the fol ubs / bellpotter BUY recommendation with a dcf valuation...

the fol ubs / bellpotter BUY recommendation with a dcf valuation of $1.01:
quote
Set to benefit from rising met coal prices

EVENT: GNM reports December quarter production GNM reported quarterly production of 418kt, -9% lower q/q but relatively inline with UBSe of 430kt. GNM has guided for FY11 (March y/e) production of 1.7Mt, implying GNM expect to produce 435kt in the March 11 quarter. Sales during the qtr were 274kt, an inventory build of 144kt, probably just a timing issue. This may be beneficial if GNM sell some spot tonnes to parties other than their parent (as they have done in the past), with spot hard coking coal prices now US$355/t.

IMPACT: Downgrading FY11e NPAT 3% to $34m from lower shipments
We have revised our shipments down to 1.7Mt for FY11e where previously we had
assumed an inventory drawdown would lead to sales being slightly higher than
guided production. This leads to a 3% downgrade to our FY11e NPAT estimate to
$34m. We note near term profitability is very sensitive to coal price assumptions
due to the operational leverage of the business from high cash cost development work. Cash costs should reduce once both longwalls are installed and profitability will also be boosted by production ramped up towards the goal of 6Mtpa by FY15.

ACTION: Upgrade to Buy, stands to benefit from rising met coal prices
We upgrade the stock from Neutral to Buy. In our view, GNM is one of the best ways to play the rising met coal price (from QLD supply issues) as it is underground met coal in NSW. We note that its current high cash cost position
(due to development work) means margin and profitability for the next 2 years is the most leveraged in our coverage to rising met coal prices. unquote