| Caledon 2009 AGM

23rd Jul '09 by marben100

7 comments 2251 reads

This thread is to document & discuss today's AGM and accompanying presentation.

Unfortunately I was not able to attend the complete AGM and had to depart at 10:30 to reach another meeting. Whilst I was there the formal business was conducted, with all resolutions being passed and Peter Seear gave a presentation whch I saw half of. The presentation is now on Caledon’s website: http://www.caledon.com/WebForms/2009AGMpresentation.html .

Of the directorate, only Nick Clarke, Mark Trevan and Peter Seear attended, with Jeremy Gorman, company secretary, also attending. Nick Clarke took the chair, stating that David de Jongh Weill (chairman) was away on overseas business. No apologies for absence were made. AFAIK only one other private investor attended. That investor queried the salary rises awarded to the executives in 2008, given the failure to meet production targets. The response struck me as unsatisfactory, relating to the share price and the coal price, neither of which are under the direct control of the executives.

The Board was also asked whether a deadline had been set for completion of the strategic review/bidding but was unable to answer as this is commercially confidential/price sensitive.

On to the presentation…

Coal market

Australian coking coal exports dropped from 36MT to 24MT in 1Q09, as steel mills cut back production dramatically (see slide4) . The drop in thermal coal demand was much less pronounced. In the past Japan has been the main customer for Aussie coking coal but last year and this year China has been taking up the slack in a remarkable manner. PS was able to report that in the last few weeks the coking coal market had been recovering strongly, with spot prices currently exceeding contract prices.

Production

The AR states:

“During 2008, virtually all operations were conducted in development and primary extraction modes. By the end of 2008, the mine had been set up to allow a more balanced mix of development, primary extraction and secondary extraction on retreat...

...In order to economically operate a bord and pillar mine, operations should be conducted via a balanced mix of high cost development, moderate cost primary extraction andllow cost secondary extraction modes. When operations commenced in 2007 all mining was in development mode as virtually all primary and secondary extraction opportunities had been fully exploited. In late 2007 and throughout 2008 operations have been conducted in a mix of development and primary extraction modes...”

I…

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marben100

23rd Jul '09

The thread header represents my notes from today's meeting. We also had the following report for the June quarter released today: http://www.investegate.co.uk/Article.aspx?id=200907230734071453W Feeding the production figures into my spreadsheet, I get the following cumulative figures since the start of Magatar operations:

'000 T	1Q08	2Q08	3Q08	4Q08	1Q09	2Q09

Raw coal produced	95	127	167	159	175	129

Coking coal produced	66	83	123	106	118	91
Thermal coal produced	12	15	22	17	22	18
CC ratio	69.5%	65.4%	73.7%	66.7%	67.4%	70.5%
TC ratio	12.6%	11.8%	13.2%	10.7%	12.6%	14.0%
Coking coal sold	90	80	122	105	118	91
Thermal coal sold	15	15	0	36	7	13

Looking at this, 2Q09 figures appear rather disappointing but based on the presentation and my analysis, they appear to be explained by utilising Caledon's resources, during a period of exceptionally low demand/prices, to conduct development work in preparation for much higher productivity when demand justifies the higher output.

IMV much higher levels of production are achievable (with correspondingly lower costs). Based on figures published to date & what I learned at the AGM, I feel that a gross margin of US$30/tonne and production of 800kt/annum is achievable on a long term basis, leading to a GM of US$24m. Putting this on a multiple of 5 puts a value on the Cook mine of US$120m.

I have done an NPV10 DCF model based on the figures for Minyango shown in slide 13 of the presentation, using a long-term coking coal price assumption of US$130/T for coking coal and US$60/T for thermal (US$86.9/T of RoM production) and arrive at a value today ITRO US$150m, with production commencing @ 1.5MT in 2013, rising to 4.5MT in 2015 onwards.

So, that would give Caledon a fair value of US$270m, equivalent to an SP of around 80p... strangely enough that's around the figure that Caledon is rumoured to have had offers for. ISTM that, if the rumours are true, there's a reasonable chance of a sale.

Regards,

Mark

I observe that the chart in the thread header is rubbish. Caledon has been trading above 50p for some time now.

24th Jul '09

I have now raised my questions with the company and had them answered promptly:

Q1. Am I right in thinking that in 2009 Caledon has deliberately focussed more on development (rather than primary or secondary extraction), whilst demand remains low, to best utilise its resources?

A1. Your thoughts are pretty much on the money. We have developed reserves of pillars which can be harvested as and when demand requires a ramp up.

Q2. Can Caledon rapidly increase increase production rates if the demand & pricing outlook justifies such an increase, by increasing the proportion of primary and secondary extraction vs development?

A2. Yes. We own three shuttle cars and a continuous miner that is ideally configured for sumping*. Thus we can turn on sumping at short notice.

Q3. In the presentation it was indicated that you are expecting mining from the North workings to continue until the end of 2009. At what point do you expect to switch the Magatar to the Southern workings?

A3. January 2010. But we continue to work our way backwards out of the North in sumping mode for 12 months.

[NB last year I was informed that this switch over would happen at the start of 2009 - but I guess demand falling off a cliff has caused Caledon to rethink]

Q4. In the event that coal demand rises sharply, can this switch be brought forward and if so, how much time is needed to complete preparation in the Southern workings before the Magatar can be moved?

A4, We would not benefit by bringing the Southern Magatar panels forward because we have set up belts, power etc to mine the last Magatar North panel.

Q5. How many days/weeks production (at the old rate) do you expect will be lost when the switch takes place?

A5. Approx 4 weeks to stop in North, drive South and set up to cut coal. However at this time we will be producing from sumping (North) and mains roads (South) which smooths the rate of production.

Q6. What production rate and what cost/tonne of RoM production is it realistic to expect at Cook once the switch to the Southern workings has taken place?

A6. Subject to sales we can produce one million tonnes per year. Costs are very much dependant on what exact volume of sales we achieve.

* From http://www.coaleducation.org/glossary.htm#S :

Sumping - To force the cutter bar of a machine into or under the coal. Also called a sumping cut, or sumping in.

Considering that potential production at Cook is 50% higher than the record rate achieved so far (A6) and that the switch won't occur until next year, we won't have figures reflecting the long-term cost of production at the mine until the 2010 interims (in over a year's time) at the earliest - unless Caledon is sold before then. Until then, costs will appear high.

26th Oct '09

Caledon have issued their production report for the September quarter today. Plugging those figures into my spreadsheet it it now looks as follows:

'000 T	1Q08	2Q08	3Q08	4Q08	1Q09	2Q09	3Q09

Raw coal produced	95	127	167	159	175	129	139

Coking coal produced	66	83	123	106	118	91	87
Thermal coal produced	12	15	22	17	22	18	23
CC ratio	69.5%	65.4%	73.7%	66.7%	67.4%	70.5%	62.6%
TC ratio	12.6%	11.8%	13.2%	10.7%	12.6%	14.0%	16.5%
Coking coal sold	90	80	122	105	118	91	84
Thermal coal sold	15	15	0	36	7	13	50

We can see that raw coal production has increased slightly since the previous quarter, but the coal quality has been relatively low, with a higher proportion of thermal coal this quarter.

The outlook for 500kT of SALEABLE production for the year implies that production in the fourth quarter should be back to record levels (total coking + thermal production >= 141kT).

I have mailed the company with some queries that I have in relation to the operational changes described in the report.

Once th Magatar is fully operational in the new south workings we ought to see new production records being hit.

I'd better note that there is an issue, having glanced at my costs spreadsheet, that will impact Caledon's profitability. That is the strength of the A$. I'm not sure how much of Caledon's costs are labour costs but that cost element will be a headwind to profitability. The consumables element (mainly power, steel) of Caledon's costs should come down with the rising A$ but high labour costs are a problem.

In the first half of 2009, I calculate that the cost/tonne was A$170 but that was based on total sales of 230kT. Saleable production of 270kT forecast for the second half (on a similar cost base) should bring that cost down, but it needs to come down quite a bit with an exchange rate of A$1 = US$0.92.

28th Jan '10

Here is the spreadsheet updated for the December quarter figures, released today:

'000 T	1Q08	2Q08	3Q08	4Q08	1Q09	2Q09	3Q09	4Q09

Raw coal produced	95	127	167	159	175	129	139	162

Coking coal produced	66	83	123	106	118	91	87	109
Thermal coal produced	12	15	22	17	22	18	23	15
CC ratio	69.5%	65.4%	73.7%	66.7%	67.4%	70.5%	62.6%	67.3%
TC ratio	12.6%	11.8%	13.2%	10.7%	12.6%	14.0%	16.5%	9.3%
Coking coal sold	90	80	122	105	118	91	84	109
Thermal coal sold	15	15	0	36	7	13	50	7

So, saleable production for the year totalled 483kT, slightly down from the 500kT forecast in the last quarterlies but in line with expectations from the 8th December announcement.

It is disappointing that Caledon's management now thinks it will fail to meet the target for moving the Magatar, set in the last quarterlies:

As part of this relocation the Company's recently refurbished wide head Joy 12CM12D is now fully utilised in the south developing roadways in preparation for the recommencement of mining with the Magatar system in January 2010.

This time:

As part of this activity, the ABM25 continuous miner and the continuous haulage are currently being relocated and are expected to commence operation in this area in February.

[the continuous miner and continuous haulage are the Magatar system.]

Given good production this quarter & strong demand, there is no reason to think that once the move of the Magatar is completed, signficiant production gains won't be achieved. Time will tell.

However, until those gains are achieved and the anticipated selling price increases* for 2010/11 kick in, Caledon's cashflow remains constrained. That could cause a problem with repayment of the £18m of convertible loans falling due for repayment or conversion in July 2010 (see Note 1 to the interims for details). They convert at 50p vs a current SP of 37.5p . I note that Polo Resources Ltd hold £4.7m of them, as well as 54.4m shares (25.9% of currently issued share capital).

These factors make me more inclined to invest in Polo than in Caledon directly.

*From today's announcement:

The recommissioning of blast furnace capacity in traditional sea borne markets, strong continuing demand in the growth economies of China and India and reported spot sales of up to USD190/t are reinforcing analyst's forecasts of a significant increase in coking coal prices for the 2010 contract year commencing in April. Any increase in annual coking coal prices will benefit Caledon from the start of the second quarter of 2010.

StrollingMolby

11th Feb '10

Just RNS'd, Polo investing in an issuance of convertible loan notes by Caledon:

Caledon announces a private placement of £4.2 million nominal 8.5 per cent. unsecured convertible loan notes due 2013, each with a par value of £50,000 (the "Loan Notes") to certain existing shareholders and other investors ("Placing").

The proceeds of the Placing will be used, inter alia, to provide additional working capital for the Company including the potential lodging/lodgement of a bid bond associated with the Wiggins Island tonnage allocation process.

One of the principal investors in the Placing is Polo Resources Limited; which is an existing substantial shareholder of the Company and a related party for the purposes of the AIM Rules for Companies ("AIM Rules").

Caledon 2009 AGM

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Marben100

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