The Indonesian government is planning to reduce coal royalties for specific mining companies that focus on domestic coal gasification projects. This move aims to promote downstream industries, particularly coal-to-dimethyl ether (DME) production, which is being developed as a substitute for imported liquefied petroleum gas (LPG). By cutting royalties, the government seeks to incentivize investment in these value-added projects, balancing environmental considerations with economic development.
The reduction in royalties is expected to make DME projects more financially feasible for mining firms. However, this comes amidst ongoing debates about the long-term sustainability and profitability of such ventures, as the technology for coal gasification remains costly, and the carbon tax regime adds financial pressure.
PT Bumi Resources Tbk (BUMI) is Indonesia's largest coal producer and a key player in the global energy market, operates major mining assets, including the Kaltim Prima Coal (KPC) in East Kalimantan and Arutmin Indonesia mines in South Kalimantan. Both KPC and Arutmin boast substantial reserves, with 1 billion tons of coal reserves and 4.5 billion tons of coal resources combined. Based on an annual production rate of 78 million tons, the estimated life of mine stands at approximately 12.8 years.
BUMI's largest shareholder is the Salim Group, which holds over 50% ownership through Mach Energy Ltd. (45.8%) and Treasure Global Investment Ltd. (8.1%). The Bakrie Group retains a c.20% stake, with the remaining shares held by the public. However, BUMI owns a 20% stake in Bumi Resources Minerals (BRMS), which operates in the gold and copper sectors. Notes, despite holding a 51% ownership in KPC, BUMI does not consolidate KPC into its financial statements. Instead, KPC’s earnings are recognized as income from associates.
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Based on our model, A 1% reduction in BUMI's royalty rate could boost its net profit by approximately 8%. Currently, BUMI’s average royalty rate ranges between 27% and 30% of revenue. Notes, our model only calculate Arutmin operations, as KPC’s results are recorded as income from associates and are not included in the consolidated revenue. This suggests that any adjustments in the royalty rate would have a significant impact on BUMI’s profitability.
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BUMI projects steady coal production of 78–82 million tons (MT) for 2024–26 while maintaining a stripping ratio (SR) of 10–11x. This consistent output and operational efficiency are expected to translate into stable cash costs over the next three years, assuming oil prices remain steady.
Since the Salim Group became a shareholder and converted debt into equity, BUMI's financial performance has improved markedly. Interest expenses declined significantly by 86% in FY23, reflecting the company’s strengthened financial position. Additionally, the net debt-to-equity ratio saw a dramatic improvement, standing at 0.2x as of 1H24, a substantial reduction from its peak of 12.7x in 2020. These changes underscore BUMI’s enhanced financial stability and operational resilience.
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Although BUMI is not part of our stock coverage, we believe its share price has the potential to surge significantly if the government confirms a reduction in coal royalties. Therefore, as a momentum-driven trade, BUMI is a stock worth considering for short-term trading opportunities.
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