Cockatoo Coal Ltd (COK) Spec Buy, TP$0.60 - Stuart HoweNovember...

Cockatoo Coal Ltd (COK) Spec Buy, TP$0.60 - Stuart Howe
November 2011
Initiation: Connected coal developer

Bowen Basin producer, Surat Basin developer. COK’s Bowen Basin mine expansion and Surat Basin development could have it producing around 8Mtpa (equity) coal by 2018 (including 2.4Mtpa LV-PCI). The company has positioned itself with strong joint venture partners including Mitsui and JFE Shoji, and has a share register supported by Posco and other major potential trading partners. Our sum of parts valuation is $0.60/sh.

Baralaba expansion to 3.5Mtpa PCI & thermal from FY15. COK has 3Mtpa port capacity at WICET Stage 1 for its Baralaba mine expansion. This open pit development will ramp up to 3.5Mtpa from FY15, with around 85% of product as LV-PCI coal and 15% thermal coal. The Baralaba mine is in joint venture with JFE Shoji, with COK’s equity interest in the expansion currently at 80%. A bankable feasibility study for the project is due to be completed by mid-2012.

North Surat Joint Venture: Leverage to emerging province. The North Surat Joint Venture (COK 51%, Mitsui 49%) currently has a resource of around 750Mt thermal coal across three projects. These projects are located adjacent to or relatively close to proposed rail infrastructure linking the Surat Basin to the Moura coal rail system and therefore ports at Gladstone. The JV has lodged expressions of interest for 30Mtpa capacity and has priority capacity rights for 14Mtpa at WICET Stage 2A/2B. We conservatively model this JV producing 10Mtpa ramping up from 2016 and apply a 50% risk weighting to this project in our valuation.

Investment view - Initiate Spec Buy, $0.60/sh Target Price. COK is trading at a deep discount to our $0.60/sh target price. We anticipate positive news flow as the company recovers production at its Baralaba mine and brings the Baralaba expansion through bankable feasibility stage. We don’t think that the market is factoring in COK’s Surat Basin project potential. This project could provide significant production, earnings and valuation upside for COK.