$1.80/share

Patterson recently increased their price target for GUF!

Event - Terra Energy restructure
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Guildford Coal (GUF) has entered into an agreement with its Mongolian partners’ Terra Holdings Limited to restructure ownership in Terra Energy Limited.
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Terra Energy controls 4 of the 5 tenements that make up the South Gobi Project in Mongolia. This includes the mining licence over the North Pit but not the East Pit which is already 70% owned by GUF, through its subsidiaries.
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Consideration for this acquisition, Guildford will provide to Terra Holdings Limited:
1. a deposit payment of $3M (already paid);
2. a cash payment of $2M, to be paid on completion of the transaction;
3. 40M fully-paid ordinary shares in GUF valued at $0.75/share, to be issued on completion of the transaction. Half of these shares will be held in voluntary escrow for a period of six months from completion;
4. $15M, which may be met either through a cash payment or through the issue of fully-paid ordinary shares in GUF, at GUF’s Option, to be paid or issued one year after completion of the transaction.
Impact
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The transaction increases GUF’s ownership of Terra Energy and the attributable coal production and cash flows from the East Pit, through its subsidiaries, to 100%. However, Och Ziff has a $25M convertible note over Terra Energy which converts to a 25% equity. We are assuming 75% ownership for modeling purposes (increased from 56%).
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This increases our price target from $1.60/share to $1.80/share. Accordingly we retain our Buy recommendation.