recent buy recommendation below

Macarthur Coal Limited (MCC) Add to Watchlist
(Trading Status: OPEN)

Last Price Today's Change Open Day High Day Low 52-Week Range

2.890 0.110 (3.957%) 2.770
2.890
2.770
21.210 2.860

December 31, 2008 10:33 AM Real-Time
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Back Issues
Huntley's Recommendation: Macarthur Coal Limited

Recommendation: Buy

MCC primarily mines pulverised coal injection (PCI) coal for steel making from two open cut mines in Queensland. Management has successfully developed both mines and a pipeline of growth projects appeals. Asian economic strength is key to demand. Infrastructure limits force supply discipline. Port expansions from 2008 gradually remove volume limits. The balance sheet is sound with modest net debt. A Queensland anti-corruption investigation into former MD and Ken Talbot is a potential negative. Single commodity, infrastructure and mining risk require consideration. Not for conservative investors.

Event17-Dec-2008
MCC downgrades 1H09 NPAT guidance to $75-$125m. Previous $150-160m guidance in October was reaffirmed in November. Management cites an ‘unprecedented reduction in coal sales as a result of postponement of coal shipments by some customers’. It says the disruption to sales is significant and that the timing of a recovery is considerably uncertain. The wide guidance range reflects uncertainty around out of the money hedges. It includes up to $48m for potential marked to market losses which may be brought into account in 1H09. The interim dividend is suspended but there may be a final. Targeted sales volumes have been lowered from 5Mt to 3.9Mt. Coppabella and Moorvale output will be cut to manage stocks. Capital and exploration expenditure deferred where possible. MCC expects coal demand to recover but says the timing is uncertain. Current actions are designed to weather the storm.

Business Impact: We lower our FY09 NPAT forecast to $162.2m after cutting forecast coal sales volumes to 3.6Mt. NPAT includes hedge losses expected to be incurred as those contracts mature. Our FY09 NPAT forecast of $227.8m assumes volumes partially recover to 4.4Mt while the removal of out of the money currency hedges will help boost received prices. Our forecast is for US$121/t PCI coal and US$79/t thermal coal in FY10. At an exchange rate of 0.64, this translates to A$123/t thermal coal and A$190/t PCI coal. PCI could fall further. Our valuation falls to $4.65 a share after slashing near term forecasts and slowing growth projects. We have also halved our exploration upside to $100m or $47c a share. Long term assumptions include US$70/t PCI coal, US$60/t thermal coal, an A$/US$ exchange rate of 0.80 and a 10% discount rate.

Forecast Impact: --

Recommendation Impact: We upgrade our recommendation from Hold to Buy. Signs of a bottoming in shipping rates, spot thermal coal, spot iron ore and steel prices are emerging. MCC is significantly leveraged to the upside but is high risk. The cost position means an extended downturn would be painful. New Hope (NHC) is the quality pure play coal miner.