Cuesta Coal (CQC Research Report)

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Cuesta Coal Limited (CQC.ASX) 21 March 2014

Advancing development of the Moorlands Thermal Coal Project

Cuesta Coal Limited (CQC) is an emerging coal producer, planning to develop Moorlands, a low-cost, low-strip ratio, open cut mine producing export quality thermal coal near the Blair Athol and Clermont coal mines in Bowen Basin age coals. First coal is planned for late 2016 at a rate of 1.9 Mtpa ROM. A Concept Study has been completed indicating attractive fob cash costs of approximately AUD 63/tonne (contractor basis, excl royalties). A Feasibility Study will begin in early 2014 to evaluate the Moorlands project before a commitment is made to develop the project. Our unrisked DCF valuation is $0.35/share with a risked and discounted 12 mo fwd Price Target of $0.16/share, which is at a 65% premium to the current share price ($0.094).

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Description

Investment Thesis

  •  Cuesta Coal Limited (CQC) is planning to develop Moorlands, a low-cost low-strip ratio, open cut, export quality, thermal coal project near the (closed) Blair Athol coal mine in the Bowen Basin. CQC holds 100% of Moorlands and has recently completed a Concept Scoping Study recommending development of a 1.9 Mtpa thermal coal project. CQC has outlined 281 Mt of JORC Resources at Moorlands. Rail infrastructure from the Blair Athol mine is only 14 km away. A maiden Reserve assessment is underway and anticipated to be completed soon. A Feasibility Study on Moorlands is planned for early 2014.
  • FOB Cash costs are forecast to average A$63/t fob (excl royalties) for 1.9 Mtpa ROM under a contract-operator. Capital costs for a 1.9 Mtpa project are forecast at $167m (incl BFS and contingency) for contract operator.
  • We expect that CQC will need to raise about $24m of capital within the next year to provide for ongoing evaluation and feasibility costs, and about $50m by June 2015 to provide the non-debt funding for construction of Moorlands which has a production target of late 2016 after a 3 yr development time-frame. We have assumed that this will be as new equity. In the absence of other funding we estimate CQC would need to raise a total of about A$74m of equity. However there is scope to sell-down an interest in the project and reduce CQC’s equity funding requirement while adding value.
  • CQC is evaluating two other projects West Emerald and Eastern Galilee with potential for near term definition of coking and thermal coal resources. It holds six additional prospects at earlier stages of evaluation.
  • CQC is supported by an experienced Board and Management and a strong cornerstone investor, Beijing Gouli Energy Investments, which now holds a 36.4% interest in the company. We have assessed CQC’s funding for its base case (1.9 Mtpa) and also run sensitivities on funding by equity and on asset sell-down cases.
  • We value CQC on an unrisked basis at $0.35/share, and after diluting for the anticipated capital requirements, with a Price Target at $0.16/share based on Moorlands’ 1.9 Mtpa ROM / 1.7 Mtpa product base case.

 

Catalysts

  •  Completion of a favourable feasibility study recommendation for the Moorlands project will increase confidence in the project commerciality and value.
  •  A sell-down of an interest in Moorlands to a JV or off-take party will demonstrate commitment of partners and or customers toward development of the project, and will assist in funding it.
  • Announcement of maiden Reserves for Moorlands, and Resource upgrades for West Emerald and /or Eastern Galilee projects.

Risks

  •  CQC needs to raise capital for development of the Moorlands project. The prices at which equity can be sold will affect valuations and Target Prices.
  •  The Moorlands project has been evaluated to Concept Study level, and has yet to pass through the detailed scrutiny of a Feasibility Study. However we believe that the initial parameters from the Scoping Study are encouraging.

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