edison research - 29 july...

For all those interested, Edison Investment Research released a report dated 29 July... the summary is below:

Investment summary: South Africa's new coal
Universal Coal is a relatively recent addition to South Africa's mid-tier coal sector. The company has three thermal coal projects and three coking coal projects. Of these, the Kangala thermal coal project is the most advanced and is expected to be in production by the end of next year, supplying a 5,400kcal/kg thermal product to the domestic industrial market. Universal Coal is also advancing its two other export thermal coal projects, Roodekop and Brakfontein, with feasibility studies underway at both. At the company's Berenice-Cygnus coking coal project, a recent 52-hole drilling programme resulted in a 450% increase in total resources to 1.2bt. In December last year, the company raised A$20.1m at 26c/share by way of an IPO on the ASX. As of 30 June 2011, Universal Coal had cash of A$12.8m and no debt.

Kangala to be followed by Roodekop
The company has received the first draft of a Bankable Feasibility Study (BFS) at its Kangala project. The results of the BFS indicate positive economics based on an open cast mine, run-of-mine production of 2Mpta and an overall average yield of 62% producing both a premium (C-grade) thermal product for the local industrial market as well as a slightly lower-quality Eskom product. Once Kangala is in production, the company plans to develop its Roodekop thermal coal project (50% moving to 74%) where a feasibility study is currently underway.

Sensitivities: Regulatory approvals top the list
Beyond variations in coal prices, production rates and operating costs, our valuation of Universal Coal is contingent upon the company successfully permitting its Kangala and Roodekop projects into production.

Valuation: A$1.23/share
We value Universal Coal at A$1.23/fully diluted share based on unrisked, discounted cash flows from Kangala (worth A$0.19/share) and Roodekop (A$0.40/share). To this we add the company's existing attributable resources of 585.6Mt, which we currently value at A$0.64/fully diluted share on the basis of a multiple of A$0.25/t derived from a group of southern African peers.