Coal of Africa New coal resource

Transcription

1 Coal of Africa New coal resource Soutpansberg resource upgrade Mining Coal of Africa released an updated compliant resource estimate for Greater Soutpansberg prepared upon the completion of the Chapudi acquisition. The area s overall gross resource was upgraded by 429% to an impressive 8.0bn tonnes, while the more relevant mineable resource estimate grew 209% to 2.0bn tonnes. The released independent technical report has also provided selective saleable coal qualities for some of the project s areas, underscoring its high coking coal potential. We have updated our valuation to incorporate the released resource estimate. 27 June 2012 Price 38.0p Market cap 252m US$1.6/ Shares in issue 662.3m Free float 88% Code CZA Year end Revenue (US$m) PBT* (US$m) EPS* (c) DPS (c) P/E (x) Yield (%) 06/ (46.2) (7.7) 0.0 N/A N/A 06/ (120.7) (22.9) 0.0 N/A N/A 06/12e (35.0) (8.5) 0.0 N/A N/A 06/13e (1.9) 0.0 N/A N/A Note: *PBT and EPS (fully diluted) are normalised, excluding intangible amortisation and exceptional items. Primary exchange Other exchanges Share price performance ASX AIM/JSE Greater Soutpansberg area resource upgrade The Greater Soutpansberg area covers eight coking and thermal coal assets, grouped into three regions Mopane, Makhado and Chapudi. The area s overall gross tonnes in situ (GTIS) resource was increased from 1.5bn to 8.0bn tonnes, while its mineable tonnes (MTIS) resource grew from 0.6bn to 2.0bn tonnes. The Chapudi project contributes the biggest portion to the updated resource as it accounts for 72% of gross and 54% of mineable tonnes in situ. The Chapudi project s MTIS were reported at 1.3bn compared to the initial estimate of 1.0bn prepared by Rio Tinto in Coal qualities point to high coking coal potential Makhado s washed coal was reported as having 10% ash and 30% volatile matter, which classifies it as high volatile hard coking (HVHCC). The Telema & Gray area has coal qualities similar to Makhado and therefore could potentially deliver a similar HVHCC product. Both the Voorburg and Mount Stuart projects have slightly higher ash and volatiles and are likely to be classified as semi-hard coking coal. While no information on the Chapudi s washed qualities was provided, the company will have to refocus its work on coking coal as Rio Tinto s extensive sampling was centred upon the primary thermal coal product and/or coking coal export fraction. Valuation: 0.66 per share SOTP We employ the SOTP methodology to arrive at the company s overall equity value of US$0.7bn, or 0.66/share. This is an 18% reduction on our previous estimate, but 74% above the current share price. While we leave our valuation of the existing thermal coal business and Vele unchanged, we slightly amended the residual resource valuation methodology and applied a lower target EV/Resource multiple as the company s share price declined. Among the catalysts that could affect the company s valuation we would watch the operating (July) and financial (September) results as well as Exxaro s Makhado option exercise (expected by the end of September). % 1m 3m 12m Abs 7.6 (37.7) (44.6) Rel (local) 1.8 (33.4) (42.9) 52-week high/low 89.25p 31.00p Business description Coal of Africa launched the Mooiplaats mine in 2008 and has followed with the acquisition of NuCoal's thermal coal business in It has recently commissioned Vele and is advancing its flagship Makhado coking coal project. Next events July 2012 Analysts Operating update Andrey Litvin +44(0) Charles Gibson +44(0) mining@edisoninvestmentresearch.co.uk Edison profile page Coal of Africa is a research client of Edison Investment Research Limited

2 New Soutpansberg resource and coal qualities Coal of Africa released an updated compliant resource estimate for the Greater Soutpansberg area on 13 June, calculated upon the completion of the Chapudi acquisition from Rio Tinto and Kwezi Mining. The released independent technical report also contains some of the coal qualities, which, in our view, underscore the area s high coking coal potential. Greater Soutpansberg resource upgrade The Greater Soutpansberg area (Soutpansberg coalfield, Limpopo) covers eight coking and thermal coal assets, which are grouped into three regions Mopane, Makhado and Chapudi. The area s overall gross tonnes in situ (GTIS) resource was increased from 1.5bn to 8.0bn tonnes, while the mineable resource (MTIS) grew from 0.6bn to 2.0bn tonnes. The Chapudi project contributes the biggest portion to the updated resource as it accounts for 72% of gross and 54% of the project s mineable tonnes in situ. The previous compliant resource statement was provided in October 2011 and did not include Chapudi, the acquisition of which was completed in May No other assets, apart from the Greater Soutpansberg area, were affected by the released resource update. The Chapudi project s initial resource estimate of 1.0bn tonnes was prepared by Rio Tinto in 2008 based on the phased exploration programme with 125 holes drilled along the strike. The initial estimate was subsequently updated to incorporate the full results of the PFS work concluded in While the project s new gross resource of 6.4bn tonnes substantially exceeds Rio Tinto s estimate, we note that the latter is more comparable to CoAL s mineable resource of 1.3bn as both estimates were prepared to a maximum opencast mining depth of 200m. The new resource also includes additional farms, which were controlled by CoAL prior to the Chapudi acquisition. Exhibit 1: Greater Soutpansberg area resource estimate summary Region Project/Area Resource category Gross tonnes in situ (GTIS), Mt Total tonnes in situ (TTIS), Mt Mineable tonnes in situ (MTIS), Mt Mopane Voorburg Measured Makhado Makhado Telema & Gray Total measured resource Mopane Voorburg Indicated Makhado Makhado Telema & Gray Total indicated resource Mopane Voorburg Inferred Makhado Makhado Telema & Gray Mount Stuart Chapudi Chapudi 6,399 5,119 1,318 Total inferred resource 6,949 5,559 1,408 Grand total resource 7,957 6,443 2,004 Source: Company data 2

3 Product qualities point to high coking coal potential The released independent technical report for Greater Soutpansberg provides coal qualities for some of the project s areas. While the available prime coal yields look low, especially for Makhado and Mount Stuart, we understand that this is the general feature of the South African coal projects. More importantly, Makhado, which is the most advanced project in the area with coal recently classified as hard coking, is reported to have a volatile content of 30% and ash of 10%. This broadly fits the international high volatile (HVHCC) pattern, which could be sold at a small discount to the premium Australian product. Although small, the Telema & Gray area has coal characteristics similar to Makhado and therefore could potentially yield a similar HVHCC product. Both the Voorburg and Mount Stuart projects have higher ash and high volatiles, which could indicate a semi-hard coking coal product if compared to the seaborne benchmarks. That said, according to the company, there is an early indication that the Mount Stuart product is comparable to the US mid-volatile hard coking coal. However, more work needs to be done to clarify the product specifications. No information on Chapudi s washed coal qualities was provided in this technical report. We understand that the company will have to refocus its work on the coking coal product as Rio Tinto s sampling was centred upon the primary thermal coal product and/or coking coal export fraction. Among other things, the company mentioned that it is considering selective mining at Chapudi (as opposed to bulk mining assumed by Rio Tinto), which should improve qualities and increase yields. In all, the revealed coal qualities once again underpin the high coking coal potential of the Greater Soutpansberg area. Exhibit 2: Greater Soutpansberg area selected washed coal qualities GTIS TTIS MTIS Yield, % Ash, % Volatiles, % Sulphur, % Makhado (MI&I) Measured resource Voorburg (MI&I) Measured resource Mount Stuart (MI&I) Measured resource Telema & Gray (MI&I) Measured resource Source: Company data Valuation implications and risks We value the company on SOTP basis using a combination of valuation methodologies for its existing thermal coal business (DCF), the recently launched Vele project (NPV) and other less advanced developments (EV/Resource multiple) to arrive at an overall equity value of US$0.7bn, or 0.66 per share. This is an 18% reduction on our previous estimate of 0.8/share (Outlook report dated 10 April 2012), but 74% above the current share price after the recent correction. We believe that the latter was primarily driven by the deteriorated industry outlook and drop in commodity pricing. Thermal coal business valuation remains unchanged at US$22m. Although the benchmark thermal coal price has recently been in free fall loosing 23% year to date, our FY12 (June 2012 fiscal year end) forecast of US$105/t is conservative and therefore does not require adjustment. We see a moderate downside risk to our FY13 benchmark thermal coal price forecast of US$110/t. However, we believe better visibility on supply-demand balance and global macro situation is required to amend our pricing assumptions. 3

4 We make no changes to our Vele valuation of US$213m. While the project s cash cost is still unknown, we are confident in our pricing/production estimates assuming US$114/t net back price for FY12 and US$107/t ex-works price for FY13. If we add the modelled transportation cost of US$40/t (the company has recently indicated that the overall railway and port cost could come in at US$40-45/t), our assumptions would translate into the realised FOB price of US$154/t and US$147/t respectively. We note that the current semi-soft coking coal price stands at around US$140/t, while the premium HCC price is about US$210/t. We adjusted our resource-based valuation to account for the released Greater Soutpansberg resource statement and recent drop in CoAL share price. We have slightly changed our methodology and are now using the GTIS estimate for measured and indicated resource and MTIS for the inferred category instead of GTIS across all categories. This makes our valuation more conservative. Furthermore, following the recent CoAL share price decline (32% since our last report in April) our target EV/Resource multiple falls from US$0.25/t to US$0.20/t. As a result, we reduced our incremental resource valuation from US$636m to US$483m. In general, given the prevailing oversupply concerns in the resource space and downward commodity price pressures, the in-situ resource valuation is becoming less important. Still, given the scarce information on Makhado, we choose to value the project at the resource level and expect its value to crystallise as it is brought to the development stage. Exhibit 3: Coal of Africa summary SOTP valuation Valuation method US$m GBPm Thermal coal business DCF Vele NPV Other resource EV/Resource Enterprise value Less net debt (FY11) Equity value Shares in issue Value per share US$ Current share price US$ p Difference 74.1% 74.1% Source: Edison Investment Research. Footnote: Existing thermal coal business valuation includes equity raising and Chapudi acquisition. Risk-wise, our biggest concern would be the coal price performance. Thermal coal prices have fallen 22% year to date on the back of the increased coal substitution by gas in the US as well as softer global demand. While we have taken a conservative stance on the thermal coal market, we see a downside risk to our mid-term thermal coal price assumptions if current supply-demand disparity persists. Being a marginal cost producer (partly due to a relatively high coal transportation cost), Coal of Africa s thermal coal business appears to be vulnerable to any visible deterioration in commodity pricing. That said, the existing thermal coal business valuation contributes only 3% to our combined value of the company. Coking coal prices have recently demonstrated better resilience supported by the force majeure declared by BMA (the largest coking coal producer) in early April in response to the ongoing labour tensions and heavy rains at its seven Bowen Basin mines. Given the recently launched Vele project, which is expected to produce semi-soft coking coal, and the relatively advanced large-scale Makhado project, which will supply hard coking coal product, the international coking coal price performance is becoming the biggest sensitivity for the company s valuation. Despite the lower underlying demand 4

5 from the steel industry, the supply side remains fairly tight and should therefore support coking coal prices in the medium term. Exhibit 4: Thermal coal price performance, US$/t Exhibit 5: Coking coal price performance, US$/t Jun/05 Oct/05 Feb/06 Jun/06 Oct/06 Feb/07 Jun/07 Oct/07 Feb/08 Jun/08 Oct/08 Feb/09 Jun/09 Oct/09 Feb/10 Jun/10 Oct/10 Feb/11 Jun/11 Oct/11 Feb/12 Jun/ Q206 Q406 Q207 Q407 Q208 Q408 Q209 Q409 Q210 Q410 Q211 Q411 HCC Semi-soft PCI Q212 Source: Bloomberg Source: Bloomberg Short-term catalysts We note a few important short-term catalysts, which could affect the company s valuation and share price performance. FY12 operating and financial results. We expect the company to post its FY/Q4 operating update in late July-early August and financial results in September While we are not expecting any major surprises on the thermal coal side of the business, we would look for indications of operating and financial progress at Vele. Although the project s contribution to FY12 EBITDA could come short of our expectations of US$12m, we believe the FY13 forecast of US$56m is still achievable. Having said that, we are wary of the ramp-up stage operational issues, which could potentially affect the project s roll-out, and the remaining uncertainty with opex, which has a big impact on margins and valuation. We would therefore seek more clarity on these issues in the upcoming announcements. The Makhado progress and Exxaro option exercise. According to the recent joint announcement, Coal of Africa and Exxaro agreed to set the deadline for a formal decision to be made by Exxaro regarding its option to acquire a 30% interest in Makhado as at 30 September In the meantime, the company should continue its work aiming to confirm the thermal coal potential of the project and its coal yields, as well as to finalise the commercial off-take negotiations with ArcelorMittal SA. On top of this, the companies will have to decide on the additional properties, which were added to the project as a result of the Chapudi acquisition and therefore were not part of the original agreement. In general, we believe the option exercise is a done deal and the only remaining question is the price to be paid by Exxaro. While Coal of Africa is unlikely to compromise on the valuation of its flagship project, its scale suggests that the company needs a partner to share the risks and funding (at least US$0.5bn). We believe that any positive developments on that front should be supportive of the company s share price. 5

6 Exhibit 6: Financial summary US$'000s e 2013e Year end 30 June IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 98, , , ,366 Cost of Sales (97,926) (303,004) (311,232) (352,421) Gross Profit 450 (41,579) (10,753) 24,944 EBITDA 12,573 14,706 40,491 71,366 Operating Profit (before GW and except.) (14,111) (64,815) (32,253) 13,444 Intangible Amortisation Exceptionals (132,476) (97,400) 0 0 Other (33,476) (56,555) (25,000) (10,000) Operating Profit (180,063) (218,770) (57,253) 3,444 Net Interest 1, (2,750) (3,669) Profit Before Tax (norm) (46,180) (120,706) (35,003) 9,775 Profit Before Tax (FRS 3) (178,656) (218,106) (60,003) (225) Tax 10,898 (897) (1,353) (13,618) Profit After Tax (norm) (35,282) (121,603) (61,356) (13,843) Profit After Tax (FRS 3) (167,758) (219,003) (61,356) (13,843) Average Number of Shares Outstanding (m) EPS - normalised (c) (7.7) (22.9) (9.5) (2.1) EPS - normalised & fully diluted (c) (7.7) (22.9) (8.5) (1.9) EPS - FRS 3 (c) (36.7) (41.3) (9.5) (2.1) Dividend per share (c) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%) BALANCE SHEET Fixed Assets 537, , , ,295 Intangible Assets 18,066 20,800 20,800 20,800 Tangible Assets 132, , , ,491 Exploration and development 310, , , ,848 Investments 18,651 13,594 13,594 13,594 Other non-current assets 57,040 52,562 52,562 52,562 Current Assets 123,319 90,617 93,377 78,122 Stocks 24,025 23,122 25,858 23,479 Debtors 27,240 44,734 55,099 52,406 Cash 72,054 22,761 12,420 2,237 Current Liabilities (90,918) (118,176) (124,149) (116,830) Creditors (68,858) (73,590) (79,563) (72,244) Short term borrowings (20,863) (38,631) (38,631) (38,631) Other current liabilities (1,197) (5,955) (5,955) (5,955) Long Term Liabilities (39,296) (39,869) (39,869) (39,869) Long term borrowings (1,506) (1,720) (1,720) (1,720) Deferred tax (28,551) (19,435) (19,435) (19,435) Other long term liabilities (9,239) (18,714) (18,714) (18,714) Net Assets 530, , , ,719 CASH FLOW Operating Cash Flow (6,130) (1,863) 5,620 55,452 Tax (3,039) (374) (1,353) (13,618) Capex (including Vele) (106,530) (73,966) (58,400) (10,000) Acquisitions/disposals (60,558) 0 (73,000) 0 Equity financing 167, ,769 0 Dividends Other 6,063 14, Net Cash Inflow (outflow) (2,367) (61,353) (10,341) (10,183) Opening net debt/(cash) (47,610) (49,685) 17,590 27,931 Other 4,442 (5,922) 0 0 Closing net debt/(cash) (49,685) 17,590 27,931 38,114 Source: Company data, Edison Investment Research EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading international investment research company. 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