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 Mon Apr 8, 2019
Tracker: Spec Value Rating for Colonial Coal International Corp (CAD-V)
    Publisher: Kaiser Research Online
    Author: Copyright 2019 John A. Kaiser

 
Colonial Coal International Corp (CAD-V: 0.51)
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Tracker - April 8, 2019: Spec Value Rating for Colonial Coal International Corp (CAD-V)

Colonial Coal International Corp has a Good Spec Value rating based on the combined NPV value indicated by recent PEA's on its 100% owned Huguenot and Flatbed metallurgical coal projects in northeastern British Columbia. Colonial Coal is a KRO Favorite because within the next 6-12 months a buyout in the $1.50-$2.50 per share range is conceivable. Metallurgical coal is distinct from thermal coal which is burned to generate electricity and releases carbon dioxide at a much greater rate than natural gas fueled power plants. While the world can carry on without thermal coal, it cannot do without metallurgical coal because it is critical to making steel. Met coal is converted into coking coal which is fed into blast furnaces to assist in turning iron ore into pig iron. The next demand wave for met coal is expected to come from India as it expands its steelmaking capacity and eventually domestic consumption if it hits its own super-cycle tipping point. CCIC is cheap because the market in general does not understand the difference between met coal and thermal coal. Australian metallurgical coal prices have ranged USD $150-$200/t for the past couple years and the projected long term benchmark price for premium low-volatile hard coking coal (HCC) is USD $185/t. Canada's met coal supply comes from a 1,000 km belt tracking the eastern foothills of the Rocky Mountains while thermal coal comes from the flatlands farther east in Alberta and Saskatchewan. Interest in securing new long term met coal supply stepped up when Australia's Hancock Group in March 2019 made a AUD $2.20 hostile offer for 48% RCF controlled and unlisted Riversdale Resources Ltd which values the Grassy Mountain met coal project in the Crowsnest Pass area at AUD $655 million. Grassy Mtn is at the permitting stage for a 4.5 million tpa open pit mine with a projected CapEx of CAD $631.6 million and FOB OpEx of CAD $88.90/t. The bid assigns a value of AUD $7.44/t for the 88 million tonnes of marketable "clean coal" the mine would yield. CCIC's two projects are located in British Columbia at the northern end of the met coal belt between Chetwynd and the Alberta border. Huguenot and Flatbed have only completed the PEA stage of feasibility demonstration. Their coal seams were explored during the 1970's but never developed because Quintette and Bull Moose, now depleted, were better deposits. Today all the met coal deposits in northeastern BC are controlled by majors (Anglo, Conuma, Cdn Dehua, Glencore, HD Mining and Teck) except Huguenot and Flatbed. They were acquired via license applications in 2007-2008 by a group headed by David Austin who was affiliated with Western Coal Corp which was bought out by Walter Energy in 2011 for $3.3 billion. CCIC was vended into a CPC in October 2010 and has spent over $20 million advancing the projects. The last financing was 51,952,661 units at $0.15 with a half-warrant at $0.30 that expires Feb 3,2020. In 2015 the founders beefed up their CCIC stake by getting 31.7 million shares for a thermal coal project near Dease Lake which is conspicuous by its absence from the web site. In July 2018 CCIC updated its PEA for Huguenot which indicated an after-tax IRR of 33% and an NPV of USD $1,166,000,000 at a 7.5% discount rate for an overlapping open-pit/underground scenario with a 31 year mine life which would mine 122 million tonnes of coal with a 73% clean coal yield (89 Mt) at 3 million tpa average. CapEx was USD $661 million, sustaining cost $178 million, and FOB OpEx at $95.50/t (clean coal). In November 2018 CCIC published a PEA for Flatbed (Gordon Creek) that yielded an after-tax IRR of 24.4% and NPV of USD $690.5 million using a 7.5% discount rate for a 30 year mine life that would longwall underground mine 111.6 million tonnes with a 51% clean coal yield (57.4 Mt) at 1.9 million tpa average. CapEx was USD $300 million, sustaining capital $406 million, and FOB OpEx 80.91/t clean coal. The PEA studies used USD $172/t and $164.80/t for Huguenot and Flatbed. CCIC has about $2.5 million working capital left, and beyond maintaining environmental studies, is now focused on finding a buyer for CCIC or either of the two projects. It has 190.1 million fully diluted, with full dilution generating $13.4 million. At a $0.51 stock price the two projects have a combined implied value of CAD $97 million which compares favorably with the CAD $2.5 billion of the two NPV values at a 1.34 CAD:USD exchange rate. However, 7.5% is too low a discount rate; at 10% the NPV is USD $832 million for Huguenot and $446 million for Flatbed, or CAD $1.71 billion. Fair value for a project ready for the PFS stage would be 25%-50% or $2.24 to $4.48 per share. If we go by the $/t clean coal metric, the market is assigning a price of CAD $0.66/t for the 146.4 million tonnes of projected clean coal output. That is considerably less than the AUD $7.44/t implied by the Hancock bid for Riversdale's Grassy Mtn project. However, Grassy Mtn has a feasibility study with a 10%-15% accuracy level compared to the 30%-35% accuracy of the PEA stage achieved by CCIC, so one could argue a third would be reasonable, or AUD $2.48/t (CAD $2.31/t). Riversdale, with RCF's backing, has rejected the Hancock offer as inadequate, including the promise to up it to $2.50/sh if Hancock gets over 50%. How the Riversdale bid plays out will have a bearing on how potential bidders view CCIC which is the only gateway to a reasonably advanced met coal project in Canada for a newcomer; alternatively, Anglo, which controls the Trend/Roman project next to Flatbed and the Belcourt-PRC and Saxon-PRC projects NW and SE of Huguenot might want to expand its land position. If we use $2.31/t as the target for CCIC, it would imply a CAD $338 million bid for CCIC or $1.78/share. That would be a 249% premium above $0.51. Is such a premium or better possible? David Austin's team has experience advancing a coal project into production, so it has the ability to play a long game with potential bidders. As Austin recounted in a recent webinar, the Western Coal auction started off with a bid in the order of a couple hundred million dollars started by an Indian company, with the final price at around $12 on Apr 6, 2011 through a $3.3 billion bid by a US company. During the coal craziness in early 2008 Western Coal traded over $10 before crashing to $0.50 by early 2009. This time around India has a greater need for a met coal supply. CCIC stock has been under accumulation by institutional investors, so if it becomes a long game, we should see over $10 million come into the treasury by Q1 of 2020 from warrant exercise. CCIC offers good speculative value given a buyout price range of $1.50-$2.50 for the last of the met coal deposits in British Columbia still controlled by a junior, which is why it has a Good Spec Value rating and is a KRO Favorite.

 
 

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