Author: marben100 - 10th Aug 2009 - 15:14 http://www.stockopedia.co.uk/forum/view/CDN/20657
With a current market cap ITRO £150m, the proposition of this thread may seem a little far-fetched - but is it?
Caledon has been in an offer period since the start of 2009 and press reports suggest that bid talks may be nearing a conclusion.
The US$1bn figure derives from this article: http://www.telegraphindia.com/1090806/jsp/business/story_11326712.jsp
Mumbai, Aug. 5: The Essar group is in advanced talks to acquire coking coal company Caledon Resources Plc, having mining interests in Australia, for up to $1 billion.
Sources said Mumbai’s Essar had been scouting for coal assets abroad for at least a year as its steel and power companies expand capacities in India...
...The number of potential buyers has now come down to two — the $15bn Essar group and a Chinese company — and a deal is likely to be clinched soon, the sources said.
So, how credible is this article? Let's have a look at supporting evidence. Firstly, along with many other commodites, the coking coal market collapsed around the turn of the year, as steel demand slumped. However, the situation appears to be turning round rapidly - as reported by Caledon at their AGM on 23rd July (see the AGM thread ). More recently there have been reports like this coming out of India: http://steelguru.com/news/index/2009/08/06/MTA1OTI3/Gujarat_NRE_Coke_sees_coking_coal_shortage_in_H2.html
Gujarat NRE Coke sees coking coal shortage in H2 Thursday, 06 Aug 2009 Mr Arun Kumar Jagatramka MD of Gujarat NRE Coke last month said that the current spot prices for coking coal in the last two weeks have been around USD 145 to USD 150 per tonne. He said this signals a very strong coking coal market.
He added that "All of us in the industry have a very strong view that in the second half of this fiscal we could see a very big shortage of coking coal in the world market once the demand really picks up in the developed world."
Mr Jagatramka, in an interview with on CNBC-TV18, said that "Coking coal prices have been settled at USD 128 this year for the Japanese fiscal April to March, but the last few months China has been importing very large quantities of coking coal and it has been pushing up the spot prices. We hear in the industry that the current spot prices for the last two weeks have been around USD 145 to USD 150 signaling a very strong coking coal market. All of us in the industry have a very strong view that second half of this fiscal we could see a very big shortage of coking coal in the world market once the demand really picks up in the developed world."...
Whilst neither confirming nor denying the article on 6th August, on 7th August Caledon confirmed that it has received an approach from Essar (and other interested parties).
Cook Valuation A price of USD150/t would given Caledon a gross margin ITRO USD40/t from their existing Cook mine. If Caledon can hit their target of 1Mtpa ROM production = ~750ktpa coking coal, that's a GP of US$30m p.a. However, there is scope for that margin to increase substantially if costs can be brought down and/or prices rise. Both of these scenarios are plausible, if Caledon delivers on what it indicated in response to my questions on the AGM thread and/or if the supply squeeze indicated in the quoted article occurs.
A valuation of US$300m for Cook alone does not seem unrealistic on that basis: whilst a 10x GP multiple might seem high for a market value, it may not be unreasonable for a coal consumer keen to secure future supplies in a foreseen tight market. It puts a value of < US$1/t on Cook's total resources of over 400Mt (of which 68.5Mt are in the Argo seam currently being mined). See this resource upgrade from May 2009.
Minyango Valuation The same resource upgrade shows resources of 341.6Mt at Caledon's Minyango property. The PFS results included in the AGM presentation indicate potential production from Minyango of 4.5Mtpa - suggest it could easily be worth more than Cook however, based on the June quartery report it appears that further coke testing will be required to confirm whether the prospective coking coal quality matches that of Cook (if not, it's prospective sale price could be considerably lower).
Other Evidence One further "clue" is given in Caledon's presentation from last November. This suggests that buyrs have been prepared to pay ITRO A$3.4/t for coking coal deposits. Whether that figure is still current is a moot point.
Conclusions
Some have suggested that the $1bn figure quoted in the article might include the ~A$400m CAPEX required to develop Minyango. This is possible - but my analysis above also suggests that US$1bn is not ridiculous as a possible sale price for Caledon. Even if it went for half that value, that would represent a fully diluted price/share of ~US$2 - ITRO 120p at current exchange rates.
Clearly there is a risk that no acceptable offer will be made - but Caledon's statements do indicate that talks are ongoing, Polo is likely to be happy to sell at the right price and a tightening coking coal market may be enough to bring competing bids to fruition. There is a further risk in that Caledon still have not proved that they can achive their production/cost targets but, as discussed on the AGM thread , there are good grounds to believe that those targets can be met.
Providing demand for coking coal remains firm and Caledon is able to ramp up production as promised, the current market cap. seems reasonable and offers the potential for rapid gains should the anticipated bid(s) be confirmed. It is possible that there is a disconnect between the share price and the trade sale value of Caledon.
CCD Price at posting:
$1.32 Sentiment: LT Buy Disclosure: Held
