OT: Coal
George Topping, Phone (416) 943-6423; gtopping@sprott.ca
Jed Richardson – Associate, Phone (416) 943-6430; jrichard@sprott.ca
MORNING MEETING NOTES
NOVEMBER 04, 2004
Our disclosure statements are located on the last page of this report
Junior Coal Companies
Coal Price Upgraded: Targets Increased
US$ unless otherwise stated
Coal Price Continues To Surge: When we compiled our report 5 weeks ago, most spot metallurgical coal price contracts were being settled in
at around the $75 to $80/tonne level, well above the official $53/tonne benchmark price set back in Q1/04. Since then spot prices have surged
even further. As at early November 2004, US producers have been settling with European consumers at prices ranging between $110 to
$120/tonne. Importantly, these prices are beginning to be entrenched in one to two year contracts rather than spot sales. This indicates a swing
in consumer sentiment from settling on spot in the hope that prices decline in the near term to lock in supply on fears of insufficient coal to go
around. As North Americans normally pocket the freight differential between themselves and Australia to Europe, the Australian reference price,
used globally, could be $10/tonne less at say between $95 to $100/tonne. The Canadian junior coal companies compete in the Asian market
and typically get a small discount to the Australian benchmark price.
Negotiations between the major coal producers and consumers for the 2005 benchmark coal price should commence in December 2004 or
January 2005. Supply and demand fundamentals at the time of negotiations tend to be the overriding factor and right now, the producers are
firmly in control. Accurate forecasting is very difficult as prices are changing almost daily.
While most of the senior producers will settle at lower coal prices in order to maintain their long-term customer relationships, there is no question
that our forecast realised met. coal price of $80/tonne and $75/tonne for the 2005 and 2006 coal year (beginning in March) respectively is too
conservative. The rapid surge in demand has caught bulk transportation by surprise and logistical problems are compounding the coal shortage.
Recent industry estimates for 2005 coal prices vary from $80/t to $95/t
Increasing Coal Price Forecast: We are increasing and extending our realized coal price forecast by $15 to $20/tonne in each year as detailed
in Table 1. Our long-term met. coal price remains $57/tonne assuming a constant US$ dollar. To reduce confusion, we have changed the way
we present the financial years such that the year 2005 for example, refers to both the coal year and Company year for the 12 months ended
March 2006. Previously we referred to this as 2006.
Table 1: New Coal Price Forecast
YE March 2004 2005 2006 2007 2008 2009 2010 2011 on
Met. Coal US$/t $53 $95 $90 $90 $85 $80 $70 $57
PCI US$/t $46 $70 $80 $80 $76 $71 $62 $53
Thermal US$/t $38 $58 $70 $70 $66 $62 $55 $48
Benefits Partially Offset By Rising Capital Costs: As Pine Valley recently demonstrated, the availability of used mining equipment and the
price escalation of steel, cement and other inputs have caused capital costs to escalate. Pine Valley’s original forecasts rose by 50% from $12
million to $18 million during 2004. Therefore, for prudence, we have escalated Western Canadian Coal’s planned $80 million and Grande
Cache’s planned $60 million capital costs by a similar amount. In Western Canadian’s case, we have included the cost of a proposed new haul
road ($20 million), which would pay for itself through reduced hauling distances.
Upgrading Cash Flow And Target Price Estimates: As detailed on page 3 of our coal report (dated October 6t), the junior companies are
particularly sensitive to coal prices. Unlike Fording, they do not have a coal price participation contract with the rail company nor with the port.
The resultant impact of our new coal price is shown in Table 2 with additional peer group information given in Table 3. We initiated coverage of
Fortune Minerals in a Morning Note dated November 4, 2004 and have included this Company in our peer tables.
Table 2: Summary of Recommendations
Company Recommendation Target Price
Western Canadian Coal Top Pick $6.35
Fortune Minerals Buy $6.10
Pine Valley Mines Buy $3.95
Grande Cache Buy $12.80
Northern Energy Buy (S) $2.50
George Topping, Phone (416) 943-6423; gtopping@sprott.ca
Jed Richardson – Associate, Phone (416) 943-6430; jrichard@sprott.ca
MORNING MEETING NOTES
NOVEMBER 04, 2004
Our disclosure statements are located on the last page of this report
Table 3: Peer Group Comparison
West. Cdn Pine Valley NEMI Grd Cache Fortune* Fording**
Shares Outstanding (MM)
Basic 51.7 57.1 23.3 36.5 27.2 49.0
Fully Diluted 69.9 69.0 30.2 39.1 30.3 49.0
Share Price $3.25 $2.35 $1.60 $7.40 $3.55 $71.35
Market Cap. (fd) $227 $162 $48 $289 $108 $3,496
Estimated Cash (MM) $30 $13 $7 $58 $3 $54
Estimated Debt (MM) $0 $10 $0 $0 $0 $210
Enterprise Value (MM) $197 $149 $41 $231 $105 $3,442
2006 Coal Production (000s tonnes)
PCI 990 1,250 0 0 1,600 0
Met. 871 750 NR 1,976 150 16,000
Cash Costs ($/t) $51 $50 NR $58 $56 $54
Avg. Production (2006 - 2008) 2,414 2,000 NR 2,331 1,538 17,000
Market Cap. / Avg. Prod. ($/t) $94 $81 NR $124 $70 $206
Saleable Reserves (MMt) 35 20 0 21 51 731
Inf. Resources (MMt) * 109 80 79 145 230 2500
Mkt. Cap. / Reserve Tonne ($/t) $6.44 $7.97 NR $13.58 $2.11 $4.78
Mkt. Cap. / Infl. Resource ($/t) $2.08 $2.03 $0.61 $2.00 $0.47 $1.40
Average CFPS 2006-2008 $1.27 $0.79 NR $2.14 $1.24 $9.92
P/CFPS 2.6x 3.0x NR 3.5x 2.9x 7.2x
Target Price $6.34 $3.95 $2.52 $12.81 $6.20 NR
Anticipated Return 95% 68% 57% 73% 75% NR
NAV 10% $3.81 $2.53 NR $8.65 $6.20 NR
P/NAV 0.9x 0.9x NR 0.9x 0.6x NR
NAV Sensitivity +-10% 32% 40% NR 40% 52% NR
CFPS Sensitivity +-10% 24% 31% NR 26% NR NR
* Estimated production starting in 2007.
**Note CFPS is before capex (I.e., not distributable cash)
In spite of its recent out performance, Western Canadian remains a Top Pick based on P:CFPS, reserves and growth outlook, which could see
production reach 2.7 million tonnes per annum by 2007. In addition, Western Canadian is assessing the potential for an accelerated start-up in
late 2005, much the same as Grande Cache and Pine Valley have achieved this year. While Fortune Minerals carries a higher risk due to its
early stage of development, we believe the Klappan coal deposit compares favourably to its peers. As they are already in production, Pine
Valley Mines and, in particular, Grande Cache, benefit the most from our anticipated higher coal prices. NEMI remains undervalued on a
resource basis, particularly in the Tumbler Ridge district.
We, George Topping and Jed Richardson, hereby certify that the views expressed in this research report accurately reflect our personal views about
the subject company(ies) and its (their) securities. We also certify that we have not been, and will not be receiving direct or indirect compensation in
exchange for expressing the specific recommendation(s) in this report. |
