building a case for a conti play - 1

I hold COOL shares and just wanted to share my thoughts with you on the developing story while the market makers squeeze out the weak holders. I see Continental Coal as primarily an asset play with the added insurance of cash flow (albeit small so far)from the three producing mines. If all new development of mines were to stop, I do not expect Cool to go insolvent in the medium term. This is a real risk with most other junior miners without production in the current macroeconomic environment.


I have no new information other than what is publicly available. I conjecture using some inductive and some deductive logic to lay my case. I feel there is more than a good chance that all these bidding on individual assets will eventually lead to a buy out of COOL, the company, by an Indian power/coal utility. We already know that such utilities have an interest in the bidding process. If Coal India limited or NTPC (National Thermal Powercorporation) is one of the interested parties, there is a very good chance that COOL might be bought in entirety.If I were to guess a buyer, I would go first go for Coal India Limited, either on its own, or in a joint bid with NTPC (National Thermal PowerCorporation). I do not expect Indian public utilities to bid against each other. Both are very large Indian public sector firms with relatively small percentage stock market flotations. The market caps extrapolated from the stock market floats will easily make them two of the largest Indian firms of any kind. Cash is not a constraint to buy a tiddler.
see the following link for Coal India Limited's market cap: http://businesstoday.intoday.in/story/coal-india-overtakes-ril-as-most-valued-firm/1/17999.html

I will explain now.


Firstly, a little bit on the characteristics of the Thermal Coal market with emphasis on the South African industry.

You have Metallurgical (or Coking) coal primarily used for producing steel and Thermal (or Steam) coal which is primarily used for power and other industrial processes (like cement manufacturing). Calorifically, coking coal is superior and more expensive. However, coking coal market gets more affected by macroeconomic fluctuations where constructional projects stall and hence steel needs stall. Power generation is much less sensitive to macroeconomic fluctuations and is more driven by demographics - hence thermal coal demand is more robust in macroeconomic turbulence.

USA and Canada produce both types of coal with greater emphasis on coking and higher grade coal. Australia produces both while Indonesia, South Africa, India
and China produce mainly the thermal coal variety. India and China are net importers and Japan and South Korea are very large importers too. Other important producers include Colombia (coking) and Mongolia. Check for details in this link. http://www.homelandenergygroup.com/s/Coal.asp?ReportID=338859


In recent times, apart from global macroeconomic uncertainties and slowdown in Europe and to an extent China, what has affected coal prices is the large inexpensive supply of Natural gas in the USA from new fraccing techniques and new availability of shale gas. Many power generators in the USA have switched from coal to natural gas and many of the North American coal mining companies will have to depend on exports to survive. This new source of supply has led to lower coal prices. An additional problem is the environmental issues about dirty coal and carbon taxes imposed on coal usage in most developed countries. However,the way carbon market has collapsed in the EU and with the high natural gas prices outside USA, coal remains the most economic alternative in generating power in Europe despite the carbon taxes.

I am quite positive about the Thermal coal market in South Africa and think that that coal prices are near a bottom. For countries like India and China, there is really no other viable, easily found and transported primary energy source for power at least for the next few decades. More than my views, Ivan Glasenberg of Glencore agrees and has decided to buy Xtrata at a low point in the thermal coal cycle. Remember that Glasenberg was a thermal coal trader in South Africa in his younger days and is probably the best judge in the world for this market. Both Glencore and Xtrata are serious players in the South African (and world) thermal coal markets. Check the following link:
http://www.mineweb.com/mineweb/content/en/mineweb-mining-finance-investment-old?oid=159641&sn=Detail

Please take a look at the following link: http://salvareport.com/india-thermal-coal-imports-reach-record-high/ For various reasons, Coal India Limited (the state owned coal monopoly) is just unable to fulfill thermal coal demand from the Indian power sector from its own mines. The import demand is huge and the imbalance is projected to increase. There has been embarassing severe power outages in India in the last year or so. Currently, India imports a lot of its thermal coal needs from Indonesia. However, logistically, the western coast of India (states like Gujarat, Maharashtra, Goa, Karnataka, Kerala) is closer to South Africa/Botswana/Mozambique than Indonesia and the quality of coal in the African countries is also better. Australia, although considered a reliable supplier, is much further away geographically for the thermal coal needs, and costs have recently increased due to carbon taxes, new mining taxes and higher wages. So far, carbon taxes is not a problem
in South Africa. In recent years, 32 per cent of Richards Bay Coal Terminal exports from South Africa goes to India growing from practically nothing from about eight years back.

Where Continental Coal's assets fit in nicely is firstly, as some of the assets are already for sale, the assets are already in focus. Secondly, the South African assets in the Witbank area enjoy one of the best developed infrastructural setups in the whole thermal coal world (Railways, port in Richards Bay, no environmental issues as it is already an established coal mining area, established workforce with mining skills). There are very few places in the world where you can bring a new mine to production any easier than in the Witbank region. This is one reason why I feel that Conti's South african coal assets should be valued much higher than what they are valued on their balance sheet. Remember that for Coal India Limited and NTPC, it is really a case of thermal coal security for India's power sector's huge needs - it is not about a few million here and there . Thirdly, 600 million tonnes of resources in a fairly concentrated area is also reasonably large enough size for Coal India or NTPC - they are much too big to buy very small assets or assets dispersed over large areas with low economies of scale. Fourthly, amalgamating small assets from different South African mine owners is a huge nightmare in management energy for the Indian utilities as they have to negotiate with different BEE partners and they have to get repeated Mining Ministry permissions. Buying all of Conti's South African assets make it one negotiation. If they are to go for a much bigger mid-tiered firm, firstly they may overpay and secondly they may incur resource nationalism from ESCOM, the South African power company.

It is this one negotiation settling everything is why I believe Botswana assets may also have an offer if one of these Indian companies are looking at the South African assets. The size of the Botswana assets is large, commensurate with the needs of Coal India Limited or NTPC. These companies are large enough to invest in the railway and port infrastructure development in Botswana (which may cost billions ofdollars) along with the Botswana government and Jindal (who have bought a neigbouring asset from CIC Canada). A purchase of the Botswana assets
by these utilities will be a blessing for the Botswana government in the infrastructural development of the coal fields. Read some Botswana argument in the following link:
http://www.miningmx.com/news/energy/India-coal-demand-to-power-Botswana.htm

Going for all of Conti's assets also help the Indian companies in mitigating country risk in possible growing resource nationalism in South Africa. Botswana is also one the most investor friendly destinations in Africa.

Here is a link why these utilities may buy African assets together. http://www.thehindubusinessline.com/companies/icvl-plan-on-overseas-assets-buy-likely-to-crystallise-by-march/article4077879.ece

For us Conti Coal shareholders, I would love to see more than one bidder in the South african assets (preferably somebody like Glencore). I think it will be harder to find too many bidders for the Botswana assets due to the infrastructural shortcomings.

Anyway, so much for my conjecturing. Thanks for reading this long piece.