investor preso update, page-8

From Citi target 80 cents

Getting skinny with it
Capex reduced - RES has announced that it has signed a power offtake deal with Eskom. This effectively negates the need to build a power station on site and removes around $120m of capex from the budget. The contract from Eskom is for 30MW in years 1+2 of mining and for 50MW in years 3 plus. We estimate that purchasing of power would lift power costs by only US$0.04-0.05/kwh and thus have only a marginal impact on the cost profile for the company. Lower capex good for financing - Banks' due diligence is continuing on the funding package for the project. We believe that an announcement on the preferred banks will likely be completed in mid-September and then subject to the banks' credit approval, debt funding could be announced mid Q4. Our understanding is that the c$120m capex reduction will lower the amount of money that the company needs to raise in the equity market. If we assume c$400m of debt financing, then today's announcement could possibly reduce the equity component of financing from c$400m to around $250-$300m. We see the capex reduction as potentially shrunken equity component of financing a huge positive for RES. Stage 1: the base case - The current rail deal with Transnet provides 6mtpa of rail access over 10 years (the tenure can easily be extended when production starts). We see Stage 1 of the Boikarabelo project delivering 3mt of domestic and 3mt of export coal from 2015 onwards at a reduced capital cost of c$700m (higher than company guidance) with a mine cost including washing of ZAR190/t and a rail & port cost of ZAR290/t. On these metrics we estimate Stage 1 delivers an NPV of $0.82 per share. Stage 2: the upside - We see potential to expand the project to 50mtpa of RoM coal (12mt domestic and 12mt export). However given the lack of domestic offtake for Stage 1, the current uncertainty in global coal markets and the large capital cost (c$800m), we do not assume any value for stage 2 in our base case value. However on an upside scenario test, the project would deliver an IRR of 24% and an NPV of $2.07 per share. Keep the Buy/High Risk - We lift our target price to $0.80/sh to reflect the higher NPV generated from the lower capex. We continue to like the RES story and with the removal of many of the short term issues (rail, funding, etc) almost complete we see long term upside in the name. As such RES remains our core small cap pick.