Cokal (CKA) – Matau Research – 20150309 – Offer Received is Inadequate

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Cokal Limited (CKA) 09 March 2015
Take-over offer is incomplete, unacceptable and under-value. 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 received an unsolicited, non-binding, incomplete offer from PT Cakra Mineral Tbk (CKRA) to a conditional off-market takeover of all of CKA shares. We consider the offer, which is not able to be presented nor accepted, to be opportunistic and under values CKA. We report with a BUY recommendation, supported by a 12 mo fwd risked and discounted Target Price of $0.19/share, at a large premium to the current share price, and low forward cash flow multiples.

Description

Investment Thesis

  •  CKA has received an unsolicited, non-binding, incomplete offer to a conditional off-market takeover of all of CKA shares, by PT Cakra Mineral Tbk (IDX:CKRA). CKA has not formed any opinion regarding the offer but intends to engage with CKRA to evaluate its proposal. Currently shareholders are recommended to take NO action.
  •  CKRA proposes to offer either cash (A$0.15/share) based on a A$70m value for CKA; or value in CKRA shares (to be agreed, though indicatively based on CKA value plus a 25% premium, which would imply a price of A$0.19/share. The offer is also conditional upon minimum acceptance of 90% of CKA shareholders. Oher terms are customary for an off-market bid for an ASX company.
  •  CKA plans to engage with CKRA “to evaluate the proposal”.
  • We consider this offer is opportunistic, and undervalues CKA. While our risked, discounted Target price is A$0.19, it includes a market discount that reflects only the short term market condition, not the longer term (risked) value of the company which we assess at A$0.27/share, (after risking at 80% for the stage of development). When the BBM project enters production late in 2015, we anticipate lifting this risked value to 100% which would lift the Target to A$0.24.
  •  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. For more details refer to our earlier reports 13 Nov 2014 (initiation) & 9 Feb 2015.
  •  CKA has 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. � 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.

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 final IPPKH (forestry production) approval for BBM.
  •  The coking coal markets appear to have bottomed. CKA’s high quality (and low phosphorus) coking coal supply will be an attractive offering in the seaborne market.

 

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.
  •  The current offer appears to seriously undervalue CKA.
  •  CKA is tightly held.

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