In a report to clients, Southern Cross Equities said many coal stocks continued to offer good upside despite rallying off their lows.
Looking at Alpha Natural Resources’ $US2 billion ($A2.66 billion) merger with debt-heavy Foundation Coal Holdings, Southern Cross said there was finally some mergers and acquisitions activity in the coal sector.
“Usually M&A occurs at the top and bottom of the market and clearly we aren’t at the top of the coal market,” the stockbroker said.
Asia-Pacific benchmark Singapore Tapis crude broke through the $US60 a barrel level last week, its highest ground for the year so far, and Southern Cross said spot thermal Newcastle prices looked ready to rise another $10 to catch up to oil.
“If you were a utility company and have seen the crude price clearly base [find support] you would surely think other forms of energy would rally as well and I [think] utilities will turn up trying to buy thermal coal here,” a Southern Cross analyst said.
While noting the current nine-day ship queue at Newcastle is well below the 30-35 day wait at the top of the recent coal boom, the stockbroker will look for longer ship queues as a sign of more thermal coal demand in the weeks and months ahead.
Coal company picks
With Gloucester Coal entangled in a takeover battle, Southern Cross said Macarthur Coal, Felix Resources, Aquila Resources and New Hope were all standouts.
Last year there was considerable media attention on a possible takeover of Felix by Chinese giant Yanzhou Coal.
While the takeover has not materialised, Southern said it all seemed to come down to price and it viewed Felix’s upcoming Moolarben thermal coal mine as the “company-maker”
“It’s believed the board doesn’t want to sell the company on the cheap as they will earn more money in two years time even at lower coal prices than what they did when coal prices were at very high prices last year,” the stockbroker said.
Mining at the prospective 13 million tonnes per annum Moolarben operation is expected to begin in September with the first shipment in March 2010, and Southern can see Felix shares rallying to $15 with or without a move from Yanzhou.
Referencing BHP Billiton Mitsubishi Alliance’s $A2.45 billion purchase of New Hope’s undeveloped New Saraji project last year, the stockbroker acknowledged the synergies with BMA’s neighbouring mine but said that price could now buy 10 producing mines.
Southern also said New Hope’s billion-dollar cash position had it earning $500,000 a day in interest while crunching numbers outside of the producer’s thermal coal sales.
Valuing its Queensland Bulk Handling Brisbane port-operating business at $150 million, Southern noted New Hope made a bumper return on the 112 million Arrow Energy shares it purchased at 58c each (trading at $3.87 this morning) and had $200 million of land around Toowoomba.
“New Hope is undervalued from a sum of its parts perspective.”
Southern has a positive view of Aquila, with its strong management and the fact that Brazilian mining giant Vale is a partner in most of its assets.
With Macarthur, the stockbroker said its $A1.2 billion market capitalisation was about the same amount needed to build one of its big-scale mining operations, when Macarthur has three.
Southern also said there was a possibility steelmakers ArcelorMittal or Posco could “tidy this structure up and clean out the minorities” in regards to the producer.
Given all the production cutbacks in the Aussie coal sector, the stockbroker views the market as having overestimated the speed of any supply side response to a boost in coal prices and recommended investors start buying into its favoured coal stocks now.