Sun, 06 Jul 2008
Published: July 3 2008 01:48 | Last updated: July 3 2008 01:48

Bayan Resources on Wednesday highlighted the interest investors are taking in Indonesia, the world’s largest thermal coal exporter, when it announced plans to raise up to $695m by floating 25 per cent of its shares on the country’s stock exchange next month.

With countries including China looking for alternatives to oil, global demand for Indonesia’s largely low-grade thermal coal, used mostly in power stations, is surging, helped by the fact that suppliers, including Australia and South Africa, can no longer meet demand.
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The price of thermal coal has climbed more than 160 per cent in the last 12 months. Power station coal prices at Australia’s Newcastle port, a benchmark for Asia, jumped to a record $172.10 a metric tonne in the week ended June 27.

“Momentum is still very much in favour of coal, ahead of other commodities,” says James Bryson of HB Capital Partners in Jakarta.

On the back of the rise in prices and demand Bumi Resources, Indonesia’s largest coal miner, has seen its share price climb 922 per cent in the last 18 months.

According to Harry Su of Bahana Securities, Indonesia’s big four listed miners now comprise some 15 per cent of the country’s stock exchange’s $200bn market cap and 20 per cent of its daily turnover.

Analysts said Bayan, a smaller player that produced 4.7m tonnes of coal last year, could draw interest from investors seeking similar returns.

The company has a goal of increasing production to 18m tonnes by 2010.

Dozens of foreign companies have bought stakes in Indonesian mines in the last two years. India’s Tata Power, for example, last year paid $1.3bn for stakes in both of Bumi’s mines and 10m tonnes of coal. Dozens more companies have started green field projects in the last year.

Indonesia’s government is mostly supportive of the expansion.

Simon Sembiring, the director-general at the energy ministry responsible for mining, told the Financial Times it would be “stupid” to reimpose an export tax lifted in 2006 and that there are “no plans to ban or limit exports” provided domestic demand is met.

Indonesia absorbed 52m tonnes or 24 per cent of the legally recorded 215m tonnes mined last year.

Demand is expected to remain constant this year and jump to 75m tonnes next year, 90m in 2010 and 220m tonnes in 2025 as new power stations come on stream.

Operators’ concerns about domestic prices being much lower than the international market have receded in recent weeks after PLN, the state electricity company, signed contracts to buy coal at $90 a tonne.

Mr Sembiring stresses, however, that foreigners would not be allowed to mine and export at will.

“If we met all the demands from China, India, Japan and Korea, all the coal would be gone in a few years,” he says. “It’s not just about chasing the money. We have to make sure we still have coal for the next 20 years.”

There are, however, very significant impediments to investing securely in Indonesia’s coal sector. The last contract of work was signed in 2000 and the world’s major players are waiting for a new mining law, which has already been three and a half years in gestation.

The other way to develop a coal mine is to form a joint venture with a local company that has obtained a mining licence from a district level government. Industry players describe such deals as “the wild west” because of the lack of oversight over the legitimacy of the estimated 5,000 of these licences that have been issued.

Jim Dracopoulos, a consultant with 13 years’ experience of Indonesia’s mining sector, says it is not uncommon to go through several dozen licences before he finds one he is satisfied is completely legitimate.

Despite the hurdles, the queue of investors appears to be getting longer, with hedge funds and private equity groups now providing financing too.

“In the short term we don’t see any quick fixes out of Australia or South Africa,” Mr Dracopoulos says. “In five years we might see output changes from Australia or South Africa but that’s not a dead cert.”

Bumi Resources, Indonesia’s largest coal miner, increased its takeover offer for Herald Resources, by 1.8 per cent to A$563.5m on Wednesday to break a stalemate in a six-month battle to control the Australian metals company. The rival Tango consortium, comprising Aneka Tambang of Indonesia, and Shenzhen Zhongjin Lingnan Nonfemet of China, said it would meet soon to consider its response. Both bidders hold about 19 per cent of Herald.



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