Disclaimer: I hold a position in SMR and will keeping adding to...

Disclaimer: I hold a position in SMR and will keeping adding to it at this level. 

The decision whether to buy or sell here should really be based on how you view the company's future under conservative, downside case price assumptions. Do your own research whether you believe the valuations of supposedly "independent" experts whose bills are paid by SMR and Golden respectively. Of course SMR's expert is going to come out with a high valuation and Golden's paid expert are going to come out with a low valuation. The Board's best interest is to extract the highest possible price for the company under a take-out scenario whilst Golden's would be to buyout the company at the lowest possible price. Likewise I'm going to have a positive view on the company's valuation or else why would I hold it?

Having said that, if Golden want to take the company private they should be paying up. A$0.95 is FAR undervalued in my opinion. There's a reason the register includes Regal and Paradice, two big institutional investors. The kafuffle over whether to use WoodMac's price deck or the broker consensus deck is largely irrelevant, as you're always going to be presenting a range of valuations anyway based on some underlying price. Also the disagreements regarding Isaac Downs is also largely irrelevant. I value it at 0. SMR wouldn't have bought it if they didn't think it was value-accretive. There's no rush to develop Issac Downs anyway. Environmental permitting/final investment decision would still be 2-3 years away at the Isaac Plains CHPP is basically operating at full capacity with Isaac Plains East material anyway. 

Why I'm long SMR: 

This is a company that is smashing it out of the park operationally, upgrading FY19 production guidance twice now, and delivering in excess of what they promised. The company is debt free, has a standing working capital facility so the balance sheet is secure, and cash in the bank at 15 January of $31.2m after a partial unwind of the working capital built up over the December quarter. Assume a full unwind of the working capital position built in the quarter and you're looking at indicative cash at bank of A$40m+. 

1. Improving product mix: FY19 guidance is now 2.15mtpa product at a 90:10 semi-soft:thermal mix. Last year the sales mix was 63:27 semi-soft/thermal so ignoring movements in the underlying coal price you're already seeing margin expansion from improved product mix.  

2. Falling operating costs with significant operational leverage: Moving from Isaac Plains to Isaac Plains East is a game-changer. You're going from 14:1 strip ratio all the way down to <10:1 strip ratio and the benefits can already been seen in the December quarterly. FOB costs per saleable tonne went from A$121/t in 1QFY19 to A$84/t in 2QFY19 and that's with the dragline only been mobilised to Isaac Plains East around Christmas at the end of the quarter. With the drag line now in place cost guidance for FY19 looks extremely comfortable, contingent on whether they decide to front-end more pre-strip. Coming in above cost guidance is also likely to be a positive result rather than negative as it would indicate the company are chasing extra tonnes in a favourable price environment. 

3. Under-promising, over-delivering management: They've done almost a million tonnes of saleable product in the first half and they're processing ROM through the plant at an annualised rate of 3.3mtpa in the last quarter. The CHPP was basically running at full capacity last quarter. This is a great result. Production guidance looks extremely comfortable and it looks like they should easily be hitting 2.2mt+ of saleable this year.

Just do cash flow projections out one year under conservative coal price assumptions: 

I assume premium low-vol coking coal of US$150/t (a 20-25% discount to spot is trading in the range of US$190-200/t). SMR's semi-soft should achieve at least 65% of this so US$97.5/t. 

I assume realised thermal at US$80/t (the futures curve has spot Newcastle at ~US$90-100/t all through CY19). 

Assume a 80:20 semi-soft:thermal product mix (far below guidance of 90:10) for an average selling price of US$94/t. 

Assume a 0.75 US$/A$ and you get A$125/t before royalties. Take off $10 for state and vendor royalties and you get A$115/t.

Assume they don't beat production cost guidance of A$84/t and you get a margin of A$31/t. 

Assume they don't beat FY19 production guidance of 2.15mt nor is there any unwind of built up stockpiles and you get operating cash/Ebitda of A$67m over the next 12 months. 

Take off $15m for sustaining capex/study work and $20m to fully repay Wotonga South and you're left with free cash flow/cash build of A$32m.

SMR's current market cap is A$253m at A$0.96. Take off indicative current cash of ~A$40m and you're left with an indicative EV of A$210m.

So under what is in my opinion an absolute worst case scenario:

- SMR is trading on a free cash flow yield of 15% at current valuation;

- will have ~A$70m of net cash in the bank after a year

- owns a 3.5mtpa CHPP in the middle of the greatest coking coal geography in the world with locked in port and rail capacity,

- and has two potential long-term semi-soft coking coal growth projects.

Ask yourself if you're comfortable owning the stock under this scenario and if you are (which I am, and which Golden/Regal/Paradice likely have also) you should be buying.

In reality I believe $140m Ebitda for the next 12 months is conservative, hence SMR is trading at <2x EV/Ebitda and ~50% free cash flow yield, by far one of the cheapest stocks across the entire sector. My expectation is a 1c interim dividend and another 2c full year dividend. On my base case estimates SMR can cover that dividend payment out of free cash flow by 14x.

Globally WHC/Coronado/Teck/Peabody all trade between ~3.5-4.0x EV/Ebitda. Currently SMR trades at a forward multiple closer to Bounty than WHC. Have a look at Bounty and WHC and see which you would compare SMR closer to. In one year I can see SMR rerating to trade at 3x EV/Ebitda implying a future share price of ~A$1.40+ and will continue to make the easy decision to increase my position at anything below A$1.00. But this is just how I see the company. Do your own research.