macquarie report

Gujarat NRE Coking Coal

Shipment timing impacts sales

Event

* GNM announced its December quarterly production report.

Impact

* Production in line. For the December quarter, longwall and development production was 418kt, 3% below expectations and 9% lower QoQ due to a roof fall on the longwall from localised geotechnical issues. In the March quarter, we expect production volumes to return to 460kt with a higher proportion of development coal given recent commentary that development work will become a key short-term focus. As such, ROM production rates would slow with overall production expected to be ~1.7mt in FY11 and ~2.5mt in FY12. We continue to highlight the risk to FY12 volumes given our assumption of successful commissioning and ramp-up of longwall mining at NRE No. 1.

* Shipment timing impacts sales. Quarterly sales of 274kt was 36% below our forecast and 19.2% lower YoY due to the timing of shipments over shutdowns at PKCT over the Christmas period. This is likely to correct in the March quarter with full year production roughly equalling total sales. We forecast 2011 production of 1,725kt vs sales of 1,719kt. GNM continues to take advantage of current market dynamics (and excess inventory at its parent) by shipping to Chinese customers at spot prices (with adjustment as per parent company for ROM coal).

* Approvals expected early 2011. GNM is in the final stages of acquiring approvals for its Wongawilli mine - ventilation shaft, surface facilities upgrade and longwall upgrade, and expects receipt in the early part of 2011.

* Upgrade to reserve/resource base. GNM has recently announced an increased reserve and resource base at its Wongawilli mine. Reserves increased by 320% to 33.38mt while Measured and Indicated Resources increased by 30% to 337mt. These additional reserves should see a mine life in excess of 20 years, which we had previously incorporated into our modelling assumptions.

Earnings and target price revision

* FY11: -12.4%, FY12: +3.6%, FY13: +14.2%, reflecting commodity price changes and incorporation of quarterly result.

Price catalyst

* 12-month price target: A$1.10 based on an Improving coking coal thematic methodology.

* Catalyst: Successful ramp-up of longwall mining in FY12.

Action and recommendation

* We maintain an Outperform recommendation on GNM reflecting its exposure to an improving coking coal price thematic.