the mac is back in black, page-6

Macquarie Report

Macarthur Coal

Hard game of ?catch up? to come

Event

* Following an early arrival of the wet season, MCC announced a relatively weak 2Q11 production report, as expected.

Impact

* Coal sales in line with expectations. Total sales for the December quarter were 1,156kt, in line with our forecast of 1,153kt. In addition, purchased coal of 21.3kt was also in line with our forecast of 22kt. 2Q11 sales were 27% below QoQ, reflecting the relative lack of flexibility operating a two mine portfolio, minimal stockpile levels given the early arrival of the wet season and shipping through DBCT (no dedicated stockpiles). This compares to BHP Billiton (BHP AU, $44.98, Outperform, PT: $53.00), which recorded a 15% QoQ fall in met coal sales during the period given its broader mine portfolio, higher inventory levels and dedicated stockpiles at Hay Point.

* Production disappointing, hard game of 'catch up' to come. While sales are what counts to the bottom line, production of 967kt was disappointing, 16% below our forecast. In our view, this simply highlights not only the limited access to the pits but also the requirement to play a hard game of 'catch up' in 2H11. Also, this supports our view that sales will lag in 2H11 as production levels recuperate to rebuild the necessary stockpile levels.

* 1H11 earnings and production guidance maintained. MCC has reiterated its 1H11 earnings guidance of $97-102m (vs Macquarie: $98m). Coal sales of 2.4mt were at the bottom end of the guidance. As a result of the wet weather, we highlight the potential of significant cost pressures in FY11 ? we forecast costs to increase by +40% YoY.

Earnings and target price revision

* FY11E: -0.2%, FY12E: -0.01%, FY13E: No change. Modelling adjustments. No change to TP.

Price catalyst

* 12-month price target: A$14.50 based on an Improving coking coal prices methodology.

* Catalyst: Further rain-related interruptions to coal supply.

Action and recommendation

* We maintain an Outperform recommendation due to the potential upside risk to met coal prices in the event of further rain in February.

* However, as we have previously commented, we see fundamental issues with the broader longer term growth strategy of MCC.