Banpu

Banpu Plc (BANPU)

Investment thesis: BANPU’s stock price fell far more steeply than we expected because of concerns about coal prices during a period of seasonally low demand coupled with worries that with the price of US natural gas falling to US$2.50/mbtu, there may be a coal-to-gas switch there, leading to US mines dumping coal on the Asian market.
The scale of BANPU’s price fall represents an overreaction. During the past two months, the benchmark New Castle Index has declined 15%, but BANPU’s price has dived 32%. Although we don’t see any short-term catalyst for the stock, as the coal price will track sideways for the next few months, we think BANPU is trading close to its bearish valuation level—while MS forecasts a Chinese economic recovery in 2H12, which should push coal prices back up.   
Stock is trading close to cash cost: The current stock price implies a coal price of only US$82/t versus a spot price of $98/t (MS’s long-term projection is $100/t). According to Wood Mackenzie, BANPU is trading close to the mean cash cost of US and Russian operators of $80/t. If the spot price were to fall to $80 (and Wood Mackenzie is correct), it would force out high-cost operators, bringing on immediate supply tightness. That would also reduce the number of new coal projects, whose mean cash cost is projected to rise to the $100-110/t range (Figures 1 and 2). 
Price troughed at $62/t in 2008 crisis, but won’t be the case this time round: In the wake of the 2008 global crash, the thermal coal price bottomed out at US$62/t with a 2008 average of $72/t. If it follows a similar pattern, we could expect another 20% downside to BANPU’s current share price. But we don’t think that scenario will play out this time round—the last coal price trough coincided with an oil price collapse (oil price dropped to a nadir of $30/bbl versus the current spot of $109/bbl). Based on a similar heating value, MS’s bear-case oil price scenario of $85/bbl implies a thermal coal price of about $90/t.
Limited upside to near-term coal price, but a decent recovery expected in 2H12: With a Chinese coal inventory of 18 days and a slowing economy in that country, we are now less optimistic about the scope for a June coal price rebound than we were previously, as restocking season (which usually starts in late May) is unlikely this year. But with Beijing stimulus measures streaming in, MS economists believe China’s GDP growth has now troughed and will rise noticeably in 2H12. If MS is correct, faster GDP growth will mean stronger demand for thermal coal and higher prices during 2H12, in our opinion.