patterson says buy

Cougar Energy (CXY) $0.105 22 February 2010
Recommendation: BUY
Analyst: Andrew Harrington Tel: 612-8238-6214
Event
Cougar has announced that practical completion of its pre-production plant at Kingaroy was achieved at the end of January.
Commissioning work and training of plant operators will be completed by the end of February.
UCG ignition will follow immediately thereafter.
CXY is considering revising its 400MW power station programme to include more than 2 stages and bring cashflow forward with a smaller initial plant during this pre-production phase.
Impact
Though ignition is now due for March, later than our initial expectations of Jan-Feb 2010, it is now imminent. Confirmation of a successful ignition, consistency, and gas quality should follow soon after.
This is one of those rare occasions when there is a predictable calendar event that we expect will have a big positive impact on the share price of a company. The shares have been trading at around 10c (+/-2c) for the past few months and we believe that ignition will provide the catalyst for a substantial uplift in investor sentiment.
Our NPV on conservative future electricity prices is 19c and we attribute very little to the large coal resources and additional projects that CXY has in the pipeline outside of Kingaroy. For example, using similar assumptions for the Wandoan project as we have used for Kingaroy would yield a further 15cps depending on the start-up date.
We would further highlight that compared with its peers on a contained energy basis CXY is very under-valued. CXY trades at a multiple of less that $0.02/GJ. LNC and CNX trade at about $0.07 and $0.04/GJ respectively, while CSG companies trade at $0.40/GJ. We recognize that the market has yet to fully accept the UCG industry but we believe that with CXY trading at an energy multiple of only 5% of the CSG companies there is large scope for an upward re-rating as the pre-production burn takes place and the BFS is completed.
Accordingly we re-iterate our BUY recommendation with a price target of 20c per share.
Patersons Securities Limited acted as lead manager to the placement that raised $8.29 million at 8.25 cents per share for Cougar Energy Limited in September 2009. It received a fee for this service.
Andrew Harrington Research Analyst D: +61 2 8238 6214 | F: +61 2 8238 6266 | E: [email protected] | W: www.psl.com.au Patersons Securities Limited AFSL No. 239 052 Level 48, Australia Square, 264 George Street SYDNEY NSW 2000