Cokal Limited (CKA) Research Report (2014)

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Coking with Coal 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. Details and terms for project development funding are expected to be finalised this month. A potential expansion to ~6 Mtpa may need to raise further capital. CKA has strong security of tenure and has mitigated, where possible, contractual and political risks which exist in Indonesia. We report with a BUY recommendation, supported by a 12 mo fwd Target Price of $0.24/share, 71% premium to the share price, and low forward cash flow multiples.

Description

Investment Thesis

  • CKA is developing a number of low-capital cost, low-operating cost projects in central Kalimantan, Indonesia. The projects are targeting predominantly hard coking coal / PCI, with potential for additional anthracite.
  •  The primary project, Bumi Barito Mineral (BBM), has a current total Resource of 261.0 Mt, which includes 27.0 Mt of Measured & Indicated Resource. There is potential to 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’.
  •  Once in production, CKA should be able to self-fund a proposed Stage-II production expansion from 2.0 Mtpa to 5-6 Mtpa, limiting shares dilution.
  •  The company plans to barge coal down the Barito River, and is not subject to rail and port infrastructure constraints experienced in other HCC regions around the world. CKA will 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 0.52/share, and a Target Price, risked for stage of development and market conditions, at AUD 0.24/share. We believe that the company represents good value under our base case and downside case scenarios.
  •  Our modelling based on 60% debt assumes that CKA would need to raise a further AUD 35m of equity in FY2015 to develop its BBM 2 Mtpa stage-I project. On the same basis we estimate a further AUD 15m of equity would be required to develop a 5-6 Mtpa stage-II expansion. We believe the project could accommodate a significantly higher level of debt funding.
  •  The low capital intensity and low cash operating costs for the BBM project means that there is potential for the project to comfortably support and service up to 100% debt funding, and yet meet project finance ratio requirements.

Catalysts

  •  Award of the IPPKH (forestry production) approval for BBM would permit CKA to commence construction. CKA anticipates obtaining the IPPKH the Dec Qtr 2014, then commencing construction.
  •  We expect that approval will also see CKA need to raise ~AUD 37m of equity during FY2015 to commence construction (based on our assumptions). Finance terms for the Platinum Partners’ facility have yet to be concluded.
  •  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.

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.
  • Funding: CKA has attracted the support of major investors Blumont andPlatinum Pacific. However terms and conditions for the ~USD 150m Platinum Partners facility have yet to be finalised.
  •  Chinese steel consumption growth rates are slowing. 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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