Batcher1,To answer you question and more, we will perform a...

Batcher1,
To answer you question and more, we will perform a heuristics. This is an important heuristics for everybody else who wants to explore my logic. So please read and think carefully. I will not have the time to respond to individual questions because of time constraints and the heavy lift involved. See for yourself if anything makes sense. Thanks
for reading.

Let me explain what my thesis stands on. My case stands entirely on high costs of capital implications in expected NPV calculations for a small producer like Conti and the high capital needs in coal mining. The fact that coal mining margins are relatively small makes this even more a case of capital cost implications on NPV rather than a coal price play. In the hands of deeper pocketed players, most of the assets will have a NPV of 3,4,5 or more times the NPV in Conti's possession (the exact number we can never be sure).

Let us do some heuristics with some hypothetical numbers.

Suppose Conti wants to bring an asset to production with projected capital needs of $200 million and a discount rate of 10%. The discount rate will be high (could be even higher) given the small market cap of Conti and the iffy nature of their current balance sheet. Now, Conti may tell us that they will raise this money and bring the project to production in 3 years. We have already see that when Conti bought Mashala, they thought Penumbra will be brought to production by 2010 - we are already three years late. Remember that raising finance was easier for them then because balance sheet looked stronger. With a much larger project with capital needs of $200m and a weak balance sheet in a difficult macroeconomic background, you can realistically not expect this new project to come into production before 7-10 years. This slowness will be partly because the project finance will be wrapped up in so many time/balance sheet conditionalities and covenants that it will be a constant battle to juggle with the balance sheet.
Let us assume that the expected NPV of the project is $45m in Conti's hands - a relatively small figure because the return stream is far out and the discount rate is so high. Let us also say that at the moment, the stock market being very pessimistic on Conti's prospects in a coal market with low prices, attribute only $25m to this NPV.

Let us hypothesize the prospects of the project in the hands of one or two stronger (deeper pocketed) players.

Imagine Coal of India thinking about this project. The $200m probably sits in their back pockets - remember this is the largest coal miner in the world with annual production twice
that of entire South Africa's annual production. If they get
this project in their hands, financing is just not an issue.
You still have to use a positive discount rate (because of
opportunity costs of capital - questions like what they could have done with this $200m otherwise, but I am not going to get into this here) - let us say they use a much lower discount rate than Conti of 5% for this project. They will also be able to bring the project into production in 2 years or so - remember that they do not get any delays coming from covenant/conditionalities - the only constraints will be engineering constraints to bring the mine to production and some mining permission/regulatory/allocation approvals time (they should be get all of these being such a large miner and given the dependence of South African coal mining industry on Indian export needs). The NPV of this project will now be much higher because of the low discount rate and the `bringing forward' of the return stream to 2 years from today. Exactly how much higher, we will never be sure (depends on the future expectations of coal price movements and demand) but even just replicating Conti's return stream (under reasonable return stream assumptions)in Conti's NPV, that this would be at least $135m if not more. Let us say it is $135m which is 3 times the NPV calculation with Conti.

Let us assume that another buyer, let us say local Exxaro, is also calculating the NPV of the assets in their own hands. Now, they are not as deep pocketed as Coal India (although they are deeper pocketed than Conti)- so we will
use a discount rate of 7.5%. However, being local established players, they may have existing complementarities with Conti's Witbank asset - like spare coal washery capacity, spare railway sidings, spare rail/port allocations. So they think they need a lesser project capital cost of $185 million - they also think that they can bring the project to production in 2.5 years as they may still have more covenants/restrictions in their financing contract, not being as deep pocketed as Coal India. Let us say, the NPV for Exxaro works out to be $90m, twice that of Conti's NPV.

Now let us look at a realistic bidding context with four situations.
Situation A - Conti fails to get any bidding interest; asset remains in Conti's hands and market ascribes the current $25m valuation to this situation. If coal prices look better next year, the NPV may increase to $50 m and market may ascribe $40m to this situation (remember the market is always worried that the following year coal prices may again fall and hence they may not give a full valuation of the NPV, especially for a small miner with weak balance sheet).

Situation B - Conti succeeds in only getting bidding interest from Exxaro; assets sold somewhere between Conti's $45m valutaion and Exxaro's $90m; exactly where would depend on how well they bargain at the table; let us say the price settles up at 30 percent (only this much because Conti's balance sheet position is a week which should reflect on their bargaining strength) of the valuation differences at $58.5m. The market price will move to reflect closer to this figure especially if the market senses that most of this money will be given back to the shareholders.

Situation C - Conti succeeds in only getting bidding interest from Coal India; assets sold somewhere between Conti's $45m valutaion and Coal India's $135m; exactly where would depend on how well they bargain at the table; let us say the price settles again 30 percent (again because of Conti's weaknesses) of the valuation differences at $72m. The market price will move to reflect closer to this figure especially if the market senses that most of this money will be given back to the shareholders.

Situation D - Conti succeeds in getting bidding interest from both Coal India and Exxaro; assets now sold at close to Exxaro's valuation and Coal India wins it $91m. Conti's wekaness doe not matter as Exxaro and Coal India bid against each other's need to get the asset. The market price will move to reflect closer to this figure especially if the market senses that most of this money will be given back to the shareholders.

The differences illustrate the advantages of having stronger
bidders in the bidding stage, especially if there at least two stronger bidders. In this illustration, the market price
for the asset is moving from $25m towards $91m (how high depends on market's perception of the money being actually returned to shareholders). Also, if you can realize a good price, this can be way above what Conti can achieve alone with Coal price improvement.

VERY IMPORTANT CAVEAT: All the above numbers are for illustrative purposes only and have a lot of assumptions right across the spectrum. We will never know the actual figures for sure. Do take this caveat seriously. Numbers have been used to heuristically show you why Conti will benefit if they can bring two strong bidders to the auction. Actual prices achieved in a real bidding situation cannot be determined with an heuristic argument.

Why should Conti not have a joint venture with a South African stronger player like Exxaro? Because Conti brings nothing new to table - whatever Conti can do, Exxaro can do cheaper, quicker and easier. The joint venture's NPV will actually be weakened by Conti's cost of capital weakness.

What about Conti setting up a joint venture with Coal India? Again the economic efficiency case is very weak just as above. However, Coal India may show an interest for some joint venture for another reason - because it is inexperienced in South African operations. Even then, the economic efficiency argument is that this joint venture partner should be a deeper pocketed South African coal miner and not Conti - because Conti's cost of capital weaknesses will make it a project weakness - it will slow the project down.

No economic efficiency justification can be made for Conti to try and venture into production from here with it's cost of capital weaknesses. The only case is if it has stranded assets or assets which are unattractive to any bigger players - I do not think that is the case here.

Why should all assets be put up for sale? That should be the
logical desirable attempt - whether it is achievable depends on the desirability/attractiveness of the individual asset to a bigger player. Even the producing 3 assets should be up for sale if that allows a stronger bidder to get attracted to bid on the the non-producing assets. And, if they have sold all their non-producing assets, as an investor, you really do not want to be holding shares of a small miner with low margins and no growth prospect - you should rather invest the money in a safer dividend playing large cap.

Further, if all assets are sold, that is the case where all money will be returned to shareholders after debt repayment. If only one or two assets are sold, Conti management will keep the money trying new adventures - very hard to argue that this is the best for shareholders of a small miner in the current macroeconomic landscape.

The proceeds from a properly designed `strong bidder
finding' strategy should be able to more than cover the debts and leave more cash than the current market cap remaining for current shareholders - how much more I do not know but I suspect considerably more.