Continental Coal valued at greater than double share price by GMP Securities

Continental Coal (ASX: CCC) has been valued at up to $0.56 per share, well over double the company’s current trading price of $0.19, by GMP Securities.

The investment dealer maintained its ‘buy’ rating on Continental  and increased its price target from $0.52 after the company released the preliminary draft Bankable Feasibility Study for its De Wittekrans Coal Project.

When in operation the project is expected to produce over 0.8 million tonnes of export sales, over 1.7 million tonnes of domestic sales, and annual EBITDA in excess of  US$50 million.

The following is an excerpt from GMP’s report.

De Wittekrans BFS – value accretive
Adding 3.6Mtpa of ROM coal production
Continental Coal reported initial results from a draft Bankable Feasibility Study (BFS) for its De Wittekrans project with plans to produce 3.6Mtpa of ROM coal for 33 years, yielding c.1.7Mtpa of domestic coal and 0.8Mtpa of export coal at a cost of c.US$55/t of export coal. The study suggests an initial capex of US$219m of which US$60m can be saved by using existing infrastructure and US$107m for underground development is to be incurred after one year of operation.

Including De Wittekrans DCF to our model
We have included the DCF valuation for the project in our model assuming the start of open cast mining in FY/15 and underground mining in FY/17. We have assumed a slow ramp up of the project to target 3.6Mtpa of ROM production in 2019. Our assumptions accounts for a 15% increase in operating costs from current forecasts and we also assume a 15% capex overrun. Taking a 12% discount rate (as very early stage) our valuation for the project stands at A$229m and we apply a further risk discount of 75% on this to arrive to our final value of A$57m for the project.

Funding an issue but can be manageable
We realise that the estimated capex of US$219m could be difficult to source but we also note that US$107m of this is for underground development which is required to be spent in the second year of operation and it can further save up to US$60m by using existing infrastructure or by using Build Own Operate Manage contractors. Therefore the company would require only US$52m in first two years of development which we believe can be managed by a combination of debt and cash flows.

PT raised to A¢56 (36p); maintaining BUY rating
We value Continental Coal using a SotP valuation based on DCFs for its operations and the Penumbra and the De Wittekrans projects and EV/resource multiples for its other development projects. On inclusion of the DCF value for the De Wittekrans project our per share value has increased to A¢56/sh vs A¢52.30/sh earlier and we increase our price target to A¢56/sh (GBp 36/sh). We maintain our Buy rating.

DE WITTEKRANS DRAFT BFS
Continental Coal reported the results of a draft BFS for its De Wittekrans project on 28 November 2011:

• The initial study suggests a 33 year mine life with an annual ROM capacity of 3.6Mt yielding 1.7Mtpa of domestic quality coal and 0.8Mtpa of export quality coal. It plans to start production with opencast mining at 100Ktpm capacity for 5 years and start developing the underground mine after one year of opencast operation. The underground mine is expected to have a life of c.31 years.
• It forecasts operating costs of ZAR140/t of ROM coal and expects a further ZAR153/t of rail and port costs for the export product.
• The capital costs for the project is expected to be c.US$219m out of which:
o US$51m surface infrastructure
o US$21m railway siding and other offsite infrastructure
o US$40m coal wash plant and
o US$107m underground mine development
• The company is in discussion with consultants to reduce capital costs by:
o Using an existing wash plant and rail siding facility in the proximity of the project (can save up to US$60m) or
o Use of contractors to complete the construction of the wash plant under a Build-Own-Operate-Manage system to save US$40m.

OUR ASSUMPTIONS

We have modelled the De Wittekrans project on a DCF basis:

- Assuming the project to start production in FY/15 with an initial production of 720Ktpa increasing to 3.6Mt in 2019.
- On our assumptions, we have provided for a 15% increasing in operating costs vs company’s current forecasts.
- We have assumed a 15% contingency on the guided capex to account for unexpected cost overruns.
- We are assuming a 12% WACC to discount the project as it is in very early stage of development.

On the basis of above assumptions the value of the project stands at A$229m. However we apply a further 75% risk discount on it to arrive to our final value of A$57m for the project. We apply the risk discount to account for funding uncertainties and other development risks.

The project was earlier valued on an EV/Resource multiple basis using a multiple of US$0.2/t deriving a value of A$25m.

Originally published at: http://www.proactiveinvestors.com.au/companies/news/22870/continental-coal-valued-at-greater-than-double-share-price-by-gmp-securities-22870.html