Mak­ing money on Wescoal

Finweek English Edition - - INSIDE -

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?



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