valuation, including penumbra, and misc notes

Conti Coal Valuation
2011 - 2013 Projected Profits

Figures used below are taken from the Nov. 2010 AGM presentation as well as Penumbra & DeWittekrans announcements. Margins have been adjusted (upwards) to account for coal price increases. All margins and profit related calculations are in USD. Current x-rates: USD100 = AUD100.42/ZAR682

CY 2011 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)

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

Commencing late 2011 - mid 2013 Production:

Penumbra (100% interest) 500Ktpa* production export - margins: $70/$7 (note that approx. 100Ktpa* of the mine's output will be quality domestic coal (minimum 20MJ/kg). Full production should be reached Q3 2012. *Using 750Ktpa at stated 81% yields. Operating profits (realizable FY ending 30/06/2013): $35m + $700K = $35.7m

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 that export prices used throughout could vary widely, giving margin ranges from $20 to $140, depending on macro-economic & energy coal industry related factors, and supply/demand dynamics. Plus we also need to consider x-rate fluctuations for ZAR/USD/AUD).

Operating profits (realizable FY ending 30/06/2013)
DWC: $196m + $29.4m =$225.4m + VlkVk/Ferreira: $50m = $275.4m [not including $25m from Jan 1 - Jun 30 2012 VlkVk/Ferreira op. profit] + Penumbra: $35.7m = $311.1

Applying a PE ratio of 15 we get a MC of $4.67B.
Today's diluted MC is $288m [3.6B*0.08].

Remember to factor in the value of 600m*5c options = $30m to add to the kitty in Feb 2013.

Free cash would then be $341.1m in FY ending June 30 2013.

Consider what Conti Coal's MC figures would look like at $US200 coal prices, and margins of $140 for each tonne of export coal, not to mention PE ratios of 20 or above.

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Miscellaneous Notes

* 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. See 3B notice appended here.

* JSE share dilution coming in late 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 good quality domestic coal. Indian coal traders are buying up SA domestic grade coal, which forces Eskom to raise their prices & compete for ST contracts.

* Note that the above calculations do not account for the 30% share of Project X & 25% share of Vaalbank which need to be distributed to Conti's partners (unless Conti buys out these stakes).

* Executive Director Bruce Buthelezi has many years of high-level African management experience. He heads up Masawu investments, which holds 26% of Continental Coal Limited. Masawu represents the Zulu Royal Family, fulfilling Conti's Black Economic Empowerment (BEE) requirements. BEE partners will only receive returns after all capex/opex costs incurred by Conti have been recovered.

* EDF's low-cost debt financing will act like a "rolling credit facility", to be used for project developments, and operating expenses. Cash flows, detailed above should also substantially cover capex/opex for new projects.

* I don't yet have all figures for capex costs, & corporate/regulatory overheads plus taxes & mining royalties. From what I can tell, however, the capex costs for Conti's mines are significantly less than those incurred by comparable Aussie coalers. Labour costs are obviously lower (SA has an unemployment rate of 25.3%).

* SA miners do not have the spectre of a MRRT, nor do they have a carbon tax to contend with. BRICS membership makes it even more certain that these dumb policies will not be replicated by the SA govt.

* The company is clearly HIGHLY leveraged to the rising RB API4 coal price. See the various articles HERE to get an understanding on why so many smarter minds than mine are bullish on thermal coal.

* Then there are the 2013+ prospects: Vlakplaats (50% share of 1.8mtpa export/domestic coal, with KORES export offtake secured, plus with JV funding from KORES & BEE partner), Leiden*, Mooifontein*, or Wesselton*. *100% Conti interest.

* Consider too the potential of Botswana: total 960km2 leases, recently advertised in Paydirt magazine's Cape Town 2011 Indaba preview, on p. 82 as potentially containing a 9bt resource. Or was that a typo? 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. CRs & dilutions should be a thing of the past, with a focus on "organic growth", based on rapidly increasing cash flows, and low-cost EDF debt funding. A phrase that was used by Conti management was that "there are a lot more Mashalas out there".

* Negotiations for more rail & port allocations should be completed soon. Knowing the "social license"/goodwill Conti has with the SA authorities (like Eskom), as well as DT's clout & reputation in the SA coal industry, the company should have no trouble securing these allocations.

* The company, led by CEO Don Turvey & Executive Director Jason Brewer are soon to embark on a roadshow in Europe & UK to promote the company to large resource funds such as BlackRock & other institutional investors, ahead of the AIM listing. Then there will be promotional activity in Cape Town for the Mining Indaba, Feb 7 - 10, followed by conference presentations in SA, Asia & Australia, later in 2011.

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