new research

Citi released an updated research report this morning. Target price reduced to 60c, but they have assumed no value for stage 2.

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Resource Generation (RES.AX)
Green Signal for Rail – Full Steam Ahead

? Maintain Buy — The recent approval of a 10-year offtake agreement with Transnet
moves the development of the Boikarabelo project closer to fruition. We have
reviewed our model in light of the agreement and current coal prices and now
believe that it is prudent to only assume value for the Stage 1 project for which we
derive an NPV of $0.60/share. Consequently we have reduced our target price to
$0.60/share and retain our Buy/High risk recommendation on the stock.
? Stage 1: the base case — The current rail deal with Transnet provides 6mtpa of rail
access over 10 years (the tenure can easily be extended when production starts).
Whilst no negotiations have been reached with Eskom for domestic offtake yet, we
believe that this will be likely in due course. Thus we see Stage 1 of the Boikarabelo
project delivering 3mt of domestic and 3mt of export coal from 2015 onwards at a
capital cost of c$800m (higher than company guidance) with a mine cost including
washing of ZAR190/t and a rail & port cost of ZAR290/t. On those metrics we
estimate Stage 1 delivers an NPV of $0.60 per share and a post tax IRR of 19.7%.
? Stage 2: the upside — We see potential to expand the project to 50mtpa of RoM
coal (12mt domestic and 12mt export). However given the lack of domestic offtake
for Stage 1, the current uncertainty in global coal markets and the large capital cost
(c$800m), we do not assume any value for stage 2 in our base case value. On our
assumptions the project delivers an IRR of 24% and an NPV of $2.06 per share.
We see stage 2 as a long term potential upside rather than core value for RES.
? Funding — We anticipate that funding will be split equally between debt and equity
with a total funding package of c$900m. An equity raising of c$450m will be
challenging in the current environment and thus some form of cornerstone partner
in either the equity or the assets is likely needed to ensure financing, in our view.
? Steps to delivery — Now that the rail has been signed off, banks can complete
their due diligence. We would expect funding to occur around October/November,
markets permitting. Thus construction could start as early December this year, but
more than likely early 2013. On that timeframe first coal would be expected end of
2014 to early 2015 and full production levels hit in 2H15.