Stanmore (SMR) 20151102

$88.00

Growth in Developing Coking Coal

Stanmore Coal Ltd (SMR) is an emerging metallurgical coal producer, having recently acquired the developed Isaac Plains mine and the Wotonga/Isaac Plains Eastproject in the Bowen Basin. SMR plans to recommence production at Isaac Plains in early 2016. At 1.1 Mtpa of product,cash costs of ~AUD 88/t FOBare calculated, producing semi-hard coking coal, semi-soft coking coal and thermal coal for export. Very little capital is required to achieve production. Development of Wotonga is planned to follow.We derived a 12 month risked and discounted Price Target of $0.27/share, a significant premium to the share price. Forecast cashflow multiples are < 2x. We recommend investment in SMR.

Description

Investment Thesis

  • Stanmore Coal Limited (SMR) recently agreed to acquire the Isaac Plains coking coal project and the Wotonga (renamed Isaac Plains East) project in the Bowen Basin for $1 and $7m respectively. SMR plans to bring Isaac Plains into production at ~1.1Mtpa saleable coal in early 2016. Matau expects production from Isaac Plains Eastat~1.1Mtpa saleable coal from 2019. We expect both mines to be open cut mines. Isaac Plains has potential to continue with underground methods when open cut resources are exhausted. We modelled both Isaac Plains and IsaacPlains East at 1.5 Mtpa ROM.
  • Isaac Plains includes port, rail and water allocations. SMR has taken on the take-or-pay obligations associated with these allocations, in addition to an existing rehabilitation provision. The Vendors are providing compensation to SMR for take-or-pay costs until Isaac Plains project resumes production whereupon a vendor production royalty will recoup the take-or-pay compensation amounts.
  • Isaac Plains was a fully equipped coalmining and 2.8 Mtpa processing operation when SMR acquired it. There is little capital required to bring it back into production. SMR plans to operate at ~1.1 Mtpaproduct. Matau has estimated FOB costs at ~AUD 88/t FOB(nominal). We have assumed similar operating costs (adjusted for strip ratios) for analysis of anticipated development of the Isaac Plains East deposit.
  • Taurus Mining Finance Fund has provided SMR with a US$30m interest only facility,with a term of up to 2 years,to provide cash backing for guarantees for the projects, plus a US$12m working capital facility.
  • Steel production is forecast to peak in about 2026, though Indian production will continue expanding through 2035. Australia is forecast to capture the largest increase of metallurgical coal supply over the period to 2035.
  • The global hard coking coal supply segment has mean cash operating costs of USD 89/t FOBaccording to Wood Mackenzie.
  • HCC contract prices are forecast to increase to USD 90-93/t FOB in the June16HY, then USD 95-100 for the Dec16HY, and to USD125/t FOB by 2019. If these forecasts hold it will confirm a turning point for HCC prices.
  • We derived an unrisked DCF value for SMR of $1.01/share and a 12 mo fwd risked and discounted Price Target of $0.27/share which is at a 47% premium to the current share price.
  • At current share prices, forecast cashflow multiples from 2017 onward are less than or equal to 2.0x.
  • We have evaluated a range of sensitivities to adverse movements in coal prices and foreign exchange rates, at which SMR continues to appear undervalued. Matau Advisory believes that SMR is significantly undervalued by the market.

Catalysts

  • Demonstrated upturn in the metallurgical coal markets (prices, volumes).
  • Isaac Plains commencement of production (mid-2016).
  • Isaac Plains East completion of acquisition (Sept 15).
  • Isaac Plains East: commencement of production (2020Matau estimate).
  • Increase in outlook for global steel demand.

 

Risks

  • Slower than forecast steel production growth from China, and/or delayed growth from India, two key markets for coking coal demand growth.
  • Lack of coal price response and or increased AUD USD values ahead of coal price increases.

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