Seeking Alpha: Bukit Asam Looking To Power Through Weak Coal Prices

It's a rough world if you're a coal company. While there has been plenty of coverage regarding the fall of met coal prices and the impact of natural gas on U.S. Appalachian coal prices, the weakness really is a global phenomenon as Newcastle thermal coal prices have been sliding for about four years and now sit less than 50% below their former peak.

I have liked Indonesia's PT Tambang Batubara Bukit Asam ("Bukit Asam") (OTCPK:TBNGY) as a company for a long time now, but I was less bullish on the stock back in August after it had enjoyed a good run of outperformance. Since then, the ADRs have fallen about 25% while the local shares have dropped more than 30% in value - a bad performance, no doubt, but not so bad compared to Bumi Resources or ITMG, and still quite a bit better than American coal companies like Arch Coal (NYSE:ACI), Cloud Peak (NYSE:CLD), and Peabody (NYSE:BTU).

Is it time to sound the all-clear? While the shares do seem about 20% undervalued on a long-term basis, the share price is still very vulnerable to further weakness in Newcastle spot prices. I like the clean balance sheet and low cash operating costs, and I think the company's efforts to diversify into power generation will offer good shareholder value down the road. The real question, then, may be whether investors have the patience to see the shares dig out a new low before heading up and whether the industry will show discipline with respect to production.

Before going further, it's well worth noting that Bukit Asam's ADRs are not very liquid. Buying the Indonesian shares may or may not be an option for you, but the weak volume of the ADRs is a definite risk factor that investors must consider. While I would expect to see volume pick up if/when coal stages a recovery, illiquid stocks can be painfully difficult to exit from when things get rough.

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Bukit Asam Looking To Power Through Weak Coal Prices

Seeking Alpha: Arch Coal Still Looking For Light At The End Of The Tunnel

Badly beaten-down stocks can often look quite tempting to investors who appreciate how often the Street overshoots both during good times and bad. In the case of coal, though, that remains a difficult trade. Asian producers like China Shenhua (OTCPK:CSUAY) and PT Bukit Asam (OTCPK:TBNGY) continue to perform relatively well (as I've written here and here), but weak met coal pricing and ongoing rail disruptions in the Powder River Basin are bedeviling Arch Coal's (NYSE:ACI) operations.

Very few analysts are willing to stick their necks out for Arch Coal at this point, with five Strong Buy/Buy ratings matching the Underperform/Sell ratings (and 11 in the middle at "Hold"), and the short interest is around 15%. There is certainly still a real risk that met coal prices don't recover as expected (or should I say hoped?) in 2015 and beyond, and likewise a risk that domestic thermal demand declines further.

It's also very difficult to construct a model wherein these shares look truly cheap. All of that said, Arch Coal has about $1.25 billion in liquidity today, no major maturities until 2018, and may be able to limit the cash burn to $500 million between now and a return to positive free cash flow in 2017 or 2018. I'd much rather own China Shenhua, PT Bukit Asam, Peabody (NYSE:BTU), or Cloud Peak (NYSE:CLD) from a safety/certainty standpoint, and I still think Arch Coal is looking at a very difficult road, but I suppose there's a play here for investors who think that coal pessimism could bottom.

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Arch Coal Still Looking For Light At The End Of The Tunnel

Seeking Alpha: Bukit Asam's Production And Delivery Growth Offset Weak Pricing

The coal market has been lousy for most of the major U.S. and international producers, but PT Tambang Batubara Bukit Asam ("Bukit Asam") (OTCPK:TBNGY) has been a notable exception. Between organic production growth, strong domestic prices, and good cost control, Bukit Asam shares have jumped 50% since I wrote about the company in January, handily beating China Shenhua (OTCPK:CSUAY), Peabody (NYSE:BTU), and U.S. producers like Cloud Peak and Arch Coal (NYSE:ACI). I do see some long-term upside from the company's aggressive production growth plans and an eventual seaborne thermal coal price recovery, but I don't see as much near-term value in the shares right now.

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Bukit Asam's Production And Delivery Growth Offset Weak Pricing

Seeking Alpha: China Shenhua Muddling Through Better Than Most

Six months ago I was pretty down on Yanzhou Coal (YZC), as I didn't like the company's asset mix or cost structure relative to other Chinese coal companies like China Shenhua Energy (OTCPK:CSUAY) or Indonesia's PT Bukit Asam (OTCPK:TBNGY). Since mid-December, Yanzhou's ADRs have fallen more than 13%, while Shenhua's shares have fallen about 7% and Bukit Asam's have risen about 5%. In that time, coal markets really haven't improved much as supply continues to stay well ahead of demand and producers are loath to close capacity.

Not all coal companies are the same, though, and this could be a reasonable time to consider China Shenhua. The company has large thermal coal reserves, but also highly integrated coal-fired power generation and railway assets. Though I'm not expecting a fast turnaround in Chinese coal prices, Yanzhou has one of the best cost structures in the business and its parent company could inject addition value-creating assets into the business. At a somewhat distressed multiple of 6x EBITDA these shares offer a decent total return, while a more normalized 7x multiple would offer a good return.

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China Shenhua Muddling Through Better Than Most

Seeking Alpha: Bukit Asam Offers Attractive Growth And Costs To Offset Weak Coal Prices

The coal story today is a global story, and Indonesia is no exception. While PT Tambang Batubara Bukit Asam (OTCPK:TBNGY) ("Bukit Asam") offers some of the best volume growth potential of any coal company and attractive cheaper-to-mine coal reserves, weak global coal prices have weighed heavily on the shares.

I believe this is a good time for risk-tolerant investors to consider a company like Bukit Asam. It will be difficult for countries like Indonesia, China, India, and Vietnam to reach their growth ambitions without expanding their electricity output and coal is likely to remain the backbone of those utility infrastructures for the time being. Moreover, Bukit Asam offers exception volume growth potential over the next few years and the prospect of lower transportation costs. Even if Bukit Asam's historical valuation multiples decline to a level more akin to global coal norms, these shares look more than 20% undervalued today.

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Bukit Asam Offers Attractive Growth And Costs To Offset Weak Coal Prices