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Broker Note, Caledon Resources, 12/12/2006 (Cannacord Adams)

Broker Note, Caledon Resources, 12/12/2006 (Cannacord Adams)

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Published by anon-332359
Caledon Resources (London: CDN) Broker Note, 12/12/2006.
Caledon Resources (London: CDN) Broker Note, 12/12/2006.

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Published by: anon-332359 on Mar 10, 2007
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Canaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM)The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analyst’s personal,independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For importantinformation, please see the Important Disclosures section in the appendix of this document.12 December 2006 2006-243Jim Taylor
44.20.7050.6648
 jim.taylor@canaccordadams.com
Nick Chalmers
44.20.7050.6636
nicholas.chalmers@canaccordadams.com
 
BUY CDN : AIM : £0.07 (£0.36*)TARGET PRICE: £0.12 (£0.59*)
*Post 1-for-5 consolidation
InsideExecutive summary ........................3Background .....................................9Project descriptions .....................15
Cook Coal Mine..............................15Minyango Coal Project...................28Chinese Gold Assets......................31
Appendix ........................................32
Share price data COB 11 December 2006.
Metals and Mining -- Base Metals and Minerals
Caledon Resources plc
Reborn as Australian coal producer 
Acquires coking coal mine in Queensland
Caledon has acquired a 100% interest in the Cook coal mine in Queensland fromXstrata for the equivalent of around US$36 million. It also has an option to purchasethe nearby Minyango coal exploration license area.
Production from Q1 2007
 A US$15 million investment program is planned to allow production to recommence inearly 2007 and to build to a plateau of 1.8 million tonnes of coal per annum by mid-2008. We estimate total operating costs at about US$54 per tonne, delivered FOBGladstone.
Steady-state operating cash flow of around US$29 million per annum
Our long-term average coal price for the 80% coking coal and 20% thermal coal mixlikely to be produced at Cook is around US$70/tonne, giving a margin estimate of US$16 per tonne, or an average operating cash flow estimate of around US$29 millionper annum.
 Valuation
Our target price is based on a risked sum-of-the-parts NAV calculation. We have used adiscount rate of 8%, which we consider appropriate once in production, to arrive at aNAV equivalent to £0.15 per share. We have then applied assumed risk factors to thisfigure to account for the risks that we see of recommencing production in line with thecompany’s targets. This results in our risked NAV estimate of £0.12 per share.
Recommendation
 We initiate coverage of Caledon Resources with a BUY recommendation and a targetprice of £0.12 per share, or £0.59 per share on a post share-consolidation basis.
Risks
 We note that our valuation is highly sensitive to assumptions of the future coal prices. We also note that the valuation includes the option over the Minyango at cost. Thisproject has the potential to deliver significant value, should exploration confirm thecompany’s expectations of coal quantity and quality.
 
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Caledon Resources plc 12 December 2006Company Statistics (pre-money) Price Chart
Symbol CDN : AIMShare Price £0.0752-week Range: £0.08-0.03Weekly Volume: 3.8MMarket Capitalisation: £24MUS$47MCash £8MUS$16MLong-term Debt £6MUS$12MEnterprise Value £22MUS$43M
Historical Financials
 
6 mts to 6 mts to 12 mts to30-Jun-06 30-Jun-05 31-Dec-05
Explortn & admin costs £M -1.49 -0.96 -2.30Other operating income £M 2.53 0.00 5.49Operating profit/loss £M 1.04 -0.96 3.19Net earnings/loss £/shr 0.25 -0.36 0.67Net current assets £M 6.77 3.61 6.78
2345678
  0   7  /  1  2  /  2  0  0  5  2  1  /  1  2  /  2  0  0  5  0  9  /  0  1  /  2  0  0  6  2  3  /  0  1  /  2  0  0  6  0  6  /  0  2  /  2  0  0  6  2  0  /  0  2  /  2  0  0  6  0  6  /  0  3  /  2  0  0  6  2  0  /  0  3  /  2  0  0  6  0  3  /  0  4  /  2  0  0  6  1  9  /  0  4  /  2  0  0  6  0  4  /  0  5  /  2  0  0  6  1  8  /  0  5  /  2  0  0  6  0  2  /  0  6  /  2  0  0  6  1  6  /  0  6  /  2  0  0  6  3  0  /  1  1  /  2  0  0  6
   G   B   p
 
Source: Bloomberg 
Forecast Earnings Summary Company Description
FYE Dec 2007e 2008e 2009e
Total coal production kT 853 1,473 1,748Average coal price US$/t 86 79 76Average cash cost US$/t 69 60 55CFPS £/shr 0.011 0.027 0.028EPS £/shr 0.007 0.021 0.028Source: Canaccord Adams estimates; company reports
Caledon Resources is an AIM listed mining company thatowns 100% of the Cook Coking Coal Mine and someassociated infrastructure in Queensland's Bowen Basin. Italso has an option to purchase the adjacent Minyango CoalExploration License. It plans to re-develop the Cookoperation and to commence production at the end of 2006,building to 1.8Mtpa coal from mid-2008.
 
 
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12 December 2006 Caledon Resources plc
EXECUTIVE SUMMARY 
Caledon has surfaced from a period of restructuring as an emerging middle tier cokingcoal producer, having previously focused on gold exploration in China. Through a seriesof transactions, the company has acquired the Cook Coal Mine, located in Queensland’sprolific Bowen Basin, and an option over the adjacent Minyango exploration license. Ithas recently completed equity and debt financings, which have funded the acquisitionand the refurbishment of the mine and associated wash plant.Caledon formally agreed in August to purchase the Cook Mine from Xstrata for A$45.6million (approx US$36 million) in cash. The transaction is expected to close later thismonth, subject to shareholder approval at an extraordinary general meeting scheduledfor 13 December 2006. The company plans to bring the mine back into productionaround the end of this year or early 2007, and to ramp up to steady-state production of 1.8 million tonnes of coal per annum from mid-2008. We estimate total steady-statecosts of production, including royalties, at US$54 per tonne of coal delivered FOBGladstone.The mine is expected to produce around 80% coking coal and 20% thermal coal, forwhich our long-term forecast prices are US$74 and US$53 per tonne FOB respectively.(Our forecast long-term price for Cook coking coal of US$74 per tonne represents a 7%discount to Canaccord Adams’ long-term forecast for Australian hard coking coal,reflecting market consultant McCloskey’s view that, as a premium semi-hard product,Cook coal is likely to fetch an FOB price somewhere between the benchmark hard andsemi-hard price.) With an average coal product sales price of US$70 per tonne, theindicated steady-state forecast gross margin would therefore be US$16 per tonne, orUS$29 million per annum.
Figure 1: Forecast coal production, price and cost profile
FYE Dec 2007e 2008e 2009e 2010e 2011e 2012eProduction
Coking coal kT 699 1,208 1,433 1,515 1,476 1,476Thermal coal kT 154 265 315 332 324 324Total coal production kT 853 1,473 1,748 1,847 1,800 1,800
Coking coal price US$/t 93 85 81 76 72 74Thermal coal price US$/t 52 53 53 53 53 53Average coal price US$/t 86 79 76 72 69 70Average cash cost US$/t -69 -60 -55 -54 -54 -54
Source: SRK Competent Person’s Report (Oct 2006) and Canaccord Adams estimates
JORC compliant in-situ measured and indicated resources are 126 million tonnes, withinwhich recoverable run of mine reserves are 17 million tonnes, sufficient for the first 10years of the operation. The likelihood of extensions to reserves beyond these levels waspointed to by independent consultant SRK, which stated in its recent Competent Person’sReport that it considers it highly likely that adequate accessible resources are available toextend the reserve to and beyond 40 million tonnes of recoverable coal, which wouldextend the mine life to over 20 years.The total capital cost of Caledon’s refurbishment programme is estimated by thecompany at approximately A$20 million (US$15 million), of which A$6 million has been

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