RESOURCES PRIMA: Up-and-coming Indonesian coal miner

Resources Prima's stockpile of coal (foreground) and the crushers and jetty in the background. Image from corporate video.

COAL PRICES have been trending down in recent years, making coal-miners a difficult investment story.

The roller-coaster ride of Resources Prima since its listing in Nov 2014. The RTO was effected with the issue of shares to the vendor at 20 cents. A share placement was also done at 20 cents.
 Chart: Yahoo!But recently-listed Resources Prima Group has interesting investment merits, going by a presentation by its CEO, Agus Sugiono, at a recent roadshow. 

Following other presentations by him, market sentiment towards the stock has improved (see chart). 

There is better appreciation of a company that listed on the Catalist board of the Singapore Exchange just five months ago and whose stock has been volatile, inexplicably falling sharply by as much as 48% in a single day in January. 

This is a young company, and there is a lot of gruelling work ahead. But there is also significant upside from extracting coal in its concession in East Kalimantan.

Key takeaways from Mr Sugiono's presentation at CIMB on Wednesday (April 8):

1. Upcoming 4QFY15 results: They should be prettier than the 3Q (ended Dec 2014) results since there will be none of the one-offs that led to the huge 3Q loss of US$63.7 million. 

The one-offs, which were non-cash. included the cost of arranger shares, goodwill written off, and professional fees related to the reverse takeover of Sky One Holdings that led to Resources Prima's listing in Nov 2014.

Without these one-offs, the 4Q results would better reflect the fundamentals of the strongly growing business. 

Argus Sugiono, 52, Executive Chairman & CEO of Resources Prima, has over 27 years of experience in the oil, gas and petrochemicals industry.
In the background is his son, Giovani, 26, the company's sales & marketing director. Photo by Leong Chan Teik.2. Big permit to come: Resources Prima has applied for a permit to mine a massive 1,625 hectares in its concession. This so-called "borrow-use" permit from the Minister of Forestry is necessary as the mining operations will first involve the deforestation of the area.

If and when granted, the permit will lead to a major increase in the company's coal reserves and resources.

Currently, Resources Prima has a permit to mine 309 hectares in its concession -- just 16% of the concession -- in an area called the Rinjani Mine.

As of end-2014, it has extracted 2.5 milion tonnes of coal since it commenced mining operations in June 2012 after obtaining the permit in Dec 2011. (Note the short track record of the company).

3. Valuation: 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 of S$253 million. This is before factoring in the value of the reserves and resources of the 1,625 ha concession area for which the company is seeking a "borrow-use" permit. 

4. Medium-high grade coal: The coal in Resources Prima's concession has an average calorific value of about 5,600 kcal/kg gar, one of the highest grades of thermal coal. 

The offtake is entirely purchased by PT Anugerah Bara Kemilau. Going forward, with greater production arising under the second "borrow-use" permit, Resources Prima is planning to trade coal in order to earn a higher profit margin.

5. Competitive edge: Resources Prima owns the full range of infrastructure -- to begin with, it built the 31-km all-weather road leading from its mine to the stockpile site. This is a relatively short distance and translates into significant cost savings, unlike the hundreds of km that many mines are located from their stockpile sites.

Resources Prima also owns coal crushers and conveyors and the jetty from where coal is transported by barges to mother ships.

By owning all this infrastructure, the company enjoys a cost advantage.

These facilities have an annual processing capacity of 6 million tonnes, with about 2 million being utilised currently.

The excess capacity is being monetised (4.2% of FY2014 revenue) by leasing it to other coal miners, a revenue stream that will continue even after Resources Prima starts mining under the second "borrow-use" permit and needs about 4 million tonne capacity for its own use.

The current infrastructure is sufficient for supporting the increased production under the second permit -- in order words, there will not be additional capex.