Coal of Africa - a quality South African coal play out of favour

 

Coal of Africa (CZA - AIM) has been an interesting stock for some time and now looks a compelling long opportunity as production is set to increase signficantly and there is takeover potential. Buy at 95p (52 week range 130 p - 32p).

 

ABOUT COAL OF AFRICA
CoAL is primarily focused on the acquisition, exploration and development of thermal and metallurgical coal projects in South Africa. The Company made the transition from explorer to producer when mining at the Mooiplaats thermal coal mine commenced in 2008. CoAL currently has four coal projects in various stages of exploration with the first of its coking coal projects, Vele, expected to commence H2 2009. CoAL also owns NiMag, which manufactures Nickel Magnesium alloys. NiMag’s growth strategy will be via the acquisition of similar alloy or foundry supply manufacturing enterprises.
CoAL’s four coal projects are:
Mooiplaats Coal Project
Vele Coal Project
Makhado Coal Project
Holfontein Coal Project

Coal of Africa Ltd, originally Golden Valley Mines, was incorporated in Western Australia in 1979, and listed on ASX Limited (Australian Stock Exchange) in 1980 primarily focused on minerals exploration in Western Australia and Indonesia. Through a series of strategic acquisitions CoAL has moved its focus from being a gold, platinum and base metals exploration company to becoming a coal mining and metals processing business, targeting predominantly South African mining and minerals processing assets. In 2005 it was decided to seek listing on the Alternative Investment Market (AIM) in the UK in order to expand the shareholder base. This was achieved in December of that year and has been the first of some major developments for the Company. At the end of November 2006 the Company listed on the Johannesburg Stock Exchange (JSE), a move which will assist the Company to further expand its interests in South Africa by allowing the Company to acquire assets by means of share issue.

REASONS FOR A CONTRARIAN INVESTMENT IN CZA

1. The company had a placement issued at 95p in October 2009 to raise £59.8 million and fund the acquisiton of Nucoal Limited, a thermal coal producer based in South Africa. Following the announcement of the placing, the share price has fallen from 130p to today's 95p (UK AIM). The current share price is equivalent to the instritutional placing price, which was 1.5 times oversubscribed.

2. The company plans to move to the main market and away from UK AIM in Q1-Q2 2010 increasing UK investment access and visibility

3. The VELE coal project approval is expected Q4 2009.


The Vele coking coal project is located in the Limpopo Province. CoAL will develop Vele in two phases, with phase one commencing in the second half of 2009 which will initially comprise the establishment of a modular coal treatment plant, and have the ability to deliver in the order of 1 million saleable tonnes (yield dependant) of coking coal per annum, likely to be delivered to ArcelorMittal for use at it steelworks in Vanderbijl Park. Phase 2 will produce the planned full capacity of 5 million tonnes of coking coal per annum.

The New Order Mining Right application for this project was lodged in October 2008.
The Environmental Scoping Report was submitted to the Department of Mineral Resources(DMR). Specialist studies for the Environmental Impact Assessment and Environmental Management Plan were also completed and submitted to the Department of Mineral Resources(DMR) as the final phase of the NOMR application process. A revised mining schedule to include both underground and open-cast sections was announced H1 2009. This revised schedule will result in significantly improved coking coal yields, reduced mining costs and an extended mine life to beyond 2040. The Company is ready to launch Phase 1 immediately upon the granting of a New Order Mining Right, currently under review by South African Department of Mineral Resources ("DMR"). A significant amount of preparation has already been completed for Phase 1, and some capital expenditure committed to shorten the production lead time. Phase 2 expansion will deliver 5 million tonnes per annum of saleable coking coal.

 

4. The company's flag ship Mooiplats coal mine is in production and increasing capacity.

The Mooiplaats coal project in which CoAL has a 100% interest is situated in the Ermelo coal fields 1.7km from the recently re-commissioned Camden Power Station. Development of the underground single seam thermal coal operation using the first continuous miner , resulting in the extraction of the first coal was on 20 October 2008.The second Continuous Miner was handed over on 24 November 2008. Mooiplaats which involves capital expenditure of R1billion will take approximately 18 months to ramp up to its full production of 3Mtpa of coal and 0.5Mtpa of middlings. The colliery sccessfully railed its first load of ’lean’ coal on the 11th of September 2009 to Matola and will continue to transport product to the port to fully utilise the 80000 tonne stockpile facility. Although the mine is currently mining the lower grade ’lean’ coal the target is to intercept and mine the high quality bituminous coal by Q1 2010. Life of mine has been estimated at 20 years. Infrastructure development has progressed according to plan.The coal handling and preparation plant (CHPP) was commissioned in May with capacity to process 110000 tonnes of run-of-mine coal per month.The completion and commissioning of the second CHPP module is planned for Q4 2009. CoAL expects to ship export quality thermal coal in Q1 2010. The latest consolidated resources statement indicates that Mooiplaats has 88.2 Mt measured and 25 Mt inferred resources with the potential of another +200 Mt from neighbouring unexplored properties.

5. Arcellor Mittal bought a 16% state in the company in April 2009. There have been persisitent rumours that they are interesting in increasing this stake or buying the company outright.

6. Strong balance sheet. No debt and $43 million in cash (sep 2009)

7. The company will be profitable in 2010. Expected Revenue of $187 m Aus (year ending June 2010). EPS of 10.12 A cents and forward p/e of 17.

8. Strong recovery in global coal prices following slump in 2008.