Research Update.

Gents

Enjoy!

Paringa Resources (PNL) has successfully raised US$20m debt (A$27m) and $53m through an institutional placement (102m shares at $0.52/sh). The Company is now fully funded to commence development of the Poplar Grave mine at the Buck Creek thermal coal complex, Kentucky, USA. More recently, PNL has begun excising options to acquire surface property for the mine and river barge load out facility ahead of development. Construction is due to commence July 2017 with first coal production in mid-2018. BUY maintained with a $1.66 target price.
Event & Impact | Positive
Poplar Grove rolling ahead: PNL has commenced pre-construction activities at Poplar Grove having received debt and equity funding totalling ~A$80m (vs est. pre-production capex of ~A$60m). The Company has secured surface rights for the mine, refuse area and barge loadout site on the Green River ahead of development. First ground will be broken in mid-May followed by the commencement of the box-cut mid-June. Over the coming weeks, PNL will complete the final design contract. Argonaut expects a high proportion of fixed costs in the construction contract and we see potential to reduce the BFS forecast of US$23m for fixed infrastructure. Construction is due to commence July 2017 with first coal to be mined mid-2018. PNL is currently in discussion with numerous parties for further sales contracts, in addition to the 4.75M tons already contracted to LG&E and KU. There are 17 power plants in the Ohio River target market area operated by 11 utilities.

High corporate appeal: As Buck Creek moves towards production, we believe the corporate appeal will escalate. We see Alliance Resource Partners (ALRP), with three operating mines within a 50km radius of Buck Creek, as the most likely acquirer. The company has US$725m in liquid assets and when questioned on M&A potential in a recent conference call, ARLP said it would focus on their “primary strategic areas of operations with Northern Appalachian and Illinois basins”. ARLP has debt/EBITDA of around 1:1 and stated that it would not expect to go over 2:1 with any transaction. With 2017 EBITDA guidance of US$605-645m, Buck Creek’s $532m NPV₁₀ (Argonaut est.) is in-budget and certainly sits within a “strategic area of operation”.

Trump good for coal: During his electoral campaign, Donald Trump repeatedly stated that he will repeal Obama’s Clean Power Plan and severely curtail the regulatory powers of the US EPA in order to boost US industrial activity, thus benefitting the coal sector. We also note that the planned reduction of the corporate tax rate from 30% to 15% would greatly benefit PNL. By applying this decreased rate our valuation increases 20% to $1.99/sh.

Recommendation
Argonaut maintains a BUY recommendation with a revised valuation of $1.66/sh (previously $1.72) taking into account the dilution from the recent equity raising. We have also removed our 10% discount to NAV, previously applied to account for financing risk, to achieve a target price in line with our valuation ($1.66/sh).