Xerxes pointed out the other day an excellent mid-cap coal producer, CEY, which to him, looked like a great buy fundamentally as well as technically. I agreed with him, however I think I’ve managed to find another coal company with similar growth potential but with a share price that doesn’t reflect this fact, yet. The company is Macarthur Coal. (MCC).
I actually bought 3,000 Macarthur Coal convertible notes (MCCG) last Thursday for $1.63, so I’m putting my money where my mouth is. I don’t want to ramp MCC, I want simply to get other people’s opinions and share my rationale for buying.
I’m bullish on coal. Coal prices have been hammered over the past five years, often trading at historic lows. Until recently, there were no mid-tier companies left in Australia as they slowly all left the industry or were taken over. Only the big guys were left standing – BHP, RIO, Glencore, Anglo Coal. This is what usually happens in bear markets (look at the carnage in the Aussie gold sector). Then, in bull markets which follow, the revival usually comes from the smaller/mid-cap end.
CEY and MCC are starting this revival, which began with the recovery in coal prices in 2002. Future prospects for the coal industry look great, in particular for the PCI (pulverised coal injection) end of the market, in which MCC operates. (So far, MCC has only one mine - Coppabella – but this should increase to three by the end of 2003). What makes MCC (and for now only Coppabella) attractive & what gives this company a niche market position is that it produces this very desirable PCI coal.
This is a high-energy coal with a high carbon content. Steel mills around the world are increasingly embracing these coals to lower their operating costs as it allows them to reduce their use of hard coking coals. The export market for PCI coal has grown rapidly and annual production has increased in the past 10 years from 500,000tpa to over 12Mtpa. The Coppabella mine currently supplies 30% of the world’s PCI coal market. It has a mine life of 15 years with excellent exploration potential.
(By the way, Australia is the world’s No.1 coal producer and as Xerxes has said, every portfolio should have at least one coal stock. I agree with him).
In 2003, MCC’s earnings should receive a positive boost when the Moorvale and Monto coal mining operations commence production and the company becomes a three-mine operation. Its future growth will be driven by the development of these two new mines. Growth will also come from renewed exploration of existing tenements.
Macarthur has a solid balance sheet; it’s operating cashflows are positive; gearing is conservative - 35% percent; book value is around $1.06; the PE ratio is about 10x; dividend yield is around 5%. The company is profitable, full year profit came in at $15.4M down slightly on the prospectus forecast ($16.6M). Fundamentally, things look good. Market cap is about $170M – very cheap imo, considering the growth potential.
One concern people might have with Macarthur is the tight shareholder structure. For example, MD Ken Talbot holds a 49% percent stake in the company. I don’t view this as such a big deal and Talbot has indicated that he is prepared to sell down his stake. Ken Talbot is very respected in the coal industry and he has developed 4 coal mining companies in Australia, 2 of them as a majority owner.
To summarize, MCC is an attractive investment based on three things: attractively priced growth; management experience and excellent fundamentals and earnings.
The reason I bought the convertible notes (MCCG), which were issued at $1.45 & earn a fixed rate of 10%p.a for 3 years (paid half yearly) was for the leverage to the share price upside and for the excellent income stream. I will probably add to my position if things go the way they should. I figure that downside is limited from here.
www.macarthurcoal.com.au is a good starting point for doing some research on MCC. I recommend people check out Macarthur.
