latest buy recommendation valuing ccc at 56c

GMP Securities Buy Target 56c per share

Adding 3.6Mtpa of ROM coal production
Continental Coal reported initial results from a draft Bankable Feasibility Study (BFS) for its De Wittekrans project with plans to produce 3.6Mtpa of ROM coal for 33 years, yielding c.1.7Mtpa of domestic coal and 0.8Mtpa of export coal at a cost of c.US$55/t of export coal. The study suggests an initial capex of US$219m of which US$60m can be saved by using existing infrastructure and US$107m for underground development is to be incurred after one year of operation.
Including De Wittekrans DCF to our model
We have included the DCF valuation for the project in our model assuming the start of open cast mining in FY/15 and underground mining in FY/17. We have assumed a slow ramp up of the project to target 3.6Mtpa of ROM production in 2019. Our assumptions accounts for a 15% increase in operating costs from current forecasts and we also assume a 15% capex overrun. Taking a 12% discount rate (as very early stage) our valuation for the project stands at A$229m and we apply a further risk discount of 75% on this to arrive to our final value of A$57m for the project.
Funding an issue but can be manageable


We realise that the estimated capex of US$219m could be difficult to source but we also note that US$107m of this is for underground development which is required to be spent in the second year of operation and it can further save up to US$60m by using existing infrastructure or by using Build Own Operate Manage contractors. Therefore the company would require only US$52m in first two years of development which we believe can be managed by a combination of debt and cash flows.
PT raised to A¢56 (36p); maintaining BUY rating
We value Continental Coal using a SotP valuation based on DCFs for its operations and the Penumbra and the De Wittekrans projects and EV/resource multiples for its other development projects.

On inclusion of the DCF value for the De Wittekrans project our per share value has increased to A¢56/sh vs A¢52.30/sh earlier and we increase our price target to A¢56/sh (GBp 36/sh). We maintain our Buy rating.