New Horizon Coal (NHO) $0.11Recommendation: BUYAnalyst: Andrew...

New Horizon Coal (NHO) $0.11
Recommendation: BUY
Analyst: Andrew Harrington Tel: (+61 2) 8238 6214
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Event
• New Horizon Coal has nearly doubled the coal resources at its Kinney project to 51.6Mt, up from the maiden JORC resource of 26.1Mt. Of the new total 87%, 44.8Mt, is in the Measured and Indicated category.
• The coal quality information is also proving very positive. The latest results show that the average energy content is over 6,600kcal/kg (GAR), which is better than the standard Newcastle spec of 6,322kcal/kg. The other key measures are also very good with moisture averaging 7%, ash averaging 8.5%, and sulphur well below the market limit of 1% at only 0.7%.
Impact
• The mine-life is now effectively beyond 20 years and the resource does not include the Bureau of Land Management acreage adjacent to Kinney that is likely to hold similar quantities of coal.
• The company is also hitting infrastructure milestones. NHO is in “advanced negotiations” with a new fully permitted coal terminal on the Gulf Coast and the company expects to conclude an agreement for port allocation by the end of 2012. That is less than 3 months away. The Gulf Coast is fast emerging as the preferred departure point for coal exports due to the community challenges facing many of the West Coast coal proposals even though the distance from Utah is greater and one has to pass through the Panama Canal to access the Pacific markets. With the expansion of the Panama Canal expected to be completed in 2014 deliveries to the Pacific will become easier.
• As we have described previously, NHO has a several options for rail haulage from the Kinney mine. There is an existing rail line on the boundary of the project and there is an existing rail loadout 5km on a Union Pacific branch line. About 25km away is the main line which gives access to all three of the major bulk haulage rail companies; namely, Union Pacific, BNSF, and Genesee & Wyoming. Negotiations for a rail contract are also progressing. Capacity is not a problem, from our perspective, it is more a matter of selecting the most convenient and competitive carrier.
• The company has $1.4m in cash at last report. This will need to be increased, more than likely through a capital raising. This will be for the company to continue its feasibility studies and to secure any additional projects, which NHO has stated it intends to do.
• The market cap of the company is only $12.4m on 113m shares, half of which are restricted. About 32m shares become unrestricted by 23-November which might normally mean a potential overhang but with the current share price at about half of where it last raised capital we think that the risk is small.
• With 51Mt in resources and an enterprise value of $11m, it equates to an EV/t of $0.21/t, which is very cheap for a project with existing rail and port options with spare capacity. Our NPV on the project on very conservative assumptions is over $70m at an initial mining rate of 1Mtpa growing to 2Mtpa over several years.
• The management team is the same highly experienced team of Mike Placha and Greg Hunt that identified and acquired the project. They have long experience in coal project development and in Utah coal mining in particular. They still expect to begin production by the end of 2013.
• In summary, resource has grown, quality is good, port allocation is being finalised in 3 months, rail is a beauty parade, the management team is strong, and they still expect to begin production a little more than a year. Our recommendation remains a BUY with a fully diluted price target of $0.35 per share.

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