Cokal (CKA) – Matau Research – 20150209

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Cokal Limited (CKA) 09 February 2015
De-risking for development Cokal Limited (CKA) is an emerging premium hard coking coal (HCC) producer, with its BBM project advancing toward development in Central Kalimantan, Indonesia. The project has low forecast capital and operating costs. CKA plans to be producing coal by late 2015, up to 2 Mtpa. CKA has upgraded its JORC coal Resources at the BBM project, and announced agreement to a funding package that will fund the whole of the BBM stage-I development to 2 Mtpa We report with a BUY recommendation, supported by a 12 mo fwd Target Price of $0.19/share, at a huge premium to the current share price, and low forward cash flow multiples.

Description

Investment Thesis

  •  CKA is developing a low-capital cost, low-operating cost coking coal project in central Kalimantan, Indonesia. It is predominantly hard coking coal, with PCI and with potential for additional anthracite.
  •  The primary project, Bumi Barito Mineral (BBM), has upgraded total Resource to 266.6 Mt (+2.1%), which includes 42.6 Mt of Measured & Indicated Resource (+71%). There is potential to further upgrade this through additional drilling. Stage-I will target production of 2 Mtpa based hard coking coal (HCC) Resource primarily within the HCC ‘J-Seam’.
  •  CKA has announced an agreement with Platinum Partners and Cedrus International for a USD 110m funding package to advance the BBM project through to 2 Mtpa of production. The term and repayment schedule remain to be negotiated. With this finalised and upon granting of the final Forestry IPPKH approval (expected in the March 15 Qtr) CKA can begin construction.
  •  Once in production, CKA should be able to self-fund the proposed Stage-II production expansion from 2.0 Mtpa to 5-6 Mtpa, limiting shares dilution. The project is permitted for 6 Mtpa.
  •  CKA has previously established a JV to introduce shallow-draft barges and tugs, reducing transport disruptions due to river levels.
  •  CKA’s additional projects: BBP, AAK, AAM and SNR all provide potential for future upside, beyond what is outlined in our modelling and evaluation.
  •  We value CKA with an un-risked DCF value of AUD 0.40/share, and a Target Price, risked for stage of development and market conditions, at AUD 0.19/share. We believe that the company represents very good value.
  •  Based the agreed funding package no further equity raising is required to achieve development of the 2 Mtpa project. We estimate a further AUD 25m of equity would be required to develop a 5-6 Mtpa stage-II expansion, and achieve a higher DCF value and Target Price.

Catalysts

  •  A funding package has been announced, though term and repayment schedule remain to be finalised. We do not expect a need to raise further equity to achieve 2 Mtpa stage-I throughput.
  •  Award of the IPPKH (forestry production) approval for BBM would permit CKA to commence construction.
  • Metallurgical coal markets appear to have bottomed. Firm indications of improvement of either or both of met-coal or steel supply/demand parameters would contribute to improved investment confidence in the met-coal sector, and low cost projects such as CKA’s BBM project. Increased steel output by China or globally would make additional (high quality) coking coal supply attractive.

Risks

  • Contractual and political risks remain a perceived issue in Indonesia generally. However CKA has a robust security of tenure over its projects, with proportional ownership in the projects (60-75%), and permitting processes are very well advanced.
  •  Chinese steel consumption growth rates have slowed. Demand growth in the rest of the world is growing at faster rates than in China, and needs to continue in order to improve support for existing and planned global production.

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