Broker places share price target of $0.95 on Universal Coal

StoneBridge Securities has prepared a research report on recently listed Universal Coal.  A summary of the report is as follows:

ASX code | UNV
IPO price | $0.23
Last | $0.46
Fully diluted (inc options) | 215.7m
Market cap | A$72m
52 week hi/low | $0.46 / $0.23
12 month price target | $0.95
Valuation | $0.95

"Universal Coal (ASX: UNV) is an emerging near term coal producer with thermal and coking coal assets in South Africa. UNV intends to fast track its thermal coal production schedule in order to feed the continuing demand for coal in South Africa, India and China.

The first development project, Kangala, we expect will come into production in 2011 with the second and third projects, Roodekop and Brakfontein in 2012. We Initiate coverage on Universal Coal with a Conviction
BUY recommendation and an initial target price of $0.95 per share based on a DCF valuation methodology with a cost of equity capital of 15% for South Africa.

Majority of resources are JORC Measured or Indicated –

Universal holds up to 70.5% equity interest in five quality coal projects across South Africa, of which three are thermal and two coking coal. Its initial focus is on its three thermal assets in the Witbank coalfield which have a total JORC compliant Resource of 308.1Mt of local Eskom and Export grade quality coal. A total of 61.4Mt is in the Measured category and a further 147.2Mt is classified as an Indicated Resource.

Thick Coking Coal sequences intersected -

Universal is also developing two substantial coking coal projects (+30,000 hectares), Berenice and Somerville, with a combined total exploration target of over 1 billion tonnes of coal. Currently drilling undertaken has intersected 30-40m thick coal seams at depths ranging from 20-200m.

Production in 2011 – Planned production of 1.5Mtpa ROM at Kangala is expected to commence in the first half of CY 2011, moving to 3mpta in FY12. Production plans for Roodekop (1.5mtpa ROM) and Brakfontein (1.5mtpa ROM) is anticipated to commence in FY12.

Close to existing infrastructure – Universal’s key thermal coal assets are located in the established coal mining region of the Witbank Coalfield presenting opportunities to fast track the pre-production process and quickly generate shareholder value via cash flow generation that could potentially see them deliver Eskom and domestic B grade coal to existing colliery and or power stations.

Quality management with considerable experience – Universal has a strong management team headed up by Tony Weber, Managing Director (ex-Nkwe Platinum) and Tony Harwood, Chairman (ex-Placer Dome). Both have a proven record of sourcing and developing high quality resources projects in South Africa.

Universal will have sufficient cash post IPO to fund working capital for commencing production at Kangala ($12.5m), as well as complete the feasibility for Roodekop and Brakfontein. In addition Universal has commenced its drilling program on its Coking coal projects and will look to prove up a Measured and
Indicated Resource in the next 6-12 months.

In calculating our price target we have applied a 10 year NPV on the three thermal projects, namely Kangala, Roodekop and Brakfontein and applied an additional risk weight discount of 30% to both Roodekop and Brakfontein given the longer time frame to get into production.

On the coking projects we have applied a $0.25/t for an Inferred resource on the eventual 50% project ownership level for Universal.

We believe the valuation applied to the coking projects is very conservative and anticipate additional value could be added quickly here once the company gets to an Indicated or Measured Resource."