Straits Asia’s profits down 12.3% QoQ to US$37m

2Q11 net profit came in within our expectations at US$37m (+59% YoY, -12.3% QoQ). Profits were down on a QoQ basis as both Jembayan and Sebuku reported (1) lower production volumes, and (2) higher cash costs. This was partially offset by higher coal ASPs achieved in 2Q11. We maintain our NEUTRAL call and target price of S$3.08. Management will hold a conference call with analysts tomorrow.

Production lower due to overburden removal. Production volumes were down 28% and 3% QoQ for Sebuku and Jembayan respectively as overburdened removal increased during the year. This resulted in higher strip ratios for both mines in 2Q11, which is already factored in our assumptions and consistent with SAR’s mine plans.

Cash costs rising; offset by higher ASPs. Higher strip ratios and additional overburden removal for Jembayan and Sebuku, coupled with firm oil prices as well as other inflationary pressures caused cash costs to increase 29% QoQ for Jembayan, and 43% QoQ for Sebuku. This was offset by a 15% increase in ASP to US$94.6/tonne for 2Q11, as part of SAR’s strategy to include more index-linked pricing, benefiting from the higher coal prices.