Universal Coal: Stonebridge places BUY recommendation with $0.73 price target

Universal Coal (UNV), the following is an extract from a StoneBridge research report released today, which maintains a BUY recommendation and a A$0.73 price target.

Underlying fundamentals still robust

Universal Coal (UNV) is an emerging near term coal producer with thermal and coking coal assets in South Africa.

The company expects to commence development of its Kangala project in the second half of CY2011 and will progress towards production by CY2012.

Draft BFS at Kangala

A preliminary Bankable Feasibility Study (BFS) has been released to UNV indicating positive economics in its current proposed form.

However, management are currently in continuing discussions with various companies that have mining operations or resources in close proximity to the Kangala project.

This could potentially improve the economics of the project but will likely delay the initial production by approximately six months. As a result we have adjusted our start date for production from the September quarter 2011, to the March quarter 2012.

Resource upgrade triggers 50% ownership interest at Roodekop

In May 2011, UNV announced it has achieved direct ownership of 50% in the Roodekop thermal project following a resource upgrade that now totals 82.8Mt with approximately 67.2Mt at the Measured level.

UNV will be given the option to acquire up to 74% in the project following the completion of a Feasibility Study at Roodekop which is expected to commence in the 2H of 2011.

First phase of drilling complete on coking coal projects

Which has resulted in a 35-40m thick consistently developed coal zone being intersected from sub-outcrop in all 24 holes completed to the end of the quarter.

Washability test results from the first nine slim diameter holes drilled have also been positive. At wash densities of less than 1.45g/cm3, the seams contain hard coking coal properties, including Free Swelling Indices from 7 to 9.

UNV has an exploration target of 700-800Mt of JORC compliant resources at these projects.

Cash at bank

UNV has approximately $14m in cash at the end of June to fund working capital and initial capex at Kangala, as well as complete feasibility studies for Roodekop and Brakfontein.

In addition, the company has commenced its drilling program on its coking coal projects and will look to delineate a measured and indicated resource in the 2H of 2011.

Investment view

We expect UNV to be a strong beneficiary of the current demand for coal out of domestic and export markets.

Domestic demand out of South Africa is significant with recent domestic consumption at 125Mtpa and expected to increase by more than 75Mtpa over the next decade.

Price Target

We maintain our BUY recommendation with an updated price target of $0.73 per share based on a NPV methodology using a 14.5% discount rate.

We have adjusted our model to reflect the delay at Kangala and determined an NPV on the three thermal projects, namely Kangala, Roodekop and Brakfontein.

Additionally, we apply a further risk weight discount of 30% to both Roodekop and Brakfontein given the longer time to production.

For the coking coal projects, we apply an EV/resource metric of A$0.30/t for an inferred resource at current ownership levels.

We believe the valuation applied to the coking coal projects is very conservative and anticipate additional value could be added quickly once the company gets to a measured resource and earns a 50% interest in the project.

Price Catalyst

Resource upgrade on coking coal assets (expected mid-July 2011).
First production from Kangala in FY 2012.

Originally published at: http://www.proactiveinvestors.com.au/companies/news/17665/universal-coal-has-stonebridge-buy-recommendation-maintained-with-a-073-price-target-17665.html