It absolutely makes sense for the following reasons: According to the agreement between Bayan and KSC (see excerpt from Bayan's 2008 prospectus below) Bayan was obliged to supply the Tabang plant with at least 1.6 Mtpa of raw coal at a fixed price for four years (after which it could have been adjusted). According to an analyst report from Bell Porter (http://www.whiteenergyco.com/documents/white_energy_time_to_refocus_attachment_1.pdf, p.2) this fixed price amounted to $8.60/t which is far below current export price for coal of Tabang's quality ($55/t). So for each ton of coal they would have deliverd to the BCB plant they would have lost $46.40 and I doubt their profit share from the sale of briquettes could have offset this loss. In addition as you can read in my previous post (http://hotcopper.com.au/post_single.asp?fid=1&tid=1700980&msgid=9857606) Bayan's Tabang mine is lagging far behind its production targets (in 2012 they intend to produce 0.6 Mtpa while they once forecasted 1.4-1.5 Mtpa for 2010!) and production costs have exploded due to the strip ratio worsening by 346% to 712%! So Bayan has not been able to deliver enough coal which would have made them liable for damages. On top of that they would have needed to significantly invest in this potentially more or less profitless mine in order to ramp up production, which however has become unexpectedly expensive due to the worsened strip ratio. And lastly if the first plant had operated as expected near nameplate capacity Bayan would have been obliged to jointly build up to two more plants with WEC in Tabang which would not only have forced Bayan to partly fund the construction costs of these additional plants but also to increase production of their Tabang mine even more so it could deliver coal for all three plants which would have required some 4.5 Mtpa. All in all they would have needed to invest probably an amount in the range of three digit of millions while return would have been significantly lower than selling the coal into the export market, which trades low rank coal at almost triple the price of what it was traded when these agreements were made. Basicly it's Bayan's failure to ramp up production of their Tabang mine and the dramatic increase in pricing for low rank coal which have fundamentally changed their economics and made coal upgrading unattractive to them. Besides this development Indonesian coal producers face an export ban for low rank coals, which has been discussed for a long period now. The draft law said that the export ban should become effective from 2014 or even earlier once coal upgrading technology becomes commercially available. The coal industry has been trying to avert this law by arguing that coal upgrading just doesn't work. Now if Tabang had proven its viability not only would the coal industry's assertion have been disproved but it could even have resulted in the export ban becoming effective very soon which would have cut profits significantly. So this plant in Tabang posed a threat not only to Bayan but to the whole Indonesian low rank coal industry. Against this background it absolutely makes sense for them to pull out even if they will be convicted to pay millions in damages to WEC.
When you say it doesn't make sense for Bayan to pull out after some $45m pumped in, does it actually make sense to pull out after almost three years of work on the plant which was in the final step of substantial modification works worth at least a dozen of millions? The plant was only missing some simple pipework for the dust extraction system (see p. 13 of WEC's latest company presentation to see how far the modification works had come when Bayan pulled out: http://www.whiteenergyco.com/pdf/Company%20Presentation%20April%202012%20-%20WEC.pdf) If they had just waited for another month these pipes to be installed the plant would probably have proven that it is working. It is absolutely obvious to anyboby following these developments closely that Bayan had the simple intention of stopping this plant at any price.
Excerpt from Bayan's 2008 prospectus, p. 174 (http://www.bayan.com.sg/dlw/prospectus/prospectus_english.pdf):
Kaltim Supacoal Coal Supply Agreement
Tabang has entered into a coal supply agreement with Kaltim Supacoal dated April 3, 2008 for the supply of:
- up to 1.6 million tonnes of coal complying with the specifications of the agreement each year for each 1.0 million tonnes of coal briquettes per year that Kaltim Supacoal's coal briquette processing plants can produce, subject to a maximum of 3.0 million tonnes of installed capacity at the coal briquette processing plants; and - such quantity of coal that is required to power the electricity generator such that it will have the capacity to generate sufficient electricity to power 3.0 million tonnes of installed capacity at the coal briquette processing plants,
in each case at a base price that is fixed based on the quality of coal supplied for the first four years and, thereafter, the base price is the total cost for the mining and delivery of the coal for the previous year, adjusted to take into account any increases in the cost of mining and delivery of the coal plus a margin.
In addition following any request by Kaltim Supacoal for the supply of any coal that is in excess of the quantities specified above, Tabang is required to use its best endeavors to meet any such request subject to mutual agreement as to the price for the excess coal.
Under the agreement, title to the coal passes to Kaltim Supacoal as the reclaimer breaker located at or near the coal briquette processing plants. Kaltim Supacoal is entitled to either reject a shipment if the shipment exceeds any one or more rejection limites specified in the agreement, or accept any such shipment at a price to be mutually agreed instead of the base price.
The agreement terminates upon the earlier of the expiry of the Tabang KP or the date on which the coal reserve at the Tabang concession area is exhausted. The agreement may also be terminated by a non-defaulting party where there is a material breach by the oterh party that is no remedied within 30 days.):
Kaltim Supacoal Coal Supply Agreement
Tabang has entered into a coal supply agreement with Kaltim Supacoal dated April 3, 2008 for the supply of:
- up to 1.6 million tonnes of coal complying with the specifications of the agreement each year for each 1.0 million tonnes of coal briquettes per year that Kaltim Supacoal's coal briquette processing plants can produce, subject to a maximum of 3.0 million tonnes of installed capacity at the coal briquette processing plants; and - such quantity of coal that is required to power the electricity generator such that it will have the capacity to generate sufficient electricity to power 3.0 million tonnes of installed capacity at the coal briquette processing plants,
in each case at a base price that is fixed based on the quality of coal supplied for the first four years and, thereafter, the base price is the total cost for the mining and delivery of the coal for the previous year, adjusted to take into account any increases in the cost of mining and delivery of the coal plus a margin.
In addition following any request by Kaltim Supacoal for the supply of any coal that is in excess of the quantities specified above, Tabang is required to use its best endeavors to meet any such request subject to mutual agreement as to the price for the excess coal.
Under the agreement, title to the coal passes to Kaltim Supacoal as the reclaimer breaker located at or near the coal briquette processing plants. Kaltim Supacoal is entitled to either reject a shipment if the shipment exceeds any one or more rejection limites specified in the agreement, or accept any such shipment at a price to be mutually agreed instead of the base price.
The agreement terminates upon the earlier of the expiry of the Tabang KP or the date on which the coal reserve at the Tabang concession area is exhausted. The agreement may also be terminated by a non-defaulting party where there is a material breach by the oterh party that is no remedied within 30 days.
WEC Price at posting:
39.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
