Stock Research: Macarthur Coal (MCC)

Share Price: $4.00
Shares: 212m
Market cap: $850m

EPS estimates

30-6-09: 150c, P/E 2.7 (Low 107c, High 174c)
30-6-10: 200c, P/E 2 (Low 177c, High 377c)

DPS estimates

30-6-09: 75c, Yield 18.8%
30-6-10: 100c, Yield 25%

Summary

Positive

* Global market leader in supply of seaborne low volatile PCI coal.
* Low cost PCI (steel) coal producer. UBS estimates cost per tonne is $94, MCC says FOB costs are $75 in FY2008 annual report.
http://ar.macarthurcoal.com.au/2008/index.cfm?contentID=13
* Still ramping up post early 2008 floods.
* Strong coal sales
* On steady state profits, very cheap and massive dividend yield.

Negative

* Hard to judge growth profile.
* Negative cash from operations in FY 2008.
* What impact to foreign exchange contracts have on the balance sheet and profits?
* What will happen to coal price? Thermal coal prices benchmark US$125, spot US$100 at 16th Oct 2008.

Company Profile

Macarthur Coal’s principal product is low volatile pulverised coal injection coal (LV PCI) for use in the production of steel.

Macarthur Coal is a major supplier of LV PCI coal to the steel mills of Asia, Europe and Brazil and also produces some thermal and coking coal. (From FP: PCI coal can be utilised in the steel-making process in blast furnaces, making it a cheaper alternative for those steel producers looking for a cheaper alternative to more expensive coking coal)

Macarthur Coal’s major assets are a 73.3% share in Coppabella Mine and Moorvale Mine through the Coppabella & Moorvale Joint Venture (CMJV) (which together provide approximately one third of the total volume of LV PCI coal exported from Australia) and a 74.66% share of the Middlemount Mine project.

Macarthur Coal has large prospective exploration tenement holdings which provide a project portfolio for the development of new coal mines.


2009 Goals

Coppabella Mine: 3m tonnes
Moorvale Mine: 1.95m tonnes

Q1 FY09 (announced 16th Oct 2009)
Production 1.1m tonnes, with quarterly production to improve over course of year as Coppabella Mine still recovering from floods.
Demand for coal still striong


Half year profit forecast: $150m - $160m

Payout 50% of NPAT as dividends

2008 Results to 30th June

Revenue $400m
NPAT from operations $55.6m
EPS 36.6c
Div 17c

Cash from operations: negative $36m (positive $30m in 2007)
Cash balance: $22.5m
Loans and borrowings: $48m

Volumes

Coal production: 3.5m tonnes (rain affected year)

Top Sales Destinations & Customers

Europe 36%
Japan 26%
Brazil 17%
Korea 11%

Strong and diverse international customer base maintained which includes most of the world’s top steel producers

Contract executed for supply to Dragon Steel Corporation, a company constructing a new integrated steel plant in Taiwan

A memorandum of understanding signed with Hyundai Steel, a company constructing a new integrated steel plant in the Republic of Korea

Stock Research: Tap Oil (TAP)

Share price: 60 cents
Shares out: 156,487,000
Market cap: $94m
Cash as at 31st Oct 2008: $60m, down from $100m at 31st Dec 2007. No exploration success. Spent $32m in Sept 08 quarter on exploration for no return.

Summary

- Generating ~$40m to $50m cashflow per annum, in steady production state, but production steady to falling.
- Shares are very cheap. Market cap $90m less cash $60m = EV $30m.
- Requires drilling success for major share price catalyst.
- Downside very limited. Upside significant.
- Near term catalyst valuation only and/or uplift in oil price (currently US$60 or A$85 with A$1 = US$0.70) as major exploration prospects don't drill for another 9 -12 months.

Major Exploration Prospects

- Block M onshore Brunei (Tap 39%, Operator). Two appraisal wells called Mawar-1 and Mawar-2) to be drilled in April/May 2009.
- Carnarvon Basin:
* WA-351-P (LNG, Tap 25%). Drill late 2009. Non-operator risk.
* WA-191-P. Fletcher 3 (Tap 10.93%) appraisal well drilled Nov 08.

Full drilling programme on p6.
http://www.asx.com.au/asxpdf/20081031/pdf/31d9t1k4yqnprv.pdf

Why are the shares cheap?

- Falling oil price
- No recent exploration success...does it suggest future exploration will also be disappointing?
- Varanus Island incident on 3rd June 2008 meant production shut down. This is subject to an insurance claim, plus production will be back to normal by end 2008.
- Caught up in the general equity and energy stocks sell off.

Production

Wollybutt (Tap 15%, ENI Operator)

Production stable at 12,000 bopd (1,800 net to Tap)

31st Oct: "Field going into natural production decline in the coming months"
http://www.asx.com.au/asxpdf/20081031/pdf/31d9ygx37w60pv.pdf

Harriet (Tap 12.23%, Apache operator)

Potential production 10,000 bopd (1,223 net to Tap)
Gas 115TJ per day

John Brookes (Tap 100%)

Gas resale, gas bought at 2005 prices.
Generates $25-30m revenue per annum.