Adaro produced 38.5 mn tons of thermal coal in 2008, the second largest after Bumi Resources’ production of 52.8 mn tons. As Bumi only controls 65%-70% of its coal-mining subsidiaries KPC and Arutmin combined production, Adaro is in fact the biggest coal producer in Indonesia, in our view. Adaro’s current stripping ratio is at very of only 4x making the company as one of the lowest-cost producers in Indonesia. We use a discounted cash flow (DCF) method to derive our target price for Adaro of Rp1950, providing 28% upside potential. We have assumed a WACC of 13.2%, a beta of 1.1x, risk premium rate of 5.5% and after tax cost of debt of 6%. We assigned terminal growth of 5% for SIS and 0% for coal mining operations .
