This morning Continental Coal reported that it had secured a 4 year, US$25m secured project loan facility to help it finance development of the Penumbra underground project. The facility is repayable on a quarterly basis following first production and includes facilities to hedge USD/ZAR exposure and the risk of a substantial correction in thermal coal prices. The company does not expect to draw down the facility until CQ3/11 Penumbra development to commence in June; first production in 2012
Management expects to start construction at the project in June and believes that first production is possible in early-2012 with full production in Q3/12. This is in line with our expectations. Export thermal coal will be transported to Richards Bay Coal Terminal and sold to EDF Trading per the company?s existing offtake agreement.
No change to our model, but positive We are not making any changes to our model until the company starts to draw down on the loan, but we regard this development as positive as it means that the company should not have to come to the market at the present time for what we would regard as being a dilutive equity raising at the current price.
Highly leveraged to rising thermal coal prices
As we have noted in recent research we expect continued power shortages in China to translate into higher thermal coal imports over the summer, and potentially higher seaborne trade thermal coal prices. With Continental Coal highly leveraged to the spot market, we believe this is a positive and highlight that following recent weakness, the stock looks highly attractive, in our view.
Valuation unchanged; re-iterate Buy rating on significant upside We value Continental Coal using a sum of the parts valuation based on DCFs for the company?s existing operations and the Penumbra project and EV/resource multiples for the company?s early stage projects. Our NAV is unchanged at A?10.1. We maintain our price target at A?10 and re-iterate our Buy rating as we believe the stock looks undervalued after recent weakness.
CCC Price at posting:
52.0¢ Sentiment: Buy Disclosure: Held