coverage of tigers realm coal by investec.

?Tiger s Realm Coal( Byu T- P: 0$A)
Tigers Realm Coal (TIG.AU)
Australia | Coal
Within the realms of probability
We initiate coverage of Tigers Realm Coal (TIG AU) with a BUY rating and AUD0.45/share target price. TIG has a 412mt coking coal resource at its Amaam project on Russia’s far-east coast, close to end markets in Asia. The company continues to look for a strategic partner to jointly develop the 10mtpa ROM Amaam project but has the option of starting a smaller 0.5mtpa- 1mtpa project at Amaam North for only modest capex. Near-term catalysts include receipt of a mining license at Amaam, expected in JunH13, and the identification of an initial resource at Amaam North, expected in late MarQ13.
? Two-pronged strategy. TIG continues to progress through pre-feasibilitystudy the Amaam coking coal project in far-east Russia. However, with initial capex estimates of USD1.45bn (100%), likely to increase, and needing a strategic partner to develop Amaam, management have identified the potential to develop a smaller, lower capex project at Amaam North with first production possible in 2015. We believe TIG will need c. AUD60m of further financing in 2013E-2014E to progress Amaam and Amaam North.
? Near-term catalysts. TIG expects to complete the Amaam pre-feasibility study by the end of MarQ13 and to receive the mining licence in JunH13. Progression to feasibility study and further coal quality test work will increase the likelihood of a strategic partner investing in this project, which could be a significantsharepricecatalyst,inouropinion.Managementis alsotargetinga maiden resource at Amaam North in MarQ13, which would add to the existing resource of 412mt (100%) at Amaam. Further exploration targets of 160-660mt (100%) at Amaam and Amaam North could see total resources exceed 1bt (100%).
? Initiating with a BUY rating, AUD0.45/share target price. Our target price implies 137% upside from the current share price of AUD0.19/share. We include in our target price the USD80m (100%) development of a 0.70mtpa (100%) direct-shipping operation at Amaam North utilising existing infrastructure, and a heavily-discounted 10mtpa (100%) ROM Amaam project.
BUY
Price: A$0.19 Target: A$0.45 Forecast Total Return: 136.8%
Market Cap: A$79m EV: A$71m Average daily volume: 71k
??Financials and valuation
Revenue (A$m)
EBITDA (A$m)
EBITA (A$m)
PBT (normalised) (A$m)
Net Income (normalised) (A$m)
EPS (normalised & continuing) - FD (c) FCFPS - FD (c)
DPS (c)
PE (normalised) (x) EV/sales (x) EV/EBITDA (x) FCF yield (%) Dividend yield (%)
Year end: 31 December
Price Performance
??2011A
0.0 (8.2) - (8.1) (8.7)
(2.3) (4.9) 0.0
(8.2) - (8.7) (25.6)
2012E
0.0 (14.1) - (13.9) (14.4)
(3.4) (5.3) 0.0
(5.6) - (5.1) (27.8)
0.0
2013E
0.0 (35.1) - (34.7) (34.7)
(5.1) (5.1) 0.0
(3.7) - (2.0) (26.7)
0.0
2014E
0.0 (25.3) - (24.1) (24.1)
(2.4) (5.7) 0.0
(7.8) - (2.8) (29.9)
0.0
2015E 0.40
10.7 (13.7)
- 0.30
(16.3) 0.25 (16.3) 0.20
(1.6)
(5.1) 0.15
0.0 0.10
Jan-12
(27.0) Price
(11.5) 6.7 (5.2)
Apr-12
Jul-12 Oct-12
____________________________
18.8 46.2 19.3 39.0
0.0 Source: Company accounts/Investec Securities estimates
0.0
Price rel to S&P ASX300 Met/Mining
(34.1) Source: FactSet
0.35
1m 3m
12m
(42.4)
____________________________
???Page 12 | 31 January 2013
?We initiate coverage of Tigers Realm Coal (TIG AU) with a BUY recommendation and AUD0.45/share target price, equal to our one-year forward NPV. Our NPV assumes development of a 0.70mtpa (100%) direct ship mine at TIG’s 80% owned Amaam North project, by mid-2015E, for capex of USD80m (100%). Our target price also includes AUD97m for the much larger 10mtpa ROM Amaam project (up to 80% TIG). Whilst we value the Amaam project at AUD487m (80% attributable), we conservatively discount the project NPV by 80% given the relatively early stage of the project and the developm ent uncertainties, the capex requirem ents identified in the scoping study of at least USD1.45bn (100%), the need for a strategic investor, probably at the project level, and the likely dilution to existing shareholders. Based on a share price of AUD0.19/share on 30 January 2013 our target price implies 137% upside. Our target price implies an EV/resource of USD0.51/t, which we believe is conservative relative to other coking coal companies, but reflects the size and early stage of development of the Amaam resource. Based on our assumption that Amaam North is brought into production by mid-2015E, we forecast EBITDA of AUD24.6m in 2016E at a hard coking coal price of USD187.5/t (FOB Australia).
Asset overview – 1bt coking coal resource potential in far-east Russia
TIG owns a 40% interes t, earning up to an 80% interes t, in the Am a am coking coal project, and an 80% interest in the Amaam North exploration tenements in Chukotka province in far-east Russia. In August 2011 TIG raised AUD37.5m in an IPO on the Australian Securities Exchange at AUD0.50/share, and in July 2012 raised a further AUD8.9m at AUD0.18/share and AUD0.75m at AUD0.16/share to fund the Amaam drilling program and pre-feasibility study. TIG management have identified a 412mt (100%) resource at Amaam and continue to progress the Amaam project through feasibility studies whilst investigating a smaller, lower capexoptionfor thedevelopmentofadirect-shippingmineatAmaamNorth.Whilst historicallythe company’s focus has been on the Amaam project the management team installed in December 2012 headed by new CEO Craig Parry has recognized the importance of creating options for nearer-term cash flow at lower initial capex.
TIG can earn up to a 60% interest in the Amaam project on conversion of part of the exploration license to a mining license and an 80% interest in the project by fully funding, through to completion, a bankable feasibility study. TIG’s interest in the Amaam project is held through Eastshore which owns 100% of Northern Pacific Coal Company (NPCC), the Russian incorporated license holder. TIG’s joint venture partner in Eastshore is Bering,a Cyprus-registered company. The Amaam project has a 412mt (100%) indicated and inferred resource, and an exploration target of 130-230mt (100%). TIG expects the Amaam pre-feasibility study to be completed in MarQ13. Completion of the feasibility study and a development decision is anticipated by management by the end of 2013. First production from Amaam could be as soon as 2016 assuming a 24-month development timetable, but is subject to securing the necessary financing. TIG has an exploration license valid until December 2014, which the company expects to convert to a mining licenseinJunH13.Basedonthe scopingstudybasecaseAmaam couldpotentially develop an integrated 10mtpa (100%) run-of-mine, 5.3mtpa (100%) saleable product open-pit mine with a coal handling and preparation plant (CHPP) linked to a deep water port by rail, 30km away, at a cost of USD1.45bn (100%).
In January 2012 TIG acquired 80% of the Amaam North tenement, 30km north of the existing Amaam tenement, for USD0.4m from Rosmiro Investments. An initial resource is expected in early 2013 and there is the potential to develop, for modest capex, a low-cost 0.5mtpa-1mtpa (100%) mining operation at Amaam North using
?Page 13 | 31 January 2013
?existing port infrastructure at Beringovsky, 35km away. TIG management has an exploration target of 30-430mt (100%) at Amaam North. Amaam North still needs to go through the Russian licensing process, meaning first production is unlikely before mid-2015 despite the modest infrastructure investment required.
TIG historically held option agreements to farm into the Landazuri project in Colombia. TIG management however made the decision in June 2012 to withdraw from this project, writing off AUD13.1m, to focus on Amaam and Amaam North.
Figure 10: Amaam project location
Source: Company
Key positives – a large, high-quality resource close to identified port sites
TIG has identified a large, 412mt (100%), coking coal resource at Amaam in far- eastRussiajust30kmfromapotentialdeepwaterportsite.Thecompanyhas also identified an exploration target at Amaam North where there is potential to develop a low-cost mine for relatively little capex shipping coal through the existing port at Beringovsky just 35km away. Historically, management was entirelyfocused on the developmentofAmaam,however with the introduction of a new managementteam in late 2012 there is more of a focus on the relatively low cost development of Amaam North and the possibility of nearer-term cash flow.
? A two-pronged strategy – TIG expects to complete the pre-feasibility study for the Amaam coking coal project in MarQ13 and to make a project development decision by late 2013. The Amaam project scoping study indicated a 10mtpa mine (5.3mtpa saleable product) at a life-of-mine cash cost of USD88/t (excluding royalties). The stumbling block is the large capex, USD1.45bn (100%), relative to TIG’s market capitalization of just AUD79.5m. TIG however potentially has the option of developing a smaller 500ktpa to 1mtpa direct- shipping mine at Amaam North for capex of what we believe will be close to AUD80m (100%) including working capital. Cash costs at Amaam North could be as low as USD40-50/t if the existing port at Beringovsky is used. In our forecasts we assume TIGspends a further c. AUD30m on additional drillingand the progressionofAmaam throughfeasibilitystudies toa developmentdecision by late 2013. At Amaam North we believe a further AUD20m is required to complete resource definition drilling and feasibility studies, and AUD80m (100%) will be required for the development of a direct-shipping mine. Our target price includes Amaam North but only includes a heavily-discounted value
????Page 14 | 31 January 2013
?of AUD97m for the Amaam project, although unrisked we value this project at AUD487m (80% attributable).
? A large JORC resource with plenty of exploration upside – TIG has already identified a 412mt (100%) resource at Amaam, of which 63mt (100%) is in the indicated category. Up to 302mt (100%) of the resource is within the open pit domain and will support a mine life of c. 25 years assuming a 10mtpa (100%) ROM production rate and an 80% conversion of resources to reserves. In addition to the resource defined to date at Amaam, TIG management has an explorationtargetof130-230mt(100%).Thecompanyhas alsocommenceda drilling program at Amaam North where there is an exploration target of 30- 430mt (100%). At Amaam North initial drilling has already intersected coal seams up to 11m thick, from surface. Amaam North will only require a small resource, probably less than 10mt, to justify a 500ktpa to 1mtpa (100%) mine. An initial resource is expected at Amaam North in MarQ13. If TIG management meets the upper end of its exploration target estimates, total resources could exceed 1bt (100%). Initial coal test work indicates favourable coking properties at Amaam and Amaam North.
? Simple infrastructure solutions – The Amaam scoping study has indicated capex of USD1.45bn (100%) will be required to build a mine, CHPP and associated infrastructure for the Amaam project. This capex estimate is likely to suffer some inflation, in our view, as Amaam progresses through pre-feasibility and feasibility studies. We would however note that the scoping study assumptions include USD470m (100%) for mining fleet and contingencies of USD150m (100%). Considerable capital cost savings could be realized by using contract mining, although the availabilityof contractors in far-east Russia could be limited. Given Amaam’s proximity to a deep water port site, rail and port capex is estimated at just USD360m (100%). Total capex estimates of USD1.45bn (100%) implya capital cost of USD145/t of annual ROM production (USD273.5/t of annual saleable production), which we believe is competitive relative to other recent coking coal projects.
In comparison, Mongolian Mining Corporation (975 HK) has spent c. USD700m in Mongolia building capacity of 10mtpa at its UHG mine, USD70/t of annual ROM production; this however did not include capex for fleet and there is no port access. Phase one of Rio Tinto’s Mozambique Benga mine was budgeted at USD500m for ROM coking coal production of 1.6mtpa; USD312.5/t of annual ROM production. In contrast to the Amaam project, Amaam North could develop a mine producing up to 1mtpa (100%) for as little as USD80m (100%), including working capital, just USD80/t of saleable product. The only infrastructure required for this project would be a 35km road and refurbishment of the Beringovsky port.
? Not much in the price – TIG’s current EV of USD71.4m implies an EV/resource of just USD0.22/t based on the existing resource of 412mt (100%). If however TIG identifies a further resource of 660mt (100%), at the upper limit of its exploration target, this EV/resource metric will fall to just USD0.08/t. BasedonourassumptionthatAmaamNorthis broughtintoproductionbymid- 2015we forecasta 2016EEBITDA of AUD24.6m assuming a benchmark hard coking coal price of USD187.5/t (nominal, FOB Australia). Should TIG be able to establish a 700ktpa (100%) mine at Amaam North we believe a sustainable EBITDA, excluding exploration, of c. AUD40m per annum is achievable. If TIG were to trade on 4-5x sustainable EBITDA this would suggest a valuation of AUD160-200m which compares to our Amaam North NPV of AUD200m. Our target price includes Amaam North but includes conservative operating
?Page 15 | 31 January 2013
?assumptions and assumes significant dilution as TIG issues more shares to fund the exploration and development of this project.
Whilst we value TIG’s 80% interest in the Amaam project at AUD487m, our target price conservatively only includes AUD97m as we risk adjust this project, discounting it by 80%. The discount we apply will reduce as Amaam progresses through feasibility studies and there is more certainty around capex, operatingcosts andfinancing.OurAmaam valuationis very sensitiveto our assumed long-term coking coal price forecast. A 10% increase in coking coal price forecasts increases our NPV by c. 90%. This gives the Amaam project considerable option value which we do not include in our valuation. In our opinion, the current TIG share price is pricing in the likelihood of a small operation at Amaam North but is heavily discounting the development of the larger Amaam project.
Key risks – funding requirements
? Funding gap – TIG had cash of AUD8.5m as at the end of December 2012, sufficient to complete the drilling program underway and the Amaam pre- feasibility study. We believe TIG will require a further c. AUD60m to complete the Amaam feasibilitystudyand to progress feasibilitystudies atAmaam North. We also assume TIG will require AUD80m (100%) to finance the development of Amaam North, of which we assume AUD30m will be equity financed. To raise a further AUD90m in equity we assume the issuance of 562.5m shares at AUD0.16/share. This would increase to 980.7m the total number of shares in issue. Alternatively, to raise capital TIG could sell an equity interest in Amaam at the project level, this is however unlikely until com pletion of the pre -feas ibility study and further coal quality test work. We assume in our forecasts the more conservative option of issuing further equity, this is however dilutive to existing shareholders.
? Amaam North is still an early-stage exploration project – Amaam North is an early-stage exploration project with no JORC resource. We are however confident that the company will be able to define a JORC resource based on historic drilling data by BHP Billiton (BHP AU). TIG has an exploration target of 30-430mt (100%), but we believe a resource of just 10mt would be sufficient to justify a direct-shipping operation. TIG will also need to apply for a mining license at Amaam North once a JORC resource is identified. The company estimates that this is likely to take at least 12 months from the definition of a resource. Our assumption that Amaam North can be developed into a direct ship operation is key to our TIG valuation and target price.
? No strategic partner (yet) – TIG is unlikely to develop the Amaam project without a s trategic partner. We believe the m os t likely s cenario is an inves tm ent by a Japanese, Korean or Chinese steel mill at the company or project level. We believe the high fluidity of the Amaam coking coal makes it an attractive blend product for steel producers such as POSCO. Whilst we assume TIG will continue to enter into discussions with potential strategic partners we make no allowance for a potential investment in our forecasts. Due diligence by any potential strategic partner is likely to be protracted. Investment by a strategic partner at the project level would provide a useful read-through as to the underlying value of the Amaam project and would be a significant potential share price catalyst, in our opinion.
?Page 16 | 31 January 2013
?? Royalty agreements – In securing the Amaam and Amaam North tenements TIG has had to give up some value to the vendors. Following agreements with various parties, TIG could pay a royalty of up to 5% of gross revenue from Amaam and 3% from Amaam North. Government coking coal royalties in Russia are, however, just RUB57/t (c. 1%), so relative to other jurisdictions such as Australia, where in Queensland a 7% royalty is payable on the first USD100/t, 12.5% on the next USD50/t and 15% on the balance >USD150/t, TIG’s royalty payments will still be low.