Monday, 27 September 2010

Edison says Oracle Coalfields recent supply deals could unlock value

Oracle Coalfields’ (PLUS:ORCP) recent deals have the potential to unlock the value from its Pakistan coal assets, according to Edison Investment Research.
Edison analyst Warren Johnstone highlighted the two deals signed at the turn of the year, December’s memorandum of understanding with the Karachi Electric Supply Company (KESC) and January’s MoU with Lucky Cement.

Oracle and KESC are working towards the signing of a joint development agreement to establish a mine-mouth power plant, which will be supplied from Oracle’s Block VI.

Additionally, the Lucky Cement deal is expected to provide the basis for a coal supply agreement. According to Johnstone the deal will allow Oracle to achieve early sales and cash flow while the pit is opened up and the power plant developed.

Oracle’s bankable feasibility study (BFS) is investigating plans to start a 3.5 million tonne per annum (Mtpa) mining operation, with initial production commencing in 2012. The company sees 2.5Mtpa being directed to a power plant and 1Mtpa being sold to the local cement industry.
Edison emphasised the size of the deposit, which has a 1.4bn tonne resource, and 371 million tonnes of reserves.

Johnstone attributes a 0.43p per tonne enterprise value, whist acknowledging "little allowance" for the potential upside which he believes is "inherent in the eventual exploitation of the deposit".

Furthermore, “investors will have access to a profit margin that we previously estimated between US$15/t and US$30/t with potential added upside in the event that Pakistan’s local coal buyers are prepared to pay a premium for locally produced coal,” Johnstone said.

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