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Tuesday, August 31, 2010

Coalspur (ASX:CPL) - a company making project

This is not strictly a blue-chip stock but it will resemble one in a few years since a company-making mining project. Australian coal miners have always competed with Canada, Colombia, Venezuela, Indonesia, South Africa and China in the seaborne coal market. Colombian coal mostly goes to Europe, South Africa is for domestic, EU and Asia, Venezuela to EU & USA, Indonesia for domestic and Asia, and increasing China is for domestic, as it can afford little export capacity given its burgeoning energy market.
West Coast Canada coal mining capacity lies amongst the Rocky Mountains. Most of the coal is used for domestic applications, however when prices have been high, some capacity has always leaked in to the Asian market. A strong Chinese demand and an appetite for coal from other sources than Australia, makes this company particularly appealing.
Coalspur (ASX:CPL) is developing a 900Mt thermal coal resource in Western Canada's Rocky Mountains. It is a lower quality coal (5800kcal/kg GAR) compared to Australian projects (6400kcal/kg GAR), so its $48/tonne FOB operating cost is not directly comparable. I suspect this local port can only do panamax ships (70,000dwt), so they will have a freight penalty to Asia, but perhaps not NE Asia (China, Japan). Canada appears to have a 15% federal resource tax judging from the feasibility study. The project is expected to generate cashflows of $110-180mil per annum. Expect this project to find a Chinese financier looking for project equity and marketing rights. For more info refer to www.coalspur.com/asx-announcements.
West Coast Canada has always been an exporter of coal to Asia, and it does not have the same potential as Australia for new capacity. This project however has a large resource. I suggest it has remained undeveloped until now because of the low coal prices before they took off a few years ago, and because the coal is lower energy. There is probably good reason they will stay high given the Asian demand for electricity, and prospect of electric cars.
Most mines I think in West Canada have been developed primarily for the domestic market. So long as China is strong, this project has value. i.e. It is vulnerable to a collapse in Chinese economic activity. I expect China to take off though, so I see little reason to expect a collapse. The company has placed shares to a strategic investor, ie. 67mil at 50c, raising $35mil, plus $7mil, so they have $42mil, which will allow them to finance some project development. I have no idea why the options were given 1:2 so cheaply. The company has 367mil shares at 77c worth $270mil. See Google Finance for a stock chart - support is at 60c, but personally I would not be surprised to see them fall back to 45c after an issue.
I have mixed feelings about this one because of the issues already make. Too much corporate activity is happening behind the scenes. I think this could have been a far better investment for you, and I was a bit late finding it. Just one to watch until it falls to one of those support levels. A mental post-it note for all of you. The project does have the capacity to produce a great deal of coal as there is a lot of unused coal export capacity in the region I suspect. These issues need to be considered. I called this a 'blue chip' only because I won't be buying it.
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Andrew Sheldon www.sheldonthinks.com
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