Bumi Resources Gearing rose to an alarming rate

Bumi Resources:  Gearing rose to an alarming rate (BUMI, Rp630, TP: Rp500)
BUMI posted net loss in 1Q13 of US$62mn vs US$100mn net loss in 1Q12 due to less forex loss and gains in derivatives, which within our FY forecast of a net loss at US$228mn. Operating profit stood at 19% of our FY forecast and 15% consensus’s. Equity value eroded by 40% as net gearing spiked to an alarming rate of 14x vs 9.5x end of 2012, ultimately suggesting a potential risk of capital raising. Maintain Sell and TP maintained at Rp500 implies 22% downside.

Production volume in-line.  BUMI produced 19.6Mt (+25%YoY), which was one of the best operational performing quarter on the basis of good weather, still within our FY forecast of 78Mt. However, weak ASP at US$72/t (-22%YoY) dragged down its earnings and margins as the Company recorded 8.3% operating margin in 1Q13 vs 11.5% in previous quarter or 14.5% in 1Q12. Strip ratio was lowered to 9.5x (-12%YoY) but was partially offset by higher fuel consumption, which lowered total cash cost.

Greater balance sheet risk. As of March 2013, BRMS, BUMI’s affiliated subsidiary, recorded worsening working capital to negative US$390mn vs US$270mn at the end of 2012. Operations worsened as Newmont’s 1Q13 gold and copper production continues to fall 36%YoY and 7%YoY respectively. Consolidated at the Group level, BUMI may face financial commitments to support BRMS, which will put BUMI’s balance sheet at risk.

Overhang on deleverage plan continues and debt services worsen. BUMI’s non core asset BRMS monetization plan continues to extend beyond schedule due to a bleak industry outlook and weak earnings performance from Newmont. With interest expense remaining high at US$146mn in 1Q13 and performance deteriorating at the EBITDA level, creditors may pose a reason to worry when debt services fall below 1x.