UNV: Universal Coal Plc
Current Price:
0.16
Price Target:
0.50
As At: 21 August 2012
Growth
Valuation
Yield
Technical
Mkt Cap: AUD$34.5m Energy: Oil Gas & Consumable Fuels
Balance
Sheet
Buy
Upside
213%
Investment Thesis
Universal Coal Plc is a coal explorer and developer with five projects within South Africa. The Thermal Coal projects are; Kangala;
0.61
Brakfontein; and Roodekop, the Coking Coal projects are Berenice-Cygnus and Somerville-Donkin.
1.20
In the short term UNV is progressing to production with it's Kangala project. Kangala, which contains a proven reserve of 19.5Mt
of thermal coal, is 70.5% owned by UNV with the remaining shareholding held by black economic empowerment partners. UNV 0.51
has signed commercial agreements, with an off-take agreement in the process of being finalised, to supply Eskom with thermal
coal from the Kangala project, with coal production due to commence last calendar quarter 2013. The agreement, which covers
an initial 8 year term and is extendable for a minimum of a further 8 years using the resource from UNV's adjacent properties, will
0.41
deliver EBITDA of $15m per annum and prove that UNV is capable of making the transition from explorer to producer. $50m is
required in project financing for the Kangala project, and given the estimated 1 year construction period, it is required by
September 2012 to ensure that coal is delivered under the agreement with Eskom on time.
1.00
0.80
0.60
0.31
0.40
The Kangala project is small scale, delivering a NPV of $76m, or 30c per share after additional equity financing, but there is
significant additional upside to the share price once financing risk is reduced and UNV has demonstrated an ability to bring a
project into production. Kangala will provide UNV with cash flow to fund further exploration and development at its other projects.
0.21
On the 20 June 2012 UNV increased its stake in the Brakfontein project, which is within 20km of the Kangala project, to 50% + 1
share to assume majority control with the long term plan of moving Brakfontein into production and supplying Eskom with the
thermal coal contained within. The Brakfontein project hosts a JORC compliant thermal coal resource of 87.6 million tonnes, of
which 70.5 million tonnes are measured, 14.9 million tonnes indicated and 2.2million tonnes inferred. The close proximity to 0.11
Dec 10
Kangala opens up the possibility of a development utilising the shared infrasturcture with Kangala, resulting in lower
Price
development CAPEX required and a resulting increase in the returns to scale.
Catalysts
0.20
0.00
Jun 11
Dec 11
Bloomberg Target Price
Valuation
1) Completion of the $50m financing for the Kangala project. To date $2m has been funded via a private placement to Mr. Ning,
Yat Hoi, a Hong Kong based mining investor with terms for approximately a further $8m agreed. The placement occurred at a
premium of 12% to the UNV 60 day VWAP, albeit at a time of an extremely depressed share price. Company guidance has been
for an approximate 50:50 split between bank debt and equity/convertible, we are now waiting to see pricing and confirmation for
the bank debt and the likely further equity investment.
Jun 12
EPS FY1
EPS FY2
EPS FY3
Growth & Returns
1
30
1.00
Earnings/EPS (RHS)
PE
25
20
1
15
0.50
10
5
0
0
50%
40%
30%
20%
10%
0%
-10%
-20%
15%
3) The recent sell off in the UNV share price, which we partly attribute to investor concerns regarding financing risk, is also partly
explained by negative investor sentiment towards the sector as a whole. A turnaround in investor sentiment, which may come
10%
from positive data from China and/or Europe could result in a sector wide re-rating, and significant uplift to the UNV share price.
Yield
5%
0%
40%
2
P/B
20%
1
10%
0%
3
-3
-5
-7
3
100%
Growth
0%
1
NDE
1
1
50%
1
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
5
4
FCF
1
Sales
1
0
D/EBITDA
0
3
0
2
3
1
-1
-3
-5
0
-7
0
0
-9
1
-11
ROE
ROA
P/B
D/EBITDA
NDE
1
Growth
PE
Yield
Margin
Growth
-9
2013
2013
2013
2012
Debt Ratios & Cashflow
2
150%
Net Income
-1
1
1
0
-1
-1
-3
-2
-10%
-5
Financials
2012
2012
0
EPS
ROE
-7
2) Continued weak economic data could continue to put pressure upon coal prices and on the share prices in the coal sector
generally. Recent weakenss in the UNV share price has not been stock specific, but has been shared with the sector as a whole.
30%
-11
1) Failure to source the additional $40m required to finance the Kanagala project to production, or financing secured on terms
that are dilutive to existing shareholders. We attribute a lot of the recent share price weakness to financing risk.
-9
Dowside Risks
0.00
Margins
-11
2) Price increases in the short term could be supported by continued resource upgrades at UNV's projects, particularly the
Brakfontein projects due to its close proximity to Kangala and the ability of UNV to deliver this resource to Eskom.
Source: APSEC, Bloomberg
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