PORTFOLIO POINT: One gap in our holdings is the absence of a coal-linked stock. This week we set about correcting that mistake
Investors who took up shares in Coalworks Ltd (CWK) in its float in May 2008 have seen their shares tumble from an issue price of $1 to a low in last year's market crash of 14¢.
They have since recovered to trade last week between 27¢ and 29¢ and the recovery should continue as several projects advance towards production. Last month the company announced the signing of what it described as a binding memorandum of understanding (MOU) with Japan's Itochu Minerals and its wholly owned subsidiary Energy Australia Pty Ltd (IMEA) for a joint venture to develop the Vickery South coal project on the Gunnedah basin of NSW, 320 kilometres by rail northwest of the port of Newcastle.
Under the joint venture, IMEA may earn a 49% interest in the project by investing $11 million, with an initial payment of $5 million due at the end of March for an initial 29% interest. CWK has an exploration target of 50–70 million tonnes of thermal and coking coal at South Vickery, with the Japanese contribution earmarked to complete a feasibility study for an annual production of 2–4 million tonnes.
Company connections believe the newly established relationship with IMEA may lead to investments in CWK's other coal assets, in particular its Ferndale project in the Upper Hunter Valley, 125 kilometres from Newcastle. CWK has a 90% equity in this project, with the company awaiting approval to begin exploration. It has an exploration target of 60–85 million tonnes of thermal and soft coking coal with an annual production target of an initial 2 million tonnes a year rising to 5 million tonnes.
Itochu has acquired a number of equity interests in Australian coal projects since the mid-1990s. Its major partners in Australia include Xstrata, Gloucester Coal, Felix Resources and Anglo Coal and its equity interests range up from 5% to 35% in Xstrata's Newlands, Collinsville and Abbot Point project.
Coalworks' most advanced asset is its Oaklands project in southern NSW where a bankable feasibility study is due by the end of July this year. This is based on a resource of 822 million tonnes of sub-bituminous coal, of which 121 million is measured with the remainder indicated (522 Mt) and inferred (129 Mt).
The company is investigating the potential of a gas-to-liquids development at Oaklands, where the company claims its coal is ideal for gasification. In an investor presentation prepared this week, the company claims:"Oaklands 822 million tonnes of coal as barrels of oil equivalent would equate to over one billion barrels of oil, ranking it as a major energy deposit linked to rail and port."
In the forthcoming feasibility study it is envisaged that product from the mine would be railed south to the port of Geelong. At 27.5¢ a share, Coalworks' 103.8 million shares carry a market capitalisation of $28.35 million while the company has net cash of almost $10 million. Interestingly, the broking firm that underwrote the initial public issue, BBY Ltd, rated the company as a "speculative buy" at 30¢ in a report prepared last month after the Itochu joint venture was announced.
That was based on a valuation for CWK's equity in the South Vickery project of $11.4 million, its 90% of Ferndale at $13.5 million and its $10 million cash, adding up to a total value of $34.9 million. But it placed no value at this stage on the advanced Oakland project because of "insufficient information on the coal-to-liquids" option. The broker conceded, however, that "even without assigning a value to Oaklands, the current market capitalisation is undervalued." The stock was then trading at 30¢.
CWK's managing director, Dr Andrew Firek, has been involved in the coal mining and processing industry for more than 20 years. He is a former group leader in the CSIRO's Division of Fossil Fuels in Sydney.