40c valuation - its going to boom !, page-2

ALTO CAPITAL
RESEARCH
Phone: (08) 9223 9888
Fax: (08) 9221 0488
Email: [email protected]
Website: www.altocapital.com.au
ACNS Capital Markets Pty Ltd T/A Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
Brief Note 31st May 2010
Atomic Resources Limited (ATQ)
Speculative Buy
Price:
12-month Target:
Enterprise Value:
14.0
40.0
$12.2m
Summary Information:
Capital Structure:
Share Price $0.14
Ord Shares 99.7m
Market Capitalisation $14.0m
Cash (Mar 2010) $1.8m
Enterprise Value $12.2m
Options (25 exercise) 28.9m
52 week Low/High 9.2 / 18.5
Directors:
Non-Exec Chairman Clive Hartz
Managing Director Clinton Cairn
Non-Exec Director Alastair Walker
Major Shareholders:
Clive Hartz & associates 18.4%
RBC Dexia Investor Services 12.5%
David Boyer 5.3%
ANZ Nominees 4.3%
Top 20 Shareholders hold 57.2% of the issued stock
ATQ Share Price
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
$0.35
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Similar Companies
$0
$50
$100
$150
$200
$250
CPL
HUN
NCR
KRL
RES
SMR
CCC
FSE
CWK
EER
ATQ
Market Cap (A$m)
Company Description:
Atomic Resources Limited (ATQ) is an Australian company, headquartered in
Perth, Western Australia, focused on the exploration and development of major
thermal coal assets in Tanzania, and uranium projects in Australia.
ATQ holds its Tanzanian coal assets via its 85% owned subsidiary Pacific
Corporation East Africa (PCEA), which in turn holds a 70% interest in Tancoal
Energy Limited (Tancoal), the holder of the Tanzanian tenements. The remaining
30% stake in Tancoal is owned by the National Development Corporation (NDC)
of Tanzania, the primary Government agency responsible for the development of
Tanzanias natural resources.
The Ngaka coal deposit (the groups most advanced project) currently has a
JORC-compliant resource of 212 million tonnes of medium ash, low moisture, low
sulphur sub bituminous coal. The company is currently conducting a Bankable
Feasibility Study (BFS) on the project, forecast for competition by the end of
August 2010. ATQ are quoted as saying that they expect to increase this resource
to at least 400mt during the June quarter.
The Tancoal JV recently announced it had made the shortlist for significant coal
and iron ore concessions located in Tanzania. The Tancoal Energy/Tata
International Joint venture made the shortlist for both the Mchuchuma coal
concession (nine parties selected to proceed to next stage) and the Liganga iron
ore concession (five parties selected to proceed to next stage).
The groups Australian based uranium assets while interesting are not the groups
major focus, and are not commented on in this report.
Key Points:
All coal assets in Tanzania are held through Tancoal Energy Limited, with the
Tanzanian government holding a 30% stake via the National Development
Corporation (NDC). This effectively makes ATQ a partner of the Government.
JORC compliant thermal coal resource at Ngaka of 212mt, expected to
increase to at least 400mt by the end of the June quarter (ATQ equity share
59.5% or ~240mt of coal).
Tancoal plans to commence small scale mining by the end of the year,
initially producing 250,000tpa (raising to 500,000tpa) to satisfy the Tanzanian
domestic market and replace the coal currently imported from South Africa
and Malawi. Production is expected to increase to over 2Mtpa by 2013 to feed
the proposed 400Mw Power Station to be built at Ngaka.
ATQ being one of the first movers in Tanzania has managed to gain control of
some of the countries best coal concessions, and although there is no
developed coal industry, many of the largest global resource companies are
tendering for projects in the country including BHP Billiton, Rio Tinto, and Vale.
Our sum of the parts valuation for ATQ generates a value of ~A$40m (~40
per share) at present, with the potential for the valuation to increase to in
excess of A$100m within 12 18 months if everything goes to plan.
We have placed a speculative buy on the company as the share price is
currently trading at a 65% discount to our valuation, and a 12-month share
price target of 40 per share.
Alto Capital
Atomic Resources Limited
May 2010
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This information must be read in conjunction with the disclaimer at the end of this document
Ngaka is ATQs most
advanced project
BFS is progress to
examine potential of
4mtpa operation
212 million tonne
JORC resource at
Ngaka at present
Resource expected to
increase to a least
400mt
1,000t bulk sample
from Ngaka to be
mined in June 2010
Brief Description ATQs Major Coal Project
The Ngaka Thermal Coal Project is ATQs most advanced project, with a Bankable Feasibility Study
(BFS) currently in progress to investigate the development of a 4mtpa coal mining operation. The
Ngaka coalfields are situated in the resource-rich western minerals province of Tanzania,
approximately 600km from the major port city of Dar Es Salaam. See figure below.
Atomic, through its 85% owned subsidiary Pacific Corporation East Africa (PCEA) has entered into
a joint venture with the Tanzanian Government (Tancoal - PCEA 70% / Tanzanian Govt. 30%) to
conduct a Bankable Feasibility Study (BFS) into the development of a thermal coal mining
operation at Ngaka. Ngaka has a JORC-compliant resource of 212 million tonnes of thermal coal.
The coal resource at Ngaka is expected to increase to over 400 million tonnes when a new resource
calculation is completed once the results of the current drilling program are assessed. This resource
upgrade does not include the new concession area that where recent granted to Tancoal.
Initially, Tancoal anticipates producing 250,000tpa of coal (rising to 500,000tpa for local demand),
to satisfy the Tanzanian domestic market and replace the coal currently imported from South Africa
and Malawi. Production is expected to increase to over 2Mtpa by 2013 to feed the proposed
400Mw Power Station to be built at Ngaka.
Negotiations with local Tanzanian companies that require coal are at an advanced stage. The
local companies have tested coal samples from Tancoal in their own laboratories with very positive
results. An initial 1,000 tonne bulk sample programme for the two main cement companies will
commence once the seasonal rains ease. This program is expected to take a month and once
complete, washable coal samples should be available for testing in June 2010.
Alto Capital
Atomic Resources Limited
May 2010
Page 3 of 5 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
NDC recently granted
an addition two coal
concessions to Tancoal
Mbamba has potential
to contain 30 million
tonnes of thermal coal
Liweta has potential to
contain 30 million
tonnes of thermal coal
Other Coal Projects
The National Development Corporation (NDC) granted two additional coal leases to Tancoal
during the March quarter (Mbamba & Liweta). These two leases offer the opportunity for further
coal to be identified close to the margins of Lake Nyssa. Preliminary estimates put the coal potential
of these two new leases at 40mt 60mt.
Mbamba
At Mbamba Bay, previous work in the region by Harkness (1953) and others identified coal at
surface. Initial proximate analysis completed on surface samples collected during the field work in
the 1950s show:
Ash Moisture VM Sulphur CV Kcal/kg
13 27% 0.8 13% 21.3 30.1% 0.3 0.4% 6,040 7,810
Based upon the main seam thickness of approximately 2 metres seen in outcrop and dip
determined from the outcrop sampled combined with the aerial extent of the basin, ATQ
anticipates that a target potential tonnage of between 20 -30 million tonnes of moderate ash, low
sulphur thermal coal with a calorific value exceeding 6,000Kcal/Kg lies within the concessions.
Liweta
The primary coal bearing formation is estimated. from work on the exposed coal field up dip from
the optioned concessions, to be approximately 50m thick with up to 6 contained seams up to a
maximum individual seam thickness seen in outcrop of 1.5m.
Ash Moisture VM Sulphur CV Kcal/kg
28% unknown 31% 0.7% 8,080
Atomic estimates Liweta has a target potential tonnage of between 20 30 million tonnes of
moderate ash, low sulphur thermal coal with a high calorific value exceeding 8,000 Kcal/kg.
Geologically the coal is within outliers of Karoo sediments within the main Mchuchuma Formation,
the coal bearing formation at Ngaka and Mchuchuma coal fields.
Part of a consortium
short listed to tender
for additional coal and
iron ore concessions in
Tanzania
Shortlisted for the Mchuchuma & Liganga Concessions
Tancoal Energy (ATQ equity ~59.5%) in conjunction with Tata International Ltd of India as per a Joint
Venture between the two companies where among the submissions shortlisted to progress to the
next stage of the tender process for the Mchuchuma coal concession and Liganga iron ore
concessions. The shortlist was announced in late February 2010 by the National Development
Corporation of Tanzania (NDC).
The Mchuchuma Coal Field is located some 600km inland in the Southern Western part of Tanzania
near Lake Nyasa and close to its border with Malawi in the West and Mozambique in the South. It is
situated in the Ludewa district of Tanzania. The NDC has estimated a resource of greater than
500mt of moderate ash thermal power generation quality coal.
The Liganga iron ore Field is located some 600km southwest of Dar Es Salaam, it is situated in the
Ludewa district of Tanzania. The NDC has described the project as containing deposit as a high
titaniferous magnetite with average grades of 51% Fe, 12.9% TiO2, and 0.5% V2O5.
Reporting formats vary
between companies so
necessary to standardise
Comparison of Coal Quality for ASX listed Peers
Coal quality is reported in various formats that can affect the interpretation of the coal quality, for
this reason it is necessary to make adjustments to the reported figures to make like for like
comparisons meaningful. The most common basis for reporting coal analysis are:
Term Symbol Definition
As Received (ar) The analysis of coal as it is received which includes both free moisture
and inherent moisture , i.e. Total Moisture (TM)
Air Dried (ad) As above but with the free moisture removed by exposure to air, but still
containing Inherent Moisture (IM)
Dry Basis (db) Excludes all moisture by heating coal to around 110C
Dry Ash Free (daf) Excludes all moisture and Ash
As the various coal components are removed the calorific value of the remaining material
increases. For this reason it is important to standardise the results.
Alto Capital
Atomic Resources Limited
May 2010
Page 4 of 5 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
More work required on
sulphur content (a little
high)
ATQs calorific value is
superior to its peers
Comparison of Coal Quality for ASX listed Peers (cont.)
Below we have standardised the results to a Air Dried Basis (ar), the major points to be taken from
the table is the high calorific value of ATQs coal compared to its peers, although the sulphur
content of ATQs coal is a bit on the high side.
IM Ash VM FC S CV
Company Area (%) (%) (%) (%) (%) Kcal/Kg Comments
East Energy (EER) AUS 14.2 12.5 31.2 42.1 0.4 4,900 Washed F1.60
Coalworks (CWK) AUS 16.5 18.2 24.0 41.3 0.3 4,600 In-Situ
Stanmore Coal (SMR) AUS Not broken down to components
NuCoal Resources (NCR) AUS Not broken down to components
Coalspur (CPL) CAN 4.5 11.9 33.7 49.9 0.3 6,200 Washed Values
Hunnu Coal (HUN) MNG No reported resource yet
Kangaroo Resources (KRL) IDN Not broken down to components
Continental Coal (CCC) ZAF 2.5 31.6 18.2 47.7 n/a 5,100 In-Situ
Firestone Energy (FSE) ZAF 2.5 32.5 25.7 40.0 0.9 4,900 De-Shaled
Resource Generation (RES) ZAF 3.6 33.1 25.7 37.7 1.0 4,500 De-Shaled
Atomic (ATQ) TZ A 2 .8 22 .8 27 .1 47 .3 1 .5 6 ,000 In-Situ
In the comments sections, Washed means the coal has undergone an upgrading stage to remove
some of the ash, De-shaled means the coal has had waste material (shale) removed before
analysis, and In-Situ means that the coal has not undergone any upgrading, i.e. raw as mined coal.
Sum of the Parts valuation
for ATQ of A$39.3m at
present.
Potential for valuation
increase to >A$120m in
next 12 18 months.
ATQ trading at 65%
discount to current
valuation
Valuation
As ATQ has not yet released a study on the viability of its Tanzanian coal assets, and is yet to
generate any income, we have decided to value the company using a sum of its parts basis. We
have presented two valuations for the group, 1) current value of projects, and 2) potential value of
the projects in 12 18 months if everything goes according to plan.
The groups major asset (Ngaka) has been valued at a conservative $30m, which is based on a 30%
50% discount to the 40 - 50 a tonne valuation generally applied to a coal resources of this
nature.
Current Potential
Item Equity ($m) Share ($m) share
Ngaka 59.5 30.0 30.0 80.0 n/a
Mbamba 59.5 3.0 3.0 7.0 n/a
Liweta 59.5 3.5 3.5 8.5 n/a
Mchuchuma 29.8 - - 15.0 n/a
Liganga (Fe) 29.8 - - 10.0 n/a
Uranium assets 3.0 3.0 3.0 n/a
Cash 1.8 1.8 1.8 n/a
Corporate (2.0) (2.0c) (2.0) n/a
Total 39.3 39.3 123.3 n/a
We have not applied a per share value for the potential value of the group as we believe ATQ is
likely to raise additional equity capital in the near future, and it is not possible to determine the
amount of funds to be raised or at what price the funds will be raised.
On our valuation of ~40 per share, ATQ is trading at 65% discount to fair value, and has the
potential for significant further capital gains if the groups future plans come to fruition.
Future value for ATQs
equity share of Tanzanian
assets could be as high as
A$250m
Little downside risk at
current share price levels.
Final Thoughts
If ATQ plays its cards right, and a bit of luck goes its way, its assets in Tanzania have the potential of
being a company maker. It does not take much imagination to see the value of ATQs projects in
Tanzania being worth in excess of $100m. potentially as much as $250m in the future.
We believe the easiest and most profitable way forward for ATQ would be for Tancoal to form a
partnership with one of the larger resource companies to provide the capital required to get a
substantial resource project off the ground.
We see little downside in the current price of ATQ at under 20, although we are aware that the
groups cash balance is getting low and will need to conduct a capital raising in the near future.
Our opinion is that a smallish raising ($2 $4m range) would provide the best outcome as it would
not dilute existing shareholders excessively.
Alto Capital
Atomic Resources Limited
May 2010
Page 5 of 5 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
The author of this report currently owns shares in ALG, ALGO, ATQ, CEU, DMG, NQM, RVE, RVEO, TAH, and TBR.
Carey P. Smith
Research Analyst
Phone: 08 9223 9838
Mobile: 0400 216 502
E-mail: [email protected]
Investment Managers
Stockley Davis
Corporate Manager
Phone: +618 9223 9835
[email protected]
Adam Belton
Director
Phone: +618 9223 9818
[email protected]
Craig Brown
Director
Phone: +618 9223 9828
[email protected]
Shane Wee
Director
Phone: +618 9223 9868
[email protected]
Brendan Fogarty
Investment Manager
Phone: +618 9223 9810
[email protected]
Peter Hayes
Investment Manager
Phone: +618 9223 9836
[email protected]
Alan Lawson
Investment Manager
Phone: +618 9223 9878
[email protected]
Maciej Rosiewicz
Investment Manager
Phone: +618 9223 9830
[email protected]
Brett Schreuders
Investment Manager
Phone: +618 9223 9825
[email protected]
Cameron Bolton
Investment Manager
Phone: +618 9223 9832
[email protected]
Chris McGrath
Investment Manager
Phone: +618 9223 9822
[email protected]
Ian Leete
Authorised Representative
Phone: 0415 707 065
[email protected]
Mathew Walker
Director
Phone: +618 6460 4960
[email protected]
Russell Lynton-Brown
Authorised Representative
Phone: +618 6460 4960
[email protected]
Nathan Barbarich
Authorised Representative
Phone: +618 9223 9848
[email protected]
Paul Poli
Authorised Representative
Phone: +618 9223 9888
[email protected]
James Robinson
Authorised Representative
Phone: +618 6460 4960
[email protected]
Carey Smith
Research Analyst
Phone: +618 9223 9838
[email protected]
Carrie Burns
Office Manager
Phone: +618 9223 9888
[email protected]
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