Today - Arbuthnot In breaking news reported by Bloomberg, BHP has agreed a very positive 55% increase in the contract price for coking coal with the major Japanese steel customer, JFE Holdings. The price agreement of $200/t covers only the June 2010 Quarter, but with no stated tonnage. NH8% above our expectations We had conservatively expected a price for hard coking coal of $185/t to be agreed in 2010 negotiations, therefore this agreement is an 8% improvement on our expectations. Further, the move to a quarterly price vs. a full year term is a major development in the market as suppliers endeavour to move average sales closer to spot prices, and is a positive sign for further price increases from the supply-side Annualised this increases earnings by over 100% In a traditionally low-margin, high tonnage business, such increases make a huge impact on earnings. In the junior sector in London, the two companies with direct exposure to the pacific (or Asian) seaborne market for hard coking coal are Western Coal Corp and Caledon Resources. If this agreed prices becomes the benchmark, we expect both Western and Caledon will see an annualised earnings boost of c. 140% on EBITDA and 170% on EPS. If higher contract prices are established over the long term, a 100% increase in the NPV valuations. BUY WTN and CDN On this news we re-iterate our Buy recommendations for these two coking coal producers, expecting them to perform well as further positive news-flow on prices is announced. On Western Coal Corp (WTN) we have a buy recommendation, and upgrade our target price to 300p. For Caledon Resources (CDN), we re-iterate our Strong Buy recommendation and 80p target price.
Cheers,Skip
CCD Price at posting:
63.5¢ Sentiment: Buy Disclosure: Held
