scrap paper valuation, page-8

Scrap Paper Valuation & Notes on Continental Coal's Future

The current share issue (diluted to include 600m "in the money" options) = 3.6B + a few hundred million unlisted shares/options to come on market by 2013

JSE share dilution coming in 1H 2011 to pay for 36% balance of full acquisition of Mashala assets at a 30 day VWAP

GMP Securities predict $US200 coal prices in 2012 - current RB spot price $US130

Eskom are under extreme pressure to raise prices for quality grade domestic coal. Indian coal traders are buying up SA domestic grade coal, which forces Eskom to raise their prices & compete for ST contracts.

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The figures below are taken from the 19/11/2010 AGM presentation & margins are adjusted, perhaps optimistically, for the recent coal price increases [apologies for the amateur formatting below - but it is worth exactly what you paid for it] -

Current Production:

VlakVarkfontein (60% interest, 1.2mtpa domestic Eskom coal @ $7 margins) & Ferreira (100% interest: 90/10 export/domestic - mine life set to be extended, 700Ktpa production, [current] margins for export = $70, domestic = $7)

2011 CY operating profits
$5.04m (@ 60% interest) + $44.1m + $490K = $49.63m

Commencing late 2011 - mid 2012 Production:
DeWittekrans Complex (70% interest in Project X, 75% interest in Vaalbank, 100% interest in DeWittekrans & Knapdaar) - 7mtpa production at 40/60 exp/dom split = 2.8mtpa/4.2mtpa - applying same margins as above = $70/$7 (note this export margin could vary widely, from $20 to $140, depending on a whole range of macro-economic & industry related factors, supply/demand dynamics, plus we need to consider x-rate fluctuations)

Operating profits (realizable FY ending 30/06/2013)
$196m + $29.4m =$225.4m + VlkVk/Ferreira: $50m = $275.4m + $25m (Jan 1 - Jun 30 2012 VlkVk/Ferreira op. profit) = $300.4m

This is where it gets interesting - applying a PE ratio of 15 we get a MC of $4.5B vs today's MC of [3.6B*0.08] $288m (+ remember to add the value of 600m converted 5c options = $30m to add to the kitty in Feb 2013).

Now calculate what these figures would look like at $US180 coal prices - and margins of $120 for each tonne of export coal, not to mention PE ratios of 20 or above. Enjoyable, isn't it?

Consider too that the synergies & relevant cost savings from the long-life "big mama" DWComplex suggest that Conti will be able to sustain these large margins. Even if the coal price stays at USD100 these mines will be extremely profitable.

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Note that the above calculations do not subtract the 30% share of PjX & 25% share of Vaalbank which need to be distributed to Conti's partners (unless Conti buys out their shares). Then we need to eventually (undetermined point in future) subtract the 26% BEE partners' share - but only after all of Conti's capex/opex costs have been covered.

Remember too that the (admittedly dirt-cheap) EDF coal/equity loans must be repaid, along the way. And don't forget capex costs, & corporate/regulatory overheads plus taxes & royalties. From what I can tell, however, the capex costs for Conti's mines are significantly less than those incurred by comparable Aussie coalers.

The company is clearly HIGHLY leveraged to the rising RB spot coal price. See the various articles HERE to get an understanding on why so many smarter minds than mine are bullish on thermal coal.

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I haven't included the 2013+ prospects: Vlakplaats (50% share of 1.8mtpa export/domestic coal, with export offtake secured - with JV funding from KORES & BEE partner), Leiden*, Mooifontein*, or Wesselton*. *100% Conti interest.

Nor have I included the blue-sky potential of Botswana: total 960km2 leases, recently advertised in Paydirt magazine's Cape Town 2011 Indaba preview on page 82 as potentially containing a 9bt resource [note - this is a 14mb pdf file]. Look at the recent action with ASX listed African Energy Resources, AFR & with Toronto listed CIC Energy.

As Dr Alex Cowie is fond of mentioning, there will be some very attractive acquisition opportunities falling into Don Turvey's lap, especially once the kind of cash flows I have indicated above eventuate. Say good bye to the mega-dilutions of 2010.

And soon we should know how those negotiations for more rail & port allocations went. Knowing the "social license"/goodwill Conti has with the SA authorities, as well as DT's clout & reputation in the SA coal industry, the company will surely secure these allocations.

So, why are we fretting & sweating about 0.1c movements, when some of us studious & ambitious blokes (and gals) here on HC can see non-consolidated SPs of +$1 within 3 years' time? Be happy that you have an opportunity to buy in at ground level, and before the big boys in London have a chance to soak up all the loose shares which are about to be transferred to the AIM market.

Hope this helps ...

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Note: as my sentiment indicates, for me this is a LT buy - I plan to accumulate more stock & options, as funds become available, and as DT & crew continue to tick the boxes (and perhaps with one eye glancing over Funky, 5holder, Robbbbbbb, and Redbacka's magic charts.)
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p.s. I will be out all day today, so this will be the one & only post from me, for the day, believe it or not!