Coal Of Africa: Impressive Resources

Coal of Africa released an updated compliant resource estimate for Greater Soutpansberg prepared upon the completion of the Chapudi acquisition. The area’s overall gross resource was upgraded by 429% to an impressive 8.0bn tons, while the more relevant mineable resource estimate grew 209% to 2.0bn tons. The released independent technical report has also provided selective saleable coal qualities for some of the project’s areas, underscoring its high coking coal potential. We have updated our valuation to incorporate the released resource estimate.

Greater Soutpansberg Area Resource Upgrade
The Greater Soutpansberg area covers eight coking and thermal coal assets, grouped into three regions -- Mopane, Makhado and Chapudi. The area’s overall gross tons in situ (GTIS) resource was increased from 1.5bn to 8.0bn tons, while its mineable-tons (MTIS) resource grew from 0.6bn to 2.0bn tons. The Chapudi project contributes the biggest portion to the updated resource as it accounts for 72% of gross and 54% of mineable tons in situ. The Chapudi project’s MTIS were reported at 1.3bn compared to the initial estimate of 1.0bn prepared by Rio Tinto in 2008.

Coal Qualities Point To High Coking Coal Potential
Makhado’s washed coal was reported as having 10% ash and 30% volatile matter, which classifies it as high volatile hard coking (HVHCC). The Telema & Gray area has coal qualities similar to Makhado and therefore could potentially deliver a similar HVHCC product. Both the Voorburg and Mount Stuart projects have slightly higher ash and volatiles and are likely to be classified as semi-hard coking coal. While no information on the Chapudi’s washed qualities was provided, the company will have to refocus its work on coking coal as Rio Tinto’s extensive sampling was centred upon the primary thermal coal product and/or coking coal export fraction.

Valuation: £0.66 Per Share SOTP
We employ the SOTP methodology to arrive at the company’s overall equity value of U.S. $0.7bn, or £ 0.66/share. This is an 18% reduction on our previous estimate, but 74% above the current share price. While we leave our valuation of the existing thermal coal business and Vele unchanged, we slightly amended the residual resource valuation methodology and applied a lower target EV/Resource multiple as the company’s share price declined. Among the catalysts that could affect the company’s valuation we would watch the operating (July) and financial (September) results as well as Exxaro’s Makhado option exercise (expected by the end of September).

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