You can contact the author (Teguh Hidayat) by email, The author live in Jakarta, Indonesia.

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Bumi Resources, and The Rising Coal Price

In one session of value investing training some time ago, a participant asked, ‘Mr. Teguh, what is your opinion about Bumi Resources (BUMI)? I read your article about the company’s management attempt to restructure their debts. If the attempt was a success, the stock will rise, no?And I replied, ‘Whether BUMI would successful or not in restructuring its debts, or whether the company’s financial performance will improved in the future, that only time will tell. But one thing for sure, the decision to buy BUMI at the price of Rp50 per share clearly offers a very different risk (and also different potential gain) than if we buy the stock at Rp1,000 per share. I'm not interested when BUMI was still trading at Rp1,000s per share, but what if we can buy it at 50 only?

BUMI has just reported its financial performance for the first semester of 2016, which shows no significant improvement: The revenue fell from US$ 21 to 12 million, and the company still reported losses of US$ 11.8 million. BUMI’ equity is still minus aka capital deficiency of US$ 2.8 billion, and the company has long-term debts which maturing within the next year amounting to US$ 3.6 billion, which, if the management does not manage to pay it off, postpone the payments, or convert the debts into shares, then BUMI will certainly be bankrupt. From this point of view, BUMI is still a company with the worst of the worst performance in the Indonesia Stock Exchange. Actually, the company is dying.

However, from the operational side, the year of 2015 might already be the lowest point for the company, as since January 2016 until today, the situation of coal business have been a little better. Okay, let's see. In 2015, BUMI sold 79.3 million tons of coal, down 6.4% compared to 2014, while the selling price of coal was also only US$ 45 per ton, plummeted compared to US$ 53 per ton in 2014. However, BUMI, like most of other coal companies, during 2015 was able to reduce its operating costs for coal production (excluding financial costs such as debt interest), of which cash cost fell to US$ 30 for every ton of coal mined, from previously US$ 35.

While in the first half 2016, BUMI sold 41.9 million tons of coal, increased 5.1% over the same period in 2015, and its cash cost dropped further to US$ 27. And while the selling price of BUMI’ coal still fell to US$ 40 per ton, but that's because the benchmark price of coal at Newcastle Australia was at its lowest points during the period. From January to June 2016, the prices of Newcastle coal were only US$ 53 – 57, compared to the same period in 2015 which were US$ 63 67 per ton (Note: the prices of Indonesian coal, in this case thermal coal including those of BUMI’, are almost always lower than the price of Australian coal because of lower quality. But everytime the price of Australian coal goes up or down, the price of Indonesian coal would follow).

The good news, lately the Newcastle coal prices start rising.. that when this article was written, it is already US$ 78 per ton! So BUMI, as well as any other coal companies, sure will enjoy an increase in revenue throughout the second half of 2016 (assuming that they not limit their productions), and operating income will be greater than 2014 and 2015, given the costs of coal production are now much cheaper than years ago.

The benchmark of coal prices in last six months, so far has risen almost 40%

However, no matter how good BUMI’ performance from the operational side, but as long as the company can not deal with its debt problems, the company will still suffer huge losses. So it is important to look at the development of the debt restructuring proposed by the company (to its lenders). In above already mentioned that if BUMI’ management did not managed to pay off its debts, filed delays of payment, or convert the debts into shares, then the company can be certain to be insolvent. And because the option to pay off the debt is impossible, the management could only propose for delays of payment or conversion of debt into shares, aka restructuring. Since last year, BUMI’ management has submitted a proposal to its creditors which offers to convert the debts totaling US$ 2.8 billion into shares of BUMI, and shares in BUMI’ subsidiaries, while the remaining debts of US$ 1.2 billion (BUMI had debts of approximately US$ 4 billion), its maturity is extended to five years, and as compensation, the company will add more collateral. You can read a more detailed information in here.

BUMI will convert its debt in the near future?

Now, after over a year, how it goes? Here we go. On October 27, the management of BUMI will attend the trial of PKPU (Penundaan Kewajiban Pembayaran Utang, aka Suspension of Payment) related to its debt amounting to Rp28.5 trillion, of which there are only two possibilities: 1. BUMI will be bankrupted, or 2. The debt converted into shares, at least some of them. If BUMI goes bankrupt, it means the end, and Bakrie Group must get out of the company, which is unlikely given the reputation of the Bakrie Group that has always escaped bankruptcy (yes, they even survived the crisis of 1998 and 2008), and because the coal prices (finally) started to rise.

Meanwhile, if the creditors agree to convert their credit into shares, then BUMI will issue new shares (right issue) for those creditors, and the exercise price of the right issue is based on the average price in the market during the 25 trading days preceding the effective date of the right issue itself. Well, here it comes the fun part: We know that the average market price for BUMI in last month is around Rp70 – 80 per share. If the exercise price of the right issue is settled at Rp70 80, then the company must issue lots of new shares, ie up to hundreds of billion shares because the value of the right issue will also very large, ie up to Rp28.5 trillion (about US$ 2.5 billion). And if BUMI do have to issue that much of new shares, then the ownership of Bakrie Group on BUMI would be diluted to the extent that they will become minority shareholders and lost control of the company, and Mr. Aburizal Bakrie obviously does not want that to happen.

So what is the solution? Well, the share price of BUMI in the market should be pulled up to a certain level, so that the exercise price of the right issue will not set at the level of Rp70 80 per share but higher than that, so the company will only need to issue new shares in a lesser number, and Bakrie will remain the majority stakeholder in BUMI! So maybe that’s why BUMI started to skyrocketted in the past two days. But unlike previous rallies, this time the increase in share price has a strong analytical basis. Should the management of BUMI later received approval to convert the company's debt into shares, the rally will continue.

Okay Sir, so are you saying that the stock is worth to buy? Well, I told you one year ago that BUMI is indeed interesting at the price of Rp50 per share! Sadly almost nobody listening. But once again, it must be remembered that the company's performance is still a mess, and even if the management is successfully convert the company’s debt into shares, it is not a guarantee that BUMI will return to make a profit in the future, so the decision to buy the stock at this moment is still closer to speculation rather than investment. If you want to play safe, then you should wait for some of the following: 1. BUMI actually received approval to convert its debt, after the trial meeting on October, 27, 2. BUMI reported a positive equity value, aka no longer the capital deficiency, for obtaining additional capital from its rights issue plus the reduced value of the debt, and 3. The company posted a net income, maybe next year or the year after (2017 or 2018) assuming the rise in coal prices continues or at least not falling back.

But one thing: When the three points above eventually happen, it is almost certain that the stock would already rose high, can be much higher than its current price. So if you dare to take risks, well, here you go your 'stock a million people', just take it now or never!

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