Caught in the rain

Jembayan facility damaged by rain.

several days has dealt Straits Asia Resources Ltd (SAR) a setback. Its

new loading facilities at the Jembayan mine, which were just commissioned

this year, have been damaged as heavy rainfall led to a failure of its foundation

structure. Although the extent and impact of the damage have yet to be

ascertained, the group has warned that no further loading will be possible

from this facility for at least some time. We expect production volume to

be hurt as a consequence. The facilities are insured against business

interruptions and we expect SAR to claim against these damages.Continuous rain over the past

Production to take a hit.

doubt cast a shadow over SAR's expansion plans. The group had originally

planned to raise Jembayan's output from 5.5m tonnes in FY08 to 7m tonnes

in FY09 with the help of the enhanced capacity. With the destruction of its

new facility, we have cut our projections to 5.8mt. Meanwhile, SAR will

seek alternatives to boost its output via access from neighbouring mines.

We understand that the latest damage merely cripples the transportation

of coal from mine to barge. Actual production at its mines remains on

track.The failure of its new loading facilities will no

Operations supported by original facilities

original loading facilities have withstood the rain. Operations continue to

run normally both at Jembayan's original facilities (SAR operates two loading

facilities at Jembayan) and also at Sebuku. Production from these facilities

formed 83% of our original projections. The smooth running of their

operations mitigates the negative impact brought on by the latest damages

and also provides support to our projections.. On a comforting note, SAR's

Downgrade to HOLD with lower earnings forecast

further updates as they assess the impact of damages. We have cut our

FY09 and FY10 earnings forecast by 18% and 15% respectively on lower

production volumes. Accordingly, our DCF-based fair value estimate falls

to S$2.20 from S$2.38. Downside risk could arise from (i) further disruptions

to mining operations in the event of persistent rain and (ii) translation losses

from a weakening USD. We downgrade SAR to . SAR will provideHOLD.