peterson change to buy from hold

Cockatoo Coal Limited (COK) - BUY

http://www.psl.com.au/research/your-market-daily

Plenty of cash to work with

SK Networks, previously a 5.5% shareholder in COK, has agreed to take a placement of 585m shares at 53.5c per share that will raise a total of $313m for COK. SK now becomes the single largest shareholder with a 40% stake and Posco, previously the largest shareholder at 8.7%, is now reduced to 5.5%.

The placement to this large Korean conglomerate is, as has often been the case with the Korean shareholders, at a premium to the prevailing share price. This time it is at a substantial 34% premium to the 30-day VWAP. We have rolled forward our model and anticipated the new issue of shares and receipt of cash next quarter resulting in a NAV which now rises to $0.57 per share, meaning that the placement is 5c accretive to our valuation.
The deal is due to be concluded by the end of Jun-12 and is subject to the usual regulatory and shareholder approvals. SK is expected to sign the final binding agreement by the end of this month but has up to the end of April to sign. Once concluded, COK will repay $78m of its outstanding debt and, after receiving $37m from Mitsui for their Woori stake, COK will have $277m in cash. This puts the Balance Sheet in much better shape than reported in the last half.

Cockatoo is anticipating several announcements about allocations for infrastructure this year and these can be a double-edged sword. Yes, they provide a transport solution but they also often require large lump sums in guarantees. Sums that COK didn't have until now.

Last half Cockatoo reported a profit of $3.6m, which was a good turnaround from the previous corresponding period. Margins were much improved and with higher production volumes from the Baralaba mine COK seems to be on a sounder operational footing. The Baralaba mine is running at record-breaking rates, and COK is forecasting RoM production for calendar 2012 at 750kt and further growth to fill the 3Mtpa allocation at the Wiggins in 2014. The BFS for the expansion is expected to be finalised by 1QFY13.
Refinancing risk was one of the reasons we had downgraded COK to a HOLD at the end of last year. Now that the risk of seasonal heavy rain has also subsided and the Baralaba mine is operating at record levels the only downside risk is declining coal prices. On balance, that is a risk that we can live with. With most obstacles to upside in the shareprice now largely overcome, we are removing our discount to NAV and accordingly we upgrade our recommendation to BUY with a price target of $0.55 per share.

Disclosure: Patersons acted as co-lead manager in September 2010 for an entitlement and placement at prices between $0.40 and $0.51/sh that raised $153.3m. Patersons received fees for these services.