paterson say buy- have target at $1.10

Even better economics likely
 Coalspur has announced that it has reached a purchase agreement
with the owners of the Z-block and McLeod River coal tenements
which are adjacent to their existing Hinton East and West coal
projects (see diagram below). It will be paid for with cash and debt.
 The leases (which come with existing but old mining permits) contain
438Mt of resources, 391Mt of which are Measured and Indicated.
Coalspurs Hinton Project now has 20km of strike with seams dipping
to the northeast at 7 to 15 degrees. We expect that the coal will be of
the same lower yielding but export quality thermal coal. Total
resources for the expanded Hinton are now 906Mt.
 The purchase price is C$90m (approximately A$100M), with C$6.5m
payable upfront and the remaining C$83.5m due on 15 November.
This works out to a resource multiple of A$0.25/t of Measured and
Indicated Resource which we think is a very reasonable price on its
own, not counting the value in merging the Hinton project into one
very large, very long life asset.
 Acquiring the Z-Block is something we had hoped for, but CPL has
now consolidated a very impressive thermal coal project. It is still one
of the most attractive coal explorers on the ASX, with the rare
attribute of being only 3km from a rail line which has spare capacity,
which in turn ends in coal port that also has spare capacity.
 The 20km of contiguous strike mean that the size and economics of
Hinton are likely to be improved from those set out in the scoping
study of earlier this year. We are still modelling a 4Mtpa saleable
mine but have added to the minelife resource base which has greatly
increased the valuation for Hinton. We think that the project is likely
to become a high volume 8Mtpa dragline operation. This doubling of
production would not require a doubling in capex which the scoping
study predicted at A$300m.
 It is early days, with first production not due till 2013, and still many
regulatory and approval hurdles to overcome, but the Hinton project
has a combination of elements that is difficult to find elsewhere. Our
valuation has risen to $1.11 and accordingly we maintain our BUY
recommendation with an upgraded price target of $1.10 per share.
The company has about $28m in cash on our calculations. This has come largely from
the recent placement to the Highland Park group (the registered shareholder is Borrowdale
Park) which brought in $22m in exchange for 44.8m shares.
The remaining purchase cost will be funded from a $65m debt facility provided by
Highland Park, with interest of BBSY +5% (approx 10%pa) repayable every six months.
The loan is repayable within 2 years from drawdown. The upfront fee is 15m options at a
strike price of 0.80 cents exercisable within 3 years.
This looks to us as a very attractive funding package that does not give away offtake
and requires very little dilution for existing shareholders.
As a reminder, the Scoping Study result highlights were:
Wardrop Consultants conducted the study and the economics of the Hinton project
are very attractive, with capex of US$255m (or ~A$300m compared to our previous
estimate of A$400m) for a 4Mtpa thermal mine and average operating cash costs over the
life-of-mine (LoM) of US$48/t.
On Wardrops base case assumptions of 7.4Mtpa ROM and 4Mtpa saleable (a 54%
yield compared to our 51%), using a truck and shovel fleet, LoM strip ratio of 4.65, and an
average LoM coal price of US$87/t, the mine will produce pre-tax cash margins of $150m.

On our much lower coal price assumptions, we estimate that Hinton will produce about
$80m in free cashflow per year (our preferred measure) at full production.