Cockatoo Coal Limited COK - EXTENSION OF ‘KEBA’ LOAN...

Cockatoo Coal Limited COK - EXTENSION OF ‘KEBA’ LOAN FACILITY
Announcement details:
• COK has extended its loan facility with Korean Export Bank Australia (KEBA), initially repayable on 31 December 2012, until 28 June 2013, but at a reduced facility amount.
• The facility extension will allow the company sufficient time to secure its broader expansion funding plan for the proposed extension to Baralaba.
• COK will reduce the facility size from AUD 150m to AUD 100m, with the AUD 50m repayment planned to be made from cash reserves.
• The Facility continues to benefit from a guarantee provided by SK Networks Co. (SKN), Ltd to KEBA.
• COK has agreed to issue up to 150 million options, (or as few as 90 million options in the event of early repayment), at an exercise price of $0.1251 per share, as consideration for SKN providing an extension to the Guarantee. Each option may be exercised to acquire one fully paid ordinary share in COK at the exercise price at any time up to 15 October 2014.
WHTM view:
• Initial analysis – The requirement to repay AUD 50m in the current period may be funded from existing cash balances. We continue to believe COK will be required to raise equity. Our original assumptions were that, in the absence of alternative sources of funds, COK would need to raise about $60m of new equity in the June 2014 HY. With $50m required to be repaid in at the end of December we believe COK will also need to raise about $50m in the Dec 2013 HY at latest. In the absence of stated alternative funding we assume that the additional funds will need to be raised by equity. We therefore estimate that the additional equity funding (estimated using $0.11 /share) would dilute and reduce our unrisked DCF value by 17% to $0.41, and our risked target price, (including a 30% market discount for market conditions) by 17% to $0.24/share.
• We believe that COK is discussing the sale of its equity interest in the Baralaba North and Baralaba South projects from a 80% interest to a 62.5%, to its JV partner JFE Shoji or an alternative party. This would reduce COK’s equity interest to the same level that it has in the operating Baralaba (Central) mine, and raise, we estimate up to ~$40m for the 12.5% stake. This would have the effect of reducing the equity interest but also significantly reducing the potential dilution through issue of additional shares. A potential sell down to 62.5% has potential to increase our target price to ~$0.32/share.
• Earnings implications – Limited, largely due to impact of changed interest payment amounts with the different facility size. Under our original assumption we estimated the entire AUD 150m facility would be rolled over. We had estimated that the company would have ~AUD 79m to repay debt as at 31 December 2012, if required.
• Investment view – Based on the premium of the (diluted) target price ($0.24) to share price ($0.13), and our expectation of a partial sell-down of interest in Baralaba North and South with reduced dilution effects, we retain our BUY recommendation.