What’s on the table
Coal sector - climate change - Dodging a bullet in Bali? One result of the contentious conclusion to the UNCCCP conference is that there will be no immediate pressure on coal consumers and producers from tougher reduce carbon dioxide/GHGs emissions.
The “success” of the US government in preventing specific emission reduction percentages from featuring in the summit text means firm targets may not be finalised until Dec 09, when the next UNCCCP conference convenes in Copenhagen.
While an agreement to cut emissions by 25-40% of 1990 levels by 2020 has been sidestepped, Bali has launched the process of finalising a replacement for the Kyoto Protocol, which will expire in 2012. Thermal coal spot prices strengthened again last week to the US$90/tonne level, above our US$75/tonne assumption for FY08.
However, we retain our current assumptions given price volatility that is producing weekly price movements of up to US$5/tonne. Maintain Neutral recommendation, Banpu and TB Bukit Asam top picks.
We maintain our Neutral recommendation on the thermal coal sector, but note that Banpu and TB Bukit Asam remain attractively valued on our conservative FY08 benchmark price assumption of US$75/tonne. We retain our Outperform recommendation on both these companies. We also have an Outperform on United Tractors, given its growing involvement in coal mining, and buoyant trading conditions at its heavy equipment and contract mining divisions.
We maintain our Underperform recommendation on Bumi Resources due to concerns over escalating capex plans. We also maintain our Underperform on Straits Asia despite its recent share price correction. The company still has to complete its Jembayan acquisition, which is expected to happen by year-end.
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