Analyst report - shares
Stock of the week: Coal of Africa
March 17, 2008
Tim Morris, wise-owl.com analyst
Stock: Coal of Africa
Recommendation: Speculative Buy
Market Cap: $581m
Coal is one of the world's cheapest and most widely available energy sources, providing 25% of global primary energy needs and 40% of the world's electricity. In an environment where broader market sentiment has been weak, the energy sector has remained a shining beacon, particularly coal.
Coal of Africa is primarily focused on the acquisition, exploration and development of thermal and metallurgical coal projects in South Africa. The Company currently has six coal projects in various stages of exploration as well as Nimag, its†interim cash-producing asset which manufactures Nickel Magnesium Alloys.
The adoption of a new strategy saw the company acquire a number of South African coal projects over the last few years, and just recently change its name from GVM Metals to Coal of Africa Ltd (CoAL) in December. Although the company generates modest cash flows from its 'Nimag' metals processing operations, the real driver of shareholder value is set to come from the development of its South African coal projects.
South Africa is heavily dependant on coal, which provided 93% of its electricity requirements in 2005. This nation’s sole provider of electricity, 'Eskom', consumes 112million tonnes per annum (Mtpa).
With most of its power stations running at near full capacity, it is in need of substantial new coal resources, and plans to build a new 12-15Mtpa coal fired power station every two years to satisfy growing domestic power demands. By developing its promising portfolio of South African coal projects, Coal of Africa aims to fill this domestic void and take advantage of strong coal export markets.
The 70% owned ‘Mooiplaats’ project is the company’s most advanced, as first production is targeted for Q3 2008. Minable coal reserves currently stand at 76.1Mt based on exploration work covering 2/3rds of the company’s granted mining and prospecting rights.
The initial plan is to produce thermal coal for domestic and export markets at a rate of 2.5-6Mtpa, after an 18-24 month ramp up period. At a production rate of 4.5Mtpa the project would support a mine life of 77 years. Expansions beyond this level are possible, but depend upon the results of exploration work to be conducted throughout the year.
Further exploration upside at Mooiplaats lies in the additional ground that the company is hopeful of securing the prospecting rights for. This area in question is currently under application, and if granted, would reduce the drilled area at Mooiplaats to only 1/3rd of the total landholding.
The company’s Holfontein project, in which it is earning 100% interest, is also hopeful of coming into production late in the year, or at least commencing development. The inferred resource base currently stands at 55 million tonnes of coal, however, further exploration drilling is due to commence earlier this year. A mining application has been submitted and approvals, which are necessary to commence development, are expected during Q3 2008. The final purchase price for this project is linked to the minable coal reserves able to be delineated. The current plan is to eventually produce 1.2Mtpa of thermal and coking coal, for a mine life in excess of 20 years.
Coal of Africa's largest resource base is hosted by its 100% owned Baobab project, located in the Limpopo province of South Africa. The project's coal resources now total 713Mt, of which 156Mt has been identified as suitable for opencast mining. A conceptual feasibility study, drilling, and a mining application are all set to be undertaken from early 2008.
Combined with one of the company’s other projects located in the Limpopo province, known as 'Thuli', which itself hosts an inferred resource of 352Mt, Coal of Africa aims to ultimately produce 10Mtpa of coking coal. It is envisaged that 3Mtpa will be exported from Thuli, and 7Mtpa from Baobab. Providing clues as to the course of the eventual production ramp up from these two projects, the company has made moves to acquire rail freight rights for production of 1.5Mt in 2009, 4-5Mt in 2010-11 and 10Mt in 2012.
Overall, Coal of Africa aims to define 2bn tonnes of coal resources within the next 12-18 months, and begin production at some projects towards the end of 2008. The company is well funded to accomplish these ambitions, with around $115m cash on hand. Ongoing exploration activity and developmental milestones at key projects are expected to drive the share price higher as the market recognises the company's near term production prospects and strength of its resource base, which could support over 50 years of mining.
We rate the stock a 'speculative buy' with a high risk rating attached akin to many of our other junior resource recommendations. Coal prices will affect sentiment towards the stock, while other key risks include developmental delays and sovereign risk, as its projects are located in South Africa.