Friday, October 27, 2017 The New Criterion: Universal Coal By...

Friday, October 27, 2017

The New Criterion: Universal Coal
By Tim Boreham


With a powerful September quarter performance, the ASX-listed South African coal miner is defying both the investor gloom pervading the sector and fears that its home country is too risky a place to do business.
With its two mines now running sweetly, Universal has achieved unicorn status as a pure-play small cap coal miner paying a dividend.
“We are in the best position than we have ever been,” says CEO Tony Weber.
Universal owns 70 per cent of the greenfields, open pit Kangala mine and 49 per cent of the recently restarted New Clydesdale Colliery. It operates both.
Both pits are underpinned by a long-term take or pay contract with the state-owned electricity generator Eskom.
In the quarter, the mines churned out 1.25 million tonnes of saleable coal (782,400 tonnes attributable to Universal).
The company recorded attributable earnings before income tax and amortisation (EBITDA) of $8.8 million and has guided to $28 million for the full year.
While off take contracts (mainly Eskom’s) accounts for 4mt of output a year, Universal ships about 20 per cent of its output and thus benefits from recovering export prices.
In late September, the board declared a maiden one cent a share dividend. In a report commissioned by the company, APP Securities Analyst Mike Harrowell says that Universal could comfortably manage a full-year payout of at least 2c a share.
He forecasts Universal’s current year EBITDA at $41.4 million – much higher than the company’s formal guidance. The latter is deemed as overly conservative because management assumes an export coal price of $US65 a tonne, compared with the healthy prevailing spot rate of $US90/t.
Universal has other growth gambits, too: it plans to double the size of Kangala (having acquired adjacent ground) and has a third project called Brakfontein that is approved but is awaiting the signing of off take agreements.
After years of being studiously ignored by local investors, the low-liquidity Universal stock has surged 150 per cent over the last six months.
But Universal’s $100 million market valuation still looks light on given it has close to $20 million of cash and net debt of only $6.5 million
They’re now trading a shade higher than the levels of late 2015, when the company was subject to an agreed 16c a share offer from 30 per cent Ichor Coal (and then a 25c share scrip offer from Coal of Africa).
Both offers were abortive, which is probably just as well given current analyst valuations north of 30c per share.
However Universal remains light on for institutional support, which probably reflects fears the country’s old political and racial problems may re-emerge.
“Now that we are paying dividends we expect to attract a different sort of shareholder,” Weber says. That, presumably, refers to those yield chasing retirees who normally would not touch a dirty coal stock.
An imploding South Africa aside, a key risk is for Universal is whether the recent coal price improvement is sustainable or whether Old King Coal indeed is in structural decline.”