Coal news and updates

Wescoal: The most undervalued coal company in the world?

A boardroom tussle between a consortium of black economic empowerment (BEE) shareholders and the company’s long-standing CEO has resulted in a parting of ways at South African junior coal company, and Johannesburg Stock Exchange (JSE)-listed, Wescoal Holdings.

In the process, shareholders have called into question whether their interests have been served since potential suitors in the form of an international buyer came calling towards the end of last year. The board, heavy with representatives of the BEE shareholding, were accused of employing delaying tactics and moving the goal posts, which led to any prospect of a firm offer to acquire the company being abandoned. The BEE consortium had been accused of attempting to prevent the company from being acquired, as they wanted to gain control themselves.

“We received a few formal letters as expressions of interest, and the discussions went on for a while, but we never got to a point where there was a meeting of minds,” says acting CEO Waheed Sulaiman, who succeeded Andre Boje as CEO on April 15. “But we never received a formal offer, although there was a perception in the market that we had done so.”

Sulaiman maintains the chairman and other shareholders with board representation recused themselves from meetings where matters pertaining to potential buyers were discussed. “We had an established and independent board, and they made sure these procedures were followed,” says Sulaiman.

But the boardroom tussle appears to have distracted the market from the company’s excellent prospects. The company provided an operational update today in Johannesburg to investors, and top of the list was the progress on the development of the Elandspruit coal field.

“We obtained the Water Use Licence in the middle of March. We have been funding the development of the project from internal cash flows and we will shortly meet the outstanding conditions to access the Investec Bank funding we have in place,” says Dutch Botes, head of mining at Wescoal.

The last outstanding hurdle relates to the receipt of the Eskom contract, a process that will no doubt culminate in an arm wrestle over the price at which the company will supply the coal. “Over the past couple of months we have made commitments that, by December 2016, we will be black controlled [50% plus one share]. They are satisfied with that undertaking, and we expect to sign the deal with Eskom shortly.”

From the time the company signs the contracts with Eskom – which will trigger the access to the funding – it will take 16 weeks to deliver the first coal. “The contractor is ready to start. They can go onsite within a week and get going on the mining,” says Botes.

Elandspruit should result in the company being able to double its coal production to 4 million tonnes per annum (Mtpa).

The company reported headline earnings per share (HEPS) of 15.2c for the interim period ending September 30, 2014, an increase of 33.3% on the previous corresponding period. If it holds at this level for the second half of the year (full year results to end March are expected shortly), then 30c/share full year earnings would imply the company is trading at a price-earnings ratio of just 5.57 (based on the current share price of R1.67). So, why so cheap?

“Judging by the questions at the shareholder update today, I gathered some people thought there was going to be a rights issue. This might explain some of the weakness in the price,” says Brendon Hubbard, portfolio manager at ClucasGrey. “From our point of view, the business is self-funding, and somewhere in the future they may want to do some acquisitions, so we think the share price doesn’t reflect the underlying value.”

In addition to Elandspruit’s imminent production, the company has also extended the life of mine for the Khanyisa and Intibane mines. Keith McLachlan, portfolio manager at Alphawealth, who is also a shareholder in the business tried to put his finger on why the company appears to be so under-valued. “I think there are a few reasons why the market has not recognized the value in Wescoal. Besides Elandspruit, I think it’s undervalued because the market views Wescoal as a junior miner – essentially a price taker. But the fact of the matter is they supply to Eskom on a cost plus margin basis. So they may be a junior, but they have far less spot risk than would be the case if they were exporting their entire product via the Richards Bay Coal Terminal.”

While the margins are usually extremely thin when supplying thermal coal to Eskom, the cost plus margin model allows companies to remain profitable, regardless of the benchmark price.

“Another reason for the discount is that I don’t think the market appreciates how dominant Wescoal’s trading division is,” says McLachlan. The trading business buys coal directly from third party mines and supplies to industrial clients (excluding Eskom) and is number one or number two in the market. “So they are a dominant force – my understanding is that Glencore is their only real competitor. And I think there are a lot of synergies still to be extracted from the MacPhail acquisition in their trading business, from logistics to buying power.”

Trying to nail down a discount of the share price in relation to the company’s earnings power is no easy task, but McLachlan did give an indication. “There are always a huge number of assumptions that can be used when valuing a commodity company. But in Wescoal’s case, I get to valuations that are comfortably above R2/share. So it’s unfortunate that the boardroom antics have distracted the market from what the business is worth.”

One thing’s for sure – if the price stays at these levels, there will be plenty of buyers knocking on the door.

source: http://www.mineweb.com