Straits Asia (SRL 47%) has now drawn on its US$250m term loan, and retired the Bridge facility used to acquire the Jembayan mine in Dec’07. An additional US$50m revolving facility remains undrawn. Straits Asia also has some US$100m in “cash and near cash”. The debt facility through Standard Chartered Bank has a 15mth term (May 2010) and an equity kicker of 35m options at S$1.095/sh (a 3% dilution). The total cost of the facility has not been disclosed. The Jembayan mine coal resources have been upgraded from 138mt to 254mt. Coal reserves remain unchanged at 92mt, although it is expected these will grow as a result of the larger resources estimate. Based on a typical conversion factor of 65% Jembayan can be assumed to have a 20yr life. Notwithstanding resources are expected to grow further, the target has been revised up to 600-700mt. Jembayan has been an immensely successful acquisition for Straits Asia, repaying the investment within 18 months. Straits Asia effectively paid US$310m, including US$275m in cash, to acquire the mine a little over a year ago. At the time the mine was producing 4mtpa, had reserves and resources of 37mt and 46mt respectively and the ensuing 12 mth EBITDA forecast was roughly US$140m. The prognosis for 2009 is 7.5mt of product following investment of an additional US$50m, generating US$430m EBITDA, meanwhile reserves and resources have grown 150% and 450% respectively. Straits Asia now suggests that approval for the Sebuku lease extension may occur by March 2009. Our model assumes negligible value from resources outside of the currently approved coal reserves. Accordingly approval for lease extension presents as a significant potential value catalyst, although uncertainty is still high.
Straits Resources Ltd
Straits has flagged that all of its operations, including the Tritton copper mine are being reviewed as a consequence of lower commodity prices.
We have previously flagged that Tritton in particular is vulnerable due to its high costs especially wrt a deeply out of the money offtake agreement with Sempra. We estimate offtake costs on the first 25kt pa Cu produced at Tritton add roughly US$0.40/lb to cash costs at current copper prices, relative to benchmark copper concentrate terms.
The remaining operations in our view are less threatened with closure:
Whim Ck - copper cathode, mining is due to finish with 2 months and thereafter low cost copper from existing heaps will continue for 12-18mths; Hillgrove - gold and antimony, currently in commissioning and product prices have remained strong in recent months, should generate 50% EBITDA margins; Mt Muro – gold, cashflow neutral, SRL is seeking to sell this asset; GfE & Magontec – metal distribution, understood to continue to operate profitably during the last couple of months.
Straits continues to trade at a discount to the implied value of its holding Straits Asia Resources, however the gap has narrowed in the last couple of weeks.
Investment Case:
We continue to be staggered at the low market valuations applied to both Straits Asia and Straits Resources.
Straits Asia (S$0.66/sh) has an enterprise value of US$620m and is expected to generate US$590m EBITDA in CY 2009, an EV:EBITDA ratio of 1.1x. Straits Resources (A$0.70/sh) has a mkt cap’n of A$163m, while its SAR investment alone is worth A$320m based on the SAR share price. In our view this investment has a real value of more like A$630m (A$2.70/sh) net of debt, before considering strategic aspects of control block, and excluding value for potential lease extension at Sebuku. Remaining SRL net assets are valued at A$160m or $0.70/sh.
Our group valuation of SRL remains similar at A$3.37/sh.
Straits Resources remains a BUY.
SRL Price at posting:
73.0¢ Sentiment: Buy Disclosure: Held
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