Thailand: Transforming Banpu

Thailand: Transforming Banpu

By diversifying investments in CLMV countries (Cambodia, Laos, Myanmar and
Vietnam) and expanding its renewable energy portfolio, Bangkok-based Banpu
Plc aims to completely transform itself from a coal company to an integrated
energy provider.

The SET-listed company, which currently operates assets in Indonesia,
Australia, China, Japan, Mongolia and the United States, is in the process
of entering Vietnam with potential investments in coal, solar and wind.
Wind, in particular, is not part of Banpu's portfolio but its first wind
farm could be in Vietnam.

The entry into Vietnam and other CLMV countries could be through merger and
acquisition (M&A) deals as well as building greenfield power plants, said
CEO Somruedee Chaimongkol.

"From now on, we are looking to invest more in renewable capacity in CLMV.
We are open to every kind of energy whether it be solar, wind or hydro," she
told Asia Focus.

"In Vietnam, we have started discussions. It will take a while to conclude
and implementation of each greenfield project will take around three to five
years. We are waiting for project endorsement and then we will proceed with
it."

Solar power is one of the areas Banpu is looking at for diversification.

In Laos, where it operates the 1,600-megawatt Hongsa mine-mouth power plant,
Banpu is looking to invest in solar and hydropower. Myanmar offers
opportunities in various kinds of energy but no concrete decision has been
made so far.

The company is also considering expanding its presence in Indonesia beyond
coal mines. Potential areas are in hydro, solar and geothermal energy, of
which Indonesia has one of the world's largest supplies.

Banpu's eight-year strategic plan projects an increase in electricity
generating capacity from 2.1 gigawatts at present to 2.6GW in 2020 and 4.3GW
by 2025. The current plan, according to Ms Somruedee, doesn't take Thailand
into account but it will be ready to invest locally if any possibility
arises.

Apart from the CLMV markets and Indonesia, Banpu aims to expand electricity
generating capacity in Japan and China from the current 130 and 150MW,
respectively, to 300MW in each country. Renewable energy is projected to
account for 20% of Banpu's portfolio or 900MW by 2025.

Of the company's existing total capacity of 2,100MW, only 7-8% or 162MW
comes from renewable sources, Ms Somruedee acknowledged.

Coal, meanwhile, continues to play an important role for the company. It
seeks to maintain its coal capacity at around 45 million tonnes but with a
focus on increasing reserves to a minimum of 15 years from 12 years at
present. Current output totals around 25-27 million tonnes in Indonesia, 16
million in Australia and four million in China.

"China and Australia have high coal reserves already so we will focus on
(increasing reserves in) Indonesia," said Ms Somruedee. "The increase will
be made through buying new concessions. At the current five mines, we can
dig deeper by raising the stripping ratio. The production cost will be
higher but it would be offset by the surging price of coal."

Prices of coal have bounced back from the plunge in 2014-15. The benchmark
price of high-quality thermal coal has reached US$96 per tonne, up from
around $60 last year. Banpu forecasts its average selling price will rise by
$12, or 22%, to $67 this year, as demand continues to rise steadily by 3%
annually, according to the International Energy Agency (IEA).

This year in particular, demand has been driven by floods in China which
have prompted higher generation from coal-fired power plants to offset
decreased output from hydropower facilities. Apart from its Chinese mines,
Banpu ships around 3 million tonnes from Australia and Indonesia to China
each year.

"Demand has increased in nearly all Asia-Pacific countries such as Korea,
Taiwan, Japan, Malaysia and the Philippines," said Ms Somruedee, adding that
supply has not increased, thanks partly to China's moves to shut down some
small mines that had poor environmental records.

Coal demand and supply are now quite balanced with the seaborne coal market
amounting to about 930 million tonnes. Indonesia and Australia rank first
and second globally in terms of coal output.

Even though many countries, including Thailand, are looking to increase the
share of renewable sources in power generation, with targets of 20-25% of
total output, Ms Somruedee said base-load power generation would still be
dominated by coal and gas at roughly 30% each.

Tariffs for renewable energy, such as solar, are still high, making it
impossible for them to replace coal and gas as mainstream power generation
sources.

"Investments in coal-fired generating capacity will continue to surge along
with those in renewable energy," she said. "Renewable (plants) will increase
in number but the size of each unit is pretty small compared to coal and
other conventional fuels.

"The demand for coal is still there. On the supply side, everyone is moving
cautiously so that the supply does not grow significantly. I'm confident
that the market is stabilising somewhat. For players who are competitive and
efficient with high-quality coal, business is going quite well."

Meanwhile, Banpu is investing in shale gas in the United States to capture
demand growth for power generation. Subsidiary Banpu North America Co (BNAC)
has invested $207 million in four acquisitions in northeastern Pennsylvania
with a capacity of 49 million cubic feet per day. An additional $300 million
is allocated for the shale gas business, with a target to lift output to 78
million mmcfd through more acquisitions, she added.

In Mongolia, the miner is processing coal into other forms of energy, such
as coal tar or other derivatives with higher value added. Targeting demand
from the steel and chemical industries, Banpu is looking to enter the
Chinese market for such products.

With the ongoing strategic plan, the company has gradually positioned itself
as an integrated energy provider rather than the pure coal company in the
past. Upstream, it has coal and gas operations focused on cleaner coal,
midstream it has coal trading and logistics, while power generation is a
growing downstream business.

"In the overall picture, we are an integrated energy provider. Compared to
pure coal companies, we are quite unique, thanks to our sustainable
strategic plan," said Ms Somruedee.

The strategy has helped Banpu to cope with the sharp decline in coal prices
over the three to four years prior to this year. Despite difficult
conditions, it managed to maintain its dividend payments. This year, its
cash flow will rise given higher coal prices and continued support from
financial institutions in every country where the company has invested.

"They look at Banpu as a company that has capability to grow firmly looking
forward," said Ms Somruedee. "We have management that is capable with real
experience and that is supported by strong partners in every country we go
to. There are risks in every country we have invested in, but they are quite
manageable.

"A recurring revenue stream from the power business helps offset the
shortfall of the coal business during the latter's slowdown. That makes
Banpu financially strong with the capacity to grow further."

At present, Banpu has total debts of $3.5 billion with net debt-to-equity
ratio of 0.9:1 which Ms Somruedee said was quite low compared with its peers
in Indonesia and Thailand.

This year, the company has targeted 20% growth in revenue to $2.26 billion
(76.9 billion baht). It will update the business outlook when it releases
second-quarter financial results on Wednesday.

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Link to Original Article:
http://www.bangkokpost.com/business/news/1305859/transforming-banpu

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com