great nec summary/research....$1.43 new target

Austock Securities - Research

Event:

Maryborough 50-70mt resource target

Data room now open

Impact:

Assumed LOM production increased to ~20mt

Maryborough valuation increased from $62.5m to $124.7m

Risked NPV increased from $0.52/share to $1.43/share

Recommendation:
Spec Buy, target price increased to $1.43/share

Sent to Institutional Clients:
Yes


Northern Energy Corporation (NEC) - $.58

Maryborough - additional 50-70mt resource target

· NEC have released a 50-70mt resource target for the Maryborough coking coal project, in addition to the current 5mt resource. 40-50mt of this new resource target is at depths of less than 100m.

· NEC is confident that the current drilling program will provide sufficient verification of the historical data to convert the resource target to JORC code compliant resource status.

Staying small, but now long life

· Maryborough is planned as a niche coking coal operation, producing high quality coking coal at the rate of 0.5mt per annum. NEC are well down the path of preparing the Mining Lease application, and to change the project parameters at this stage would be counter productive at several levels, so the mine is likely to remain a 0.5mt pa producer. It is likely that the extended mining life will come via satellite Mining Lease applications within the project area in future years.

· With exports through the Port of Bundaberg now all but ruled out, the project will need to haul coal via rail up to the port of Gladstone. Port capacity is expected to be available through Barney Point, but this may serve as a constraint on production expansions until Wiggins Island is developed, providing further support to our view that the mine throughput will not be increased in the medium term.

· Previously, the company expected to produce ~5mt of product coal , with a “blue sky” LOM production case of 10mt, which is now clearly conservative. With 40-50mt of resource within 100m of surface we have increased our assumed LOM production to from 4.4mt to 19.8mt, representing ~45% conversion of the existing 5mt resource and 40mt of the shallow resource target to marketable reserves.

· We have maintained production levels at the modest rate of 0.5mt per annum, with an unchanged capex estimate of ~$40m.

Increasingly significant

· NEC will now re-open the data room for Maryborough. Any negotiations may remain prolonged, as Indian parties in particular appear unlikely to attribute value to the resource target until it is converted to a JORC code compliant resource. However, the company also has interest in both Maryborough and Elimatta from Australian companies.

· The Maryborough coking coal project has quickly moved from an also ran project to vie for the position of flagship project within NEC’s portfolio. The company will now be considering offers for Maryborough on that basis, aware that it represents a valuable development option for NEC on a 100% basis.


Maryborough Valuation

· The additional project life has increased our unrisked project valuation from $63m ($0.56/share) to $125m ($1.11/share) with the project now a long life (~40yr), small scale operation. We have moved initial production back to the MarQ’11, in line with NEC’s latest schedule.

· Resource uncertainty was the main risk to the Maryborough project. The project has only modest capex requirements and low technical risk, both in terms of project development and mining. We have reduced our project risk weighting from 50% to 25%, to reflect the increased confidence in the resource. We will likely retain a 25% risk weighting until the resource target converts to a JORC code compliant resource, and project financing/JV issues are clarified. Our risked valuation for Maryborough is now $94m ($0.83/share).

Elimatta Valuation

· Given the improvement in the availability of finance we have also decreased our risk weighting on the Elimatta project from 90% to 75%. The Elimatta project will be an open cut export thermal coal mine with a 106mt reserve. The project is dependant on the Southern Missing Link rail project and the Wiggins Island port expansion at Gladstone. NEC estimates project capex to be ~$600m for a 20 year, 5mtpa open cut operation, and is actively seeking a partner to develop the Elimatta project. We value Elimatta at $226m unrisked, but have risked this by 75% in our valuation to $57m ($0.50/share) until NEC secure a development partner for the project.

Overall Valuation

· As a result of reduced risk weightings for Maryborough and Elimatta and increased mine life at Maryborough our risked NPV for NEC has increased to $1.43/share. On an unrisked (but also unfinanced) basis, our valuation for NEC is now $3.57/share.

· Maintain Speculative Buy, target price increased to $1.43/share, in line with risked valuation.