http://www.theaustralian.com.au/business/rios-78m-cast-off-is-a-g...

http://www.theaustralian.com.au/business/rios-78m-cast-off-is-a-good-deal-for-junior/story-e6frg8zx-1225962970542


Rio's $78m cast-off is a good deal for junior
Tim Boreham, Criterion From: The Australian November 30, 2010 12:00AM

WHEN a giant such as Rio Tinto offloads a project there's a sneaking suspicion about the motives.

But a $78 million transaction cost is nary a rounding error in Rio's books so "can't be bothered keeping it" would be as good a reason as any. On the vendor side, there's solid evidence of junior purchasers making a decent fist of the majors' cast-off assets.

In this case, Coal of Africa (CZA, $1.18) will pay said amount for Rio's Chapudi coal project (and other ground) in South Africa. The undeveloped Chapudi, in Limpopo province, has a one-billion-tonne resource (mainly inferred) of coking and thermal coal and is close to CoA's 994mt Makhado coking coal project. Coincidentally, Continental Coal (CCC, 7.3c) said yesterday it had signed South Korea's state-owned Korea Resources Corporation (KORES) as offtake partner for its Vlakplaats thermal coal project.


As well as committing to buy all the output on arm's-length terms, KORES pays $13.5m for a 37 per cent stake in the project and also helps to fund the $4.5m project to bankable feasibility stage. Continental recently paid $26m to acquire the whole project.

Criterion had Continental as a speculative buy at 6.4c on September 22 and maintains the call.

Back at CoA, Chapudi adds to a broader suite of assets, including the Mooiplaats coal mine, which aims to produce 2mtpa. CoA expects annual coking coal output to rise to 10mt after Makhado starts in 2013. The backdrop to the South African coal push is that Queensland coal is (arguably) overvalued and (unarguably) weather prone. Export-quality coking coal is likely to be in short supply, while locally South Africa's voracious power demand augurs well for the thermal stuff.

Riversdale Mining (RIV, $13.56), the poster child for local African coal plays, started with a modest but profitable South African anthracite colliery (acquired from BHP Billiton) and is now a $3.2bn stock thanks to the potential of its Zambeze coking coal project in Mozambique.

We're less enamoured with the performance of Paul Jury's Resource Generation (RES, 47.5c), which in September lined up an Indian offtake deal for its 74 per cent owned Boikarabelo project, also in the land of springboks. At the time, Resource Generation shares were trading at 70c but this month's $30m raising at 50c a pop was well supported. We'll maintain this one as a speculative buy.

Finally, we'll also treat Coal of Africa as a spec buy.