Subject: re: gotta love it Stock Code: GUJ - GUJARAT NRE...

Subject: re: gotta love it
Stock Code: GUJ - GUJARAT NRE RESOURCES NL
Posted: 03/06/07 22:41 Hotcopper Radio: GUJ on BoardRoom Radio
Posted By: trade4profit Views: 513
Post #: 1842610 (In Reply to msg #1841654 from SP3) Sentiment: Buy
IP: 124.180.xxx.xxx Voluntary Disclosure: No Stock Held



SP3...

I spent a bit of time today reading back over the ZCO announcements (GUJ's prior life)...I suggest anyone interested in this play do the same!

Seems many of their metals assets appear relatively advanced...so given the obvious coal/iron focus of the parent company, it would seem obvious that a resources spin off is on the cards near term?

In fact, this could be a nice way to encourage early options conversion, which would net the company proceeds of some $34m...I will discuss why later.

Back to the coal...

It seems standard practice for BHP to off-load projects nearing the end of their lives, before remediation needs to be considered I guess...but to do so while they are still profitable and obviously attractive to someone.

The benefit for GUJ here goes beyond the usual attraction of a typical BHP disposal however in the obvious synergies for the neighboring Avondale colliery!

Not only does the Elouera acquisition afford them instant and ongoing production potential, reserves and infrastructure, but it brings forward the Avondale production plans by about 2 years!

Elouera Colliery was originally established from the consolidation of Wongawilli, Nebo and Kemira Collieries. During full production, annual capacity was listed in the state records as 2mtpa in 2005(2.5mtpa in 1997) and at the recent cessation of the short-term Delta Mining contract, was down to just under 1mtpa, with some 41mt of untapped resources.

A recent news article quote from Gujarat NRE Coke's chairman Arun Jagatramka in regards to Elouera...

"With the acquisition the company's production of coal is expected to go up to around two million MTPA from one million MTPA in the short-term.

He added...

The acquisition also means that Avondale should be able to come into production much sooner than we had anticipated."

So it appears they are looking at 1mtpa from Elouera here near term, possibly with upside of 2mtpa - 2.5mtpa, with feed likely from Avondale...with first production due this month if their claims of "production this financial year" are to be upheld!

It might also be worth mentioning, the parent company is on something of a declared buying spree in Australia for coal projects to bolster supply back home...it is currently spinning off the NRE No.1 Colliery via an IPO on the ASX, with a very similar business model and share structure as GUJ.

If not for GUJ's Avondale project, I suspect the parent would have bought Elouera for a separate listing, but the obvious synergies made sense to list it via GUJ. The benefit for shareholders here is that the parent will not be able to "value add" as they are with the other coal projects, as such much of the "bonus value" they are extracting from their acquisitions will be equally shared by all GUJ shareholders here.

It still has to be paid for however (AUD$49m)...so perhaps in the free-float seeding process currently underway, the company is also maintaining a temporary cap on the stock while they quickly arrange a share issue to themselves as repayment for the AUD$49m purchase price?

Interestingly, this will put them over 90% shareholder threshold...which I suspect they will not want to do? Might be a bit of creative accounting required here?

Back to the coal resources again...

Collectively, our new combined project (Avondale-Elouera) sits on some 125mt of proved and probable reserves (27mt-Elouera + 98mt-Avondale), with significant inferred upside and immediate production capacity of 1mtpa from Elouera (future capacity of 2.5mtpa?) and the bringing forward of the Avondale project plans for a 1.5mtpa operation.

This suggests a total production capacity in just 2-3 years of some 4mtpa, with current capacity of 1mpta.

This provides a very favorable comparison to several of their peers, namely the recently listed WHC and of course the parent company's current IPO for the NRE No.1 Colliery.

WHC listed on Friday, so provides a very current comparison...
Current market cap = $550m
Reserves = 113mt (proved & probable)
Resource = 512mt (inferred)
Current production = 1.5mtpa
Projected production = 6.9mtps (by 2010)

The NRE No.1 Colliery IPO...
Current market cap = $250m (at listing value)
Reserves = 35mt (proved & probable)
Resource = 324mt (inferred)
Current production = 0.5mtpa
Projected production = 3mtpa (by 2010)

GUJ...
Current market cap (35.5c) = $135m (fully diluted)
Reserves = 125mt (proved & probable)
Resource = 241mt (inferred)
Current production = 1mtpa
Projected production = 4mtpa (by 2009?)

GUJ seems to be a little smaller than WHC, but perhaps not far behind, whilst clearly larger than the new IPO...which should put the GUJ market cap somewhere between $250m - $550m.

The halfway mark is $400m

Lets not forget however GUJ also has a fairly decent resources portfolio, including precious and base metals, iron and of course more coal in Tasmania...perhaps worthy of supporting at least $30m of value on their own?

So...it would seem at a fair assessment that GUJ, once it gets over the current seeding approach, to carry a market cap close to $420m

Current shares on issue = 380m (fully diluted)

The above market cap would give us at least $1.10 per share.

Assuming as a worse case scenario that the parent company issues itself shares to cover the Elouera purchase, say 140m shares @ 35c, we still get a fully diluted share price of some 80c per share.

Alternatively, if they encourage early options conversion with a subsequent $34m injection of funds, they might only need to issue themselves some 40m shares, which would result in a fully diluted share price of some $1 per share.

Assuming however they need to add a sweetener to get options converted, say a 1 for 3 free additional option with say a 50c exercise price, then we get a fully diluted share price of some 88c.

So, from worst case to best case scenario, we get the following potential CURRENT share values as referenced from their peers...

$0.80
$0.88
$1.00
$1.10

As I said, the current seeding and potential capping of the stock will last for perhaps another 4.5m shares...after which I expect the above numbers to come into play!

Of course, the drilling of Cethana, if successful, would be capable of these sorts of numbers on its own...but I guess that's the upside?

Cheers!





My posts are for discussion purposes only; in no way are they intended to be used for, nor should they be viewed as financial, legal, medical, fishing or cooking advice in any way. Good stocks fall, bad stocks rise...irrespective of my views on TA or FA. If the opportunity presents I will typically trade the swings on any stock and may or may not maintain a core position.

Resisting change is like holding your breath...if you succeed your'e dead