Coal Of Africa Mixed FY12 Results Mixed

Coal of Africa (CZA.L) released mixed FY12 financial results, followed by a weak Q113 operating update. After Exxaro decided not to exercise its 30% option on Makhado, the company announced the strategic partnership agreement with China’s BHE, which is expected to provide US$100m in equity funding and should be instrumental in bringing Makhado into production. We update our CoAL valuation to incorporate the revised coal price and production forecasts.

Mixed set of financial and operating results
The reported Q113 operating results confirmed earlier trends on the reduction in export coal sales. While ROM and saleable coal production were up by 6% and 12% respectively, export shipments dropped 45% q-o-q due to weaker demand and lower throughput at Matola. On a positive note, Vele continues to ramp up, delivering 72kt of saleable thermal coal product. On 1 October, CoAL released FY12 results, with the EBITDA loss widening to US$27m and revenue falling 7% y-o-y to US$244m.

Makhado update and strategic partnership
Exxaro decided not to exercise its option to acquire a 30% stake in the Makhado project, citing its own project pipeline and weak fundamentals. This decision coincided with the announcement on the strategic partnership with Beijing Houhua Energy Resources (BHE), a Chinese coal producer. BHE is expected to provide CoAL with US$100m in equity funding (with the initial US$20m payment transferred to an escrow account pending regulatory clearance). Beyond that, we expect CoAL to benefit from BHE’s technical expertise and ability to facilitate the required project financing, which could be instrumental in bringing the Makhado project up the curve. The latter is crucial to the CoAL value realisation.

Valuation: Under pressure from lower coal pricing
We cut CoAL’s valuation from US$0.66 to US$0.40/share (208% upside) on the back of the reduced coal pricing and production assumptions, as well as the lower residual resource value contribution. In all, the company’s fundamental value remains strongly dependent on Vele’s operational success and its coking coal potential, and Makhado execution. We are positive about Makhado, which, once advanced to the development stage and de-risked, should become CoAL’s flagship operation contributing the bulk of its value. However, we continue to value the project on an EV/Resource basis, as visibility on the project’s economics and execution remains low. To this end, we look forward to the BFS release in early-2013, which could be the first step towards unlocking the project’s value.

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