Sakari Resources staggers from brutal coal prices

The coal company is in danger of missing revenue and earnings targets, and is facing a prolonged share price drop.

Sakari Resources faces a tough bind due to lower-than-unexpected dives in coal prices, which has tanked its forecasts and disappointed the market overall.

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Tumble in stock price. Sakari Resources Limited (SRL) saw its share price taking a big hit, falling some 31% after reporting a dismal set of 1Q12 results; this despite the management assuring investors that things should start to improve from 2Q12 onwards. Instead, investors are likely spooked by the continued fall in coal prices as the situation in Europe becomes increasingly uncertain; a major coal producer in the US has also expressed a pretty muted outlook.

Coal prices below US$100. According to Bloomberg data, the Newcastle coal futures prices have now fallen below the 3.5-year average to hit US$91.7; it has also fallen some 34% from its high in early 2011. More importantly, we note that the coal prices have also fallen below what management had earlier believed to be the floor of around US$100. And if coal prices continue to remain depressed or drift lower, this would further jeopardise the company’s targeted ASP of around US$85-90/ton for this year.

Price-sensitive earnings. In light of the tumble in global coal prices and also the increased uncertainty in Europe, we deem it necessary to further pare our coal price assumption by 10% to US$76/ton. And because cash cost is unlikely to fall as fast, margin compression is likely to kick in quite sharply. As such, we cut our FY12 earnings forecast by 48% even though the cut in revenue is only 10% (FY13F earnings by 23% and revenue by 5%).