Wilson HTM Stockbrokers have penned a research note on Cockatoo Coal.
Highlights of the report were as follows:
ASX Code: COK
Market Cap: $317 M
Issued Shares: (dil) 621.1 M
Avg Mth T’over: 13.84 M
12 Mth High – Low: $0.57 - $0.32
12 Mth Price Target: $0.87
Current share price: $0.51
Cockatoo Coal Ltd (ASX:COK) is a mining, development and exploration company producing LV PCI coking coal and thermal coal at its Baralaba mine, shipping through Gladstone.
Production and sales growth of coal exports is expected to grow with the completion of rail and port infrastructure linking the Surat Basin to Gladstone by 2014. Wilson HTM's un-risked DCF valuation is $1.01 /share with a risked 12 month target price of $0.87 /share, derived by DCF methods.
With the share price valuing Cockatoo Coal at a 41% discount to the broker's risked target price, it initiates coverage of Cockatoo Coal Ltd (COK) with a BUY recommendation.
Key Points
Cockatoo Coal has existing LV PCI coking coal and export thermal coal production of about 0.5 Mtpa from its Baralaba mine, 180 km from the coal terminals in the Port of Gladstone. The company is positioning itself for growth in line with increased availability of export infrastructure capacity.
Growth to 3 Mtpa saleable tonnes is via a de-risked brownfields expansion from the Bowen group of projects, including the Baralaba mine, in the Bowen Basin.
Initial growth from 0.5 Mtpa will see a ramp-up up to ~1 Mtpa with existing infrastructure, and up to 3Mtpa from 2013/14 with new port capacity at Wiggins Island Coal Export Terminal (WICET) stage-I.
Long term sales relationships include Nippon Steel, JFE Steel and POSCO.
COK has extensive coal exploration tenements in the northern Surat Basin, near Wandoan, of which its Woori project is the most advanced having been the subject of a completed pre-feasibility study.
Development of COK’s Surat Basin projects is dependent on completion of key rail and port infrastructure capacity, expected by 2014, notably the Surat Basin Rail, WICET stages-I&II and a Moura rail line upgrade.
In July, COK joined with POSCO and KEPCO to acquire five coal projects in the northern Surat and Sydney Basins from Anglo Coal. The two Sydney Basin projects have potential targets of 7.5 Mtpa (Bylong) and 1.3 Mtpa (Sutton Forest) ROM respectively. Surat project targets are unannounced.
Wilson HTM's un-risked DCF valuation is $1.01/share with a risked 12 month target price of $0.87 /share, derived by DCF methods. With the share price ($0.51) valuing Cockatoo Coal at a 41% discount to our risked target price, they initiate coverage of Cockatoo Coal Ltd (COK) with a BUY recommendation.
From 2011 the seaborne coking coal market is expected to be in structural deficit as growth of Chinese and Indian demand continues and established economies return to prior levels. All potential new sources of metallurgical coal have their own infrastructure issues that need to be overcome before coal can be made available to seaborne markets, limiting the effect of new supply.
Demand for seaborne thermal coal is expected to remain robust supported by demand growth from India and China. A recent indication of the potential of Indian demand was evident in the recently announced proposed acquisition of potentially very large coal resources in the Galilee Basin by Adani Group.
Industry Trends:
Global economic activity is divided between Asia which has displayed a strong recovery from the global downturn in late 2008, and North America and Europe which are seeing recovery, albeit sluggish.
Coking coal markets are tight and expected to remain tight on the strength of steel production growth in China, India and the rest of the world. From about 2011 onward the coking coal market is expected to be faced with a structural supply shortfall, with most supply regions continuing to experience infrastructure constraints.
The historically separate Asia-Pacific and Atlantic Basin thermal coal markets have been joined in trade, at least for the next few years, under the influence of significant new-build bulk ship supply, which has been driving low bulk freight rates.
The recent reduced demand for thermal coal in the Atlantic Basin appears to be showing signs of recovery, though is still relatively subdued. Demand for seaborne thermal coal from the traditional Asian country importers, Japan, South Korea, Taiwan and India has remained robust.
Resources - Location:
The Bowen group of LV PCI and thermal coal projects is located near existing rail infrastructure west of Gladstone’s coal export terminals. The Surat Basin thermal coal projects require the development of the Surat Basin Rail link to gain access to export port facilities.
The Bylong project in the upper Hunter Valley is adjacent the Sandy Hollow rail line, leading into the Newcastle coal terminals. Sutton Forest is adjacent the Southern Highlands rail lines, 60km west of the relatively demurrage-free port of Port Kembla, Wollongong.
Resources - Geological:
COK’s Bowen group resources incorporate Rangal Coal Measures from the Baralaba mine, Baralaba North, as well as south of Baralaba at Wonbindi. Reserves have been declared for the Bowen group of projects totalling 32.8 Mt.
Reserves of 64.3 Mt have been declared for the Woori project in the Surat Basin. Further definition of Reserves within the current Resources is anticipated.
Mining Conditions:
Open pit mining conditions at Wonbindi and in the northern Surat Basin are not expected to present any notable challenges. Mining conditions in the newly acquired NSW tenements have yet to be evaluated but are not expected to present issues.
Coal Quality:
Baralaba PCI coal is a low-volatile (12%), high fixed carbon (~77%) PCI coal. Baralaba thermal is a high ash (~22%), low-volatile thermal coal. The northern Surat Basin coal is a Walloon coal with low nitrogen, low-sulphur and highhydrogen levels that contributes to lower greenhouse gas emissions than other thermal coals. Bylong coal is a high quality export thermal coal. Sutton Forest coal is capable of producing a coking coal product.
Coal Production:
LV PCI and unwashed thermal coals are produced at a rate of 0.5 Mtpa from the Baralaba project, with plans to increase to 0.75 Mtpa by 2012 then to 3.0 Mtpa. Based on production from the Bowen Group resources, and the Woori and other Surat deposits, COK is targeting growth in production to about 6-9 Mtpa from 2016.
Completion of the Anglo Coal transaction has scope to significantly increase this further. A conceptual total COK equity production target of 14.5 Mtpa has been identified, including the recently acquired projects. However, concept targets need to be substantiated via a development process. Surat project targets are unannounced.
Markets:
COK plans to develop projects that expose it to both the export thermal coal market and the steel industry through the metallurgical (coking) coal markets. Importantly COK has long term sales relationships for LVPCI with Nippon Steel, JFE Steel and POSCO.
Infrastructure:
Product from Baralaba is trucked to Moura then railed on the Moura line to the RG Tanna Coal Terminal at Gladstone. The northern Surat Basin projects will require development of the Surat Basin Rail link to match WICET stage-II, by about 2014.
Potential production from the Sutton Forest and Bylong projects is expected to be transported along existing NSW rail infrastructure.