = copper!
MYOH = we are looking at nickel contractors and opportunities
Hillcon (soon to be listed) = also nickel contracting
UNTR = we are looking at other business outside of coal
From what we notice, those who still double down on coal projects primarily are BUMI, ITMG and lastly, BIPI.
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Our team met with BIPI’s management yesterday to hear their latest grand investment in coal asset.
To note, previously the company was founded as a petroleum company, but later converted to energy infrastructure in 2014, investing in conveyor belt and port services for two gigantic coal mine owners, KPC (East Kalimantan) and Arutmin (South Kalimantan).
Typically, these businesses are made for long term projects, which often lead to mid-teens level of IRR, or even lower. We note that capex might range from $3-5 million per kilometer range, and the company is charging $11-12 cent/ton/km. The beauty of this project is that BIPI earns more stability of earnings despite the volatility of coal price.
Going for Coal Investment
The leap of faith from the company is the plan that they are buying PTT’s asset, called as PTTML. An asset worth $471 mn that generates almost $50 mn of cash just in one quarter. The assets include Sakari Resources in Indonesia, Straits located in Brunei, and Yoxford Holdings located in Madagascar. PTT has planned to let go of this asset since three years ago, and BIPI managed to win the tender this year, against 12 others competitive bidders. The seller is looking not only for credibility of the buyer, but also the capacity of buyer to raise funding.
The company consists of 5 mining concessions located in Jembayan, Sebuku, Penajam, Madagascar, and Brunei.
PTT itself has been shying away from coal, knowing that even 30% of its business contribution is coming from coffee shops "Amazon", making the firm as the fourth largest in the world from coffee chain. Knowing their intention to leave the coal business by this year, PTT coal asset need to leave the book by November to BIPI.
Currently, the only coal asset that is productive is Jembayan, which is positioned under Sebuku. The mine produces 6.1 million tons per year of coal, with coal calorific value of 5,200-5,700 Kcal/Kg (GAR). In FY2021, the company generated USD109 mn free cash flow at the ASP of $84/ton. They estimates ASP to rise to $130/ton this 1H22.
The company produces 6.1mn tons from Jembayan alone, which is the only operating concession. The GAR ranges from 5,200-5,700. In FY2021, the company generated $109 mn free cash flow, at the ASP of $84/ton. Note that the 1H22 ASP is estimated to be USD130/ton. Assuming the coal prices stay at the same level, PTT is expected to generate USD200mn cash flow per year, some of it will be consolidated into BIPI's balance sheet upon the transaction completion.
The mine reserve is roughly 71 mn tons, with 493 mn tons of resources. Although the asset is small for PTT, this can be very positive for BIPI. The comparison of the acquisition value versus the other coal stocks valuation can be seen below:
Looking forward the next step is securing the funding. According to management, the purchase will be financed by third party lender, and will be refinanced next year by high-yield global bond. Any update on this front will determine whether we have conviction to this stock in the future, including the usage of cash flow post acquisition of PTT.
Whether we think the acquisition is attractive or not, we think yes. Many of the clients argue that BIPI might be buying coal asset at the peak of the cycle. We understand the concern amid the fact that expensive coal price makes the acquisition value looks cheap (referring to the gist that cyclical stock is expensive when the multiple is small). But seeing the condition that we have globally, from shortage of energy and increasingly expensive oil, we think the coal outlook remain constructive for now.
The asset itself is operated by credible contractors. From our latest discussion, Jembayan is equipped by PAMA’s team with long history of success, and secured with IUPs with options to extend for the next 10 years. Management notes that there might be a chance that July 2022 onwards’ cash flow might be able to be consolidated when the transaction is finished in November. If the negotiation can pull through, we note roughly $80-100 million extra cash from PTT can be booked on BIPI’s balance sheet.
Aside from the coal assets, BIPI has two conveyor belt projects, which cost USD 190-200mn. The projects are estimated to give an additional EBITDA of USD100mn per year.
Happy to discuss on our latest minutes of meeting
Cheers,
Boris, the Stock Broker 🐾
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