Guildford Coal Ltd (GUF.ASX; $0.48/sh, Mkt Cap $250m) – On track for November start up
•GUF’s start up schedule remains on track for November targeting an initial run rate of 3Mt production in year 1 of operations from the North Pit. We forecast sales of 1.2Mt in FY13 building to 3.1Mt in FY14. On our assumptions of operating costs at A$27/t, Mongolian 1/3 coking price US$75 (FY14) & US$77 (FY14) we forecast EBITDA of A$19m & A$96m in FY13 & FY14 respectively.
•Our valuation for the South Gobi using a 10 year mine life at an average rate of 3.5Mtpa provides a NPV10 valuation of US$883m or US$1.69/sh. We have modelled the total Indicated resource of 40Mt, with a 15% contingency for potential ore dilution. Upside risks to our valuation include higher production and pricing.
•Development of the East Pit has progressed with a maiden 40MT inferred resource delineated and mining contractor Leighton engaged. Management is forecasting an additional 2Mtpa of production will be delivered from the East pit in year 1 with production commencing as early as 1QCY13.
•Negotiations have progressed with the Sojitz/Erdos JV to establish an offtake agreement based on the current HoA in place. Subject to final coal testing the agreement will allow direct sales for ROM coal at the mine gate of up to 1mtpa to be processed at the JV’s coal prep-plant on the Ceke border, 60km from South Gobi, and then transport into China.
•Our valuation for South Gobi is solely on the planned operations of the North Pit only pending confirmation of start date for the East Pit . This highlights significant upside once a JORC resource is in place for the East Pit and production success on the North Pit is demonstrated. We expect management to update the market in the coming months on future development of the East Pit. Conceivably, the South Gobi operations could ramp up to 5Mtpa run rate within 6 months with minimal capex required per pit start-up.
•We maintain our BUY recommendation on GUF with a price target set at $1.25/sh, which is 0.7x our 12-month group valuation.
