Shares digital

Coal of Africa (CZA:AIM) – 105p, stop loss 84p

SHARES SUMMARY

Coal prices are rocketing and few companies can boast world class reserves like Coal of Africa. There might be a few hiccups but prospects look bright despite the falling rand.

Business:

Nascent major coal mining business in South Africa

Vital stats:

Market value: £316 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009: 20.6

Sector PE: 11

1-month relative strength: 7.7%

1-year relative strength: 163%

Yield: n/a

NMS: 5,000

Spread: 2.8%

Not many junior coal mining companies have potential reserves of over two billion tonnes of coal. Proven reserves are currently just 143 million tonnes but the balance could be proved up by 2011. Production is expected to start in September, ramping up over 18 months to produce just under six million tonnes of coal a year at the Mooiplaats thermal-coal project near Ermelo in Mpumalanga Province. Much of this will supply the recently re-commissioned local power station.

The company has just increased its stake in this valuable project to 100% where measured reserves total 103 million tonnes accounting for the bulk of Coal of Africa’s valuation. There is another 251 million tonnes that could be upgraded from the inferred resource category.

There are a further three coal projects in various stages of exploration as well as Nimag, which made £3 million profit from manufacturing nickel magnesium alloys. All these projects are low cost, open cast mines.

Coal of Africa still has around £50 million cash helped by the fundraising last November, which raised £42 million at 65p a share. The two-year target is to bring first Mooiplaats and then the larger Limpopo Mines into production.

The company recently changed its name from GVM Metals which was founded in 1979 in Australia. It also listed on Aim and the Johannesburg Stock Exchange. Golden Valley Mines used to be focused on minerals exploration in western Australia and Indonesia with little success. The strategy changed dramatically three years ago when management saw huge opportunities to buy coal acreage cheaply in South Africa.

The two projects in Limpopo, on the border with Zimbabwe, should enter production in 2009. Coal of Africa has done a deal with Transnet, the South African railway company, to transport up to 1.5 million tonnes of coal next year rising to ten million tonnes in 2012.

There is existing rail network and capacity; port capacity will probably be increased allowing the coal to be exported if the state energy company Eskom and other generators do not buy the coal.

Coal prices are rocketing in line with soaring oil and gas prices. South Africa is desperately short of electricity and rationing will last for at least five years.

Even better, the Limpopo mine will produce higher quality, higher price coking coal which is in big demand from steel mills.

The remaining project is at Holfontein to the east of Johannesburg. A pre-feasibility study is in progress to firm up finds of high value semi-soft coking coal. Production could start next year at around 1.2 million tonnes a year and last 20 years.

Total production should climb to around 20 million tonnes a year over the next decade and maintain this rate for over 50 years. Profits from Mooiplaats and Holfontein should total almost £12 million in 2009 and quadruple to almost £50 million in 2010 producing earnings per share of 21p. This could be much higher depending on Limpopo output. Mirabaud Securities has a 182p price target.

by: Timon Day