La Nina effect not priced into thermal coal companies

A protracted, La Nina-related wet season cut Indonesia's thermal coal exports (the country is the world's largest exporter) by 15 percent in 2010 (though the overall industry's capex was up 18% yoy, suggesting the potential for increased volume capacity) and also hurt output in other key producing regions such as Queensland, South Africa and Colombia will give miners “the upper hand over the utilities in the next round of annual contracts negotiations,” as analysts predict rising thermal coal prices against the backdrop of tightening supplies coupled with feverish and price-sticky demand from developing countries.  In India and China, for instance, roughly 67% of primary energy used comes from coal (versus a developed country average of 20%).  Indonesia is a bit more oil-intensive (at a tremendous subsidized cost) though the idea going ahead, per Bukit Asam, is to “burn more [coal] to make up for falling crude oil production from aging fields.”  Taken together this points to a quick study of the Indonesian coal sector.  ITMG, for one, looks cheap.  It trades at a multiple of 10x versus the sector average of 14x and per J.P. Morgan analysts will be least affected by the state possibly implementing a price cap on domestic sales and/or the ministry level's recent announcement of a potential ban exports of coal with calorific value (CV) of less than 5,600kcal by 2014, given ITMG's high-CV coal (6,200kcal/kg) and low-volume government sales (5% of sales).  Moreover, per CIMB, “the company is strongly geared to price upside as a substantial portion of its volume (75%) is still exposed to index and spot prices.”  On that note,  the overall sector is priced “implying unrealistically low (thermal) coal prices of US$75-85/ton” whereas the FT writes that even conservative traders put impending contracts at about $130.