The advantages of the approval are four fold for Straits Asia; that is, 1) 50-60mt higher reserves from a 12 meter thick coal seam, 2) 2-6mt higher production in the medium-term, 3) lower weighted average costs due to low 4x stripping ratio, and 4) weighted average higher selling price due to higher coal quality. We expect the company to increase production within nine months and for the Sebuku mine to produce 3-4mt in 2010.
We re-iterate our Buy rating on Straits Asia despite its strong performance year-todate as we expect a shortfall in thermal coal over the next two years. We believe coal demand will regain momentum inline with economic growth, while supply remains tight due to neglect and lack of investment. As Chinese metal smelters ramp up production in H209, we note that coal prices should strengthen further as they account for 25-30 pct of power consumption.
Our 12-month price target of S$2.50 is based on a 2010E PE multiple of 12.7x and WACC of 13%.
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