excellent nec research paper...$4+ valuation !

AUSTRALIAN EQUITIES RESEARCH
NORTHERN ENERGY CORPORATION LIMITED
UPDATE
ASX code: NEC 12 month price range: $0.20-$1.12
Current price: $1.07 PER (x): -
Ordinary shares on issue: 112.1m Yield (%): -
Market capitalisation: $120m Cash backing per share: $0.10
Web-site address: www.northernenergy.com.au
Northern energy is a coal company with 4 projects. It is developing an extensive resource base and is in the process of
moving from explorer to producer.
Prices for both coking coal (used in steel making) and thermal coal (power generation) are strong and expected to remain
robust for the foreseeable future.
We value the company at $4.33 to $4.67 on a risked valuation (includes around $0.10 per share in cash or approx $12m).
This value will increase significantly once a mining lease is granted on Maryborough and an NPV valuation can be applied.
Below is a break up on each project.
Elimatta (100%) – THERMAL COAL
The Elimatta Thermal Coal project (100% Northern Energy) is located in the northern part of the Surat Basin in the Taroom
Shire.
Mining development at Elimatta is proposed to be open cut, producing 100% thermal coal. Current indications are of a
highly volatile, low nitrogen and low sulphur product, which would be suitable for export.
VALUATION
Category Measured Indicated Inferred Exploration Target TOTAL Value
Mt 129 75 40 30 to 50 274 to 294
Value ($)/t $6 $6 $1 $1
RISK Factor (%) 80% 80% 80% 80% 80%
Total ($)m $155 $90 $8 $6 to $10 $259 to $263
Value $/Share $1.38 $0.80 $0.07 $0.05 to $0.09 $2.31 to $2.35
** 82mt PROVEN and 24mt Probable (MARKETABLE RESERVES)
For our valuation purposes we will apply a $6/t valuation on Measured and Indicated Marketable Resources and $1/t for
inferred and exploration targets. These valuations are within the range of recent valuations on market based transactions.
We will also apply a very conservative risk factor of 80%. We expect that PRODUCTION at a rate of 5mtpa should occur
by late 2012/early 2013 IF current infrastructure plans are maintained.
13 October 2009
Page 2
Maryborough (100%) – HARD EXPORT QUALITY COKING COAL
The Maryborough EPC923 is 100% owned by Northern Energy Corporation. It is located approximately 20km north of the
town of Maryborough and west of Hervey Bay, along the Queensland coast. Japan’s Department of New Energy and
Industrial Technology Development Organization, also known as NEDO funded the initial drilling programme at
Maryborough. NEC has confirmed that the coal within the area has coking properties, which should make it attractive to the
global steel industry and will therefore put the resource at the higher end of the coal price spectrum.
The area was historically mined using underground techniques to produce coal for domestic power generation. However,
NEC is proposing an open-cut, multi seam operation.
The Maryborough area has some advantages because it is close to the coast, serviced by road and rail, and is approximately
only 220km from Gladstone by rail. Therefore infrastructure does not appear to be an issue.
A 50Mt TO 70Mt exploration Target has recently been identified along with a 5Mt Inferred resource. Most of the target is at
shallow depths making the initial 500,000tpa mine production rate now look EXTREMELY CONSERVATIVE. Current
Drilling is under way to upgrade the resource and Exploration Target and provide input to the washplant design. Currently
an environmental plan and mining leases are being worked on with a POTENTIAL PRODUCTION COMMENCEMENT
BEING ABOUT 12 MONTHS AWAY.
VALUATION
Category Inferred Exploration Target TOTAL Value
Mt 5 50 to 70 55 to 75
Value ($)/t $3 $3
RISK Factor (%) 50% 50% 50%
Total ($)m $8 $75 to $105 $83 to $113
Value $/Share $0.07 $0.67 to $0.94 $0.74 to $1.01
We have used a $3/t valuation for inferred and exploration target resources and assumed most will be brought up into JORC
classification.
The premium over Elimatta and Yamala resources is due to the coking characteristics of the coal and the premium that they
would receive in export markets. We will apply a lower risk factor of 50% due to better access to infrastructure.
We believe that the market has not fully appreciated the value in this asset and as such it is not reflected in the current share
price of the company.
We will change our valuation method to an NPV basis once the mining lease is granted.
This will have a MATERIALLY POSITIVE impact on our valuation for this project.
Yamala is a JV between Northern Energy (83%) and Japanese commodities trading house Sojitz (17%) –
THERMAL, SEMI SOFT COAL
Under the terms of the JV, Sojitz will fund a three stage AUD$5.3m exploration and evaluation program to earn a 30%
interest in the project with an option to acquire another 19% for $6.65 million cash.
The JV has spent $3m on exploration to achieve a resource of 220Mt inferred and a large exploration target of 190Mt to
220Mt.
NEC is targeting a deposit with a 100Mt reserve. At Yamala, the conceptual and pre-feasibility study will focus on initially
a small open cut mine with direct shipping of thermal coal. We assume the mine will be extracting the subcrop at a 1Mtpa
rate, starting with only a 5Mt reserve. Subsequent to this an underground mine of the highwall, using either punch
continuous mining or a longwall, will be developed.
13 October 2009
Page 3
The project is located in the Southern part of the Bowen Basin along the Capricorn Highway, between Emerald and
Blackwater. Yamala is in a very prospective neighbourhood, with the Ensham project adjacent to the North, Xstrata’s
Togara North to the south, and Felix’s Minerva to the southwest of the Yamala tenement.
VALUATION
Category Indicated Inferred Exploration Target
TOTAL Value *83%
attributable to NEC
Mt 40 180 190 to 220 340 to 365
Value ($)/t $6 $1.50 $0.75
RISK Factor (%) 80% 80% 80% 80%
Total ($)m $48 $54 $29 to $33 $131 to $135
Value $/Share $0.43 $0.48 $0.26 to $0.29 $1.17 to $1.20
We have used a $6/t valuation for indicated as the coal is a higher energy thermal coal and has the potential to produce low
ash PCI / export thermal coal in a 55/45 proportion. Additionally the exploration target has been limited to a 300m depth,
however the coal extends below this depth. We have also applied a risk factor of 80% due to the mining risk associated with
this deposit.
Ashford (50%) – HARD EXPORT QUALITY COKING COAL and exploration ground
This project is 50% owned and managed by Northern Energy with the other 50% owned by Renison Consolidate Mines. It
is located 10km north of Ashford in northern New South Wales, approximately 60km north of Inverell. The company had
been considering a development based on the 18mt inferred resource previously outlined at Ashford, possibly in conjunction
with other deposits identified by third parties in the region. However, given the high priority currently given to the Elimatta
and Yamala projects, development is currently on stand by. No further exploration work is expected in the near future.
Ashford is currently stranded and the new proposed rail line linking Moree in NSW to Toowoomba in QLD is unlikely
within the next 10 years. The company is currently exploring all options with the Ashford project including exporting
through the Port of Brisbane. As a result a disposal of the project may be possible in the future. The company has stressed
that alternative transportation options may still also be possible at Ashford.
We value this project at $3/t of coking coal * 9mt = $27m and have applied a discount of 90% due to infrastructure
constraints. This values this project at around $2.7m or $0.012/share for NEC's 50% interest.