Resource upgrade at Jembayan mine

Good tidings from Jembayan mine.

has delivered another positive update, hot on the heels of its announcement

last week regarding the finalization of its refinancing arrangement. This

time, the company has upgraded its Jembayan mine's available resources

to 254Mt (from 138Mt) as continued exploration work had bore fruit. This is

the second upgrade of Jembayan's resource since SAR acquired the mine

in Dec 07, and management is optimistic that further drilling efforts will

lead to more resource upgrades. On top of this, SAR has also raised its

exploration target for in-situ coal at Jembayan to 600Mt - 700Mt,

substantially higher than the 200Mt it had originally targeted.Straits Asia Resources Ltd (SAR)

Long-term cheer but no near-term earnings impact

upgrade puts SAR in the position to raise its reserves and production

output in the long run, boosting its future revenue stream. However in the

near term, capacity constraints remain, and as such, our projection stays

intact. Our combined production target from Jembayan and Sebuku remains

at 9Mt for FY09 - the lower end of management's guidance. Of this, 73%

has been fully priced at US$114/ton (+62% YoY), leaving only the residual

27% of its output exposed to price volatility.. The resources

Bridge loan repaid in full.

US$250m from its recently secured US$300m loan facility to repay its

bridge loan in full. This leaves the group with an additional US$50m of

untapped facilities which we expect will be kept as cash buffer until it

earmarks the funds for expansion and development plans. Management is

confident of meeting its repayment obligations, given its robust anticipated

earnings and healthy operating cash flow in FY08 and FY09, buoyed by

strong order book visibility.SAR also announced that it has drawn down

Bear-case assumptions factored in. Maintain BUY.

estimates unchanged. Our numbers have already accounted for bear-case

scenarios including weaker output from Sebuku following delays in obtaining

the relevant permits, as well as lower selling prices in FY10 and beyond in

light of falling energy prices. The stock has experienced volatility in recent

weeks, possibly triggered by liquidation among funds, and we suspect

that this could persist in the near term. Nevertheless, fundamentals of the

company remain intact. As such, we reiterate our

fair value estimate.We are leaving ourBUY rating and S$1.35