RESOURCES PRIMA: 5 takeaways from FY15 results briefing

Resources Prima's stockpile of coal (foreground) and the crushers and jetty in the background. Image from corporate video.
#1 Imminent award: HOW CLOSE is Resources Prima to being awarded a government permit to mine a large section of its coal concession in East Kalimantan? 

Very close it would seem. Resources Prima last week said it had cleared three out of four major steps -- ie,  Recommendation by the Mayor of Kutai Kartanegara; recommendation by the Governor of East Kalimantan; and recommendation by the Directorate General of Coal under the Ministry of Energy and Mineral Resources.

The final step is the issue of a so-called “borrow-use” permit by the Ministry of Forestry.

Analysts say Resources Prima could secure the permit over the next few weeks.

The permit will translate into higher resource and reserve estimates for Resources Prima, enhancing the value of the business (and the stock price).

In Resources Prima's RTO circular, an independent valuation pegged the fair market value of the mining assets and business as at 31 March 2014 to be US$220 million - US$330 million, with a "most likely value" of US$275 million (S$385 million). This is way above the current market cap of Resources Prima (stock price: 13 cents) of S$244 million.

And this is before factoring in the value of the reserves and resources of the 1,625 ha concession area covered under the second "borrow-use" permit.

This1,625 ha area represents 84% of the concession awarded to Resources Prima with 16% represented by the area covered by the first borrow-use permit already awarded.

Will there be a need for high capex? Apparently not, since the company will focus first on the mine area of to the west of the current site, so its existing infrastructure can still support expanded operations. 

John Watson, CFO of Resources Prima, at last week's results briefing. Photo by Leong Chan Teik#2: Profitable operations: Resources Prima last week released its 4QFY2015 (ended March 2015) results. In that quarter, Resources Prima earned a net profit of US$5.8 m compared to a loss of US$3.3 m a year earlier.

That 4QFY15 performance reflected the operating business, while the preceding quarter (3QFY15) was hugely loss-making because it included non-recurring charges (amounting to US$61.5 m) related to the reverse takeover exercise leading to the listing of Resources Prima in Nov 2014.

For the full FY15, Resources Prima's net loss amounted to US$64.2 m, which would have become close to break-even if professional fees for the RTO were deducted on top of the US$61.5 m non-recurring charges relating to goodwill and shares paid to the arranger. 
 
#3: Boost from reduced waste mining rates: On 2 April 2015, the company reached an agreement with its waste mining contractor for a reduction in the waste mining rate which will result in a cost reduction (including value-added tax) of between USD2.70 per metric tonne and USD3.40 per metric tonne.

Agus Sugiono, executive chairman of Resources Prima.
NextInsight file photo.This new rate will apply with the start of drilling and blasting activities, instead of conventional excavation.

Waste mining costs -- ie the removal of rock, soil, etc covering coal seams -- are the single largest component of the cost of goods sold, accounting for 47% of the COGS in FY2015.

#4. Provision of facilities to other miners: Resources Prima owns the full range of infrastructure for coal mining -- from a 31-km all-weather road leading from its mine to the stockpile site to coal crushers and conveyors and to a jetty from where coal is transported by barges to mother ships.

The company has leased the use of these facilities to a third-party coal miner (which operates in the vicinity) and has signed on another four users, who will begin contributing revenue when their mines start operations from this FY onwards.

The current user paid US$2.3 m in FY15, a figure which can be considered the base. It will rise if the customer increases its already-low coal production.

Giovani Sugiono, sales & marketing director of Resources Prima. Photo by Leong Chan Teik.#5. New trading business: Resources Prima has had a single off-taker (ABK) to date, and the agreement is up for renewal. Resources Prima will continue to sell to ABK but not on an exclusive basis. 

Resources Prima will do some selling itself in order to earn a higher profit margin.

In addition, it will buy coal of lower calorific value from other miners and blend it with its coal of higher calorific value which averages 5,600 kcal/kg gar, one of the highest grades of thermal coal. 

Coal of lower calorific value may not be economical to mine but it can become viable if blended with Resources Prima's coal.