Making money on Wescoal
Globally, the spot coal price is down around 17% over the last 12 months. The declining spot has been driven by shale gas supplanting some of the US coal consumption, while at the same time China has turned its focus to its own coal reserves.
Locally, the coal export rate at Richards Bay Coal Terminal has followed international spot prices downwards, being in no small part to blame for a recent 39% drop in Exxaro’s ( EXX) headline earnings per share (HEPS).
After all of this, why would anyone consider the coal sector investable?
Globally, China consumes half the coal t he world ’s produces. Given its economic growth and the expected growth of its coal production, China likely has less than a decade of coal reserves left. Considering that around 80% of China’s electricity comes from coal-fired power stations, this time horizon is simply too short for the country to switch over to alternative power sources. Thus China’s demand for imported coal will probably rise as time goes on, more than offsetting any excess exports from the US.
Locally, Eskom is facing its own supply challenges. The electricity utility approaches a potential supply mismatch from approximately 2015 that may dramatically spike inland coal prices.
In an environment characterised by these major variables, Wescoal Holdings ( WSL) has strategically grown its operations from its historical coal-trading business, Chandler Coal, to include coal mining. Now, while Wescoal’s coaltrading operations are valuable in their own right, the group’s aggressively built portfolio of thermal coal assets in South Africa is worth investigating.
Without getting technical about t he group’s various mines, I arrive at a sum-of-the-parts (SOTP) fair value of around R376m (218cps) for the coal mining segment. Put into context, this fair value is roughly R10/t per in situ coal resource, versus the much larger Exxaro’s shares that are currently trading at around R15.1/t per measured resources (different measures, but interesting relatives) and against the inland spot thermal coal price averaging around R250/t, per my calculations.
Assuming recent coal trading acquisitions become unconditional, I get a fair value for the group’s coal trading segment of approximately R135m (79cps), implying an undemanding (pro-forma) price-toearnings multiple (P/E) of 8.6 times.
Finally, adjusting for net cash and a 20% group overheads discount, Wescoal’s SOTP places the fair value at around R367m (213cps), thus implying a 12 month target price of 246cps on an exit P/ E of 10.6 times with an implied return of a little over 50% (current share price: 162cps).
So, after all of this, why would anyone consider investing in this overlooked coal junior?
KEITH MCLACHLAN, IS SENIOR RESEARCH ANALYST
AT THEBE STOCKBROKING