Caledon Resources Annual General Meeting, Part Two: Analysis & Valuation

7th Jul '10 by marben100

18 comments 10857 reads

This is the second part of an article covering the AGM for Caledon Resources Plc (LON:CDN) . You can find the first part here: http://www.stockopedia.com/content/caledon-agm-2010-part-i-details-44365/

In this part, I analyse historical data and the figures revealed at the AGM, to arrive at a valuation for Caledon of 107p/share. The valuation is made up of two components: i) The Cook Mine and ii) The Minyango project. We also have to consider Caledon’s cash position and the likelihood of dilution. I also consider the impact of the proposed Australian MRRT and other risks facing investors. A glossary of terms is included at the end of the article.

As ever, please note that my calculations have not been independently checked, so could contain errors.

Cook Profits & Valuation

Historic Figures

Unlike a purely speculative investment, we now have a detailed two year history of operations, revenues and costs. I will ignore 2007 data, when operations at Cook were just starting up, equipment & staff weren’t in place and operations could not be described as fully commercial. Ramp up continued into the early part of 2008 but that can be seen in the figures. Using the information gleaned from the AGM, this allows us to make some realistic forecasts. So, let’s have a look at the historic data first ^[1] :

…


	1H08	2H08	1H09	2H09

Production ('000 tonnes)

ROM production	222	326	304	301

Coking Coal (CC)	149	229	209	196
Thermal Coal (TC)	27	39	40	38

Proportion CC within ROM	67.1%	70.2%	68.8%	65.1%
Proportion TC within ROM	12.2%	12.0%	13.2%	12.6%

Total coal sales	200

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AbAngus

7th Jul '10

Thankyou Mark for another excellent summary.
AA

Mattybuoy

Superb.

To put it really simply, this is basically a highly leveraged play on seaborne coking coal prices. For myself, the Baltic Dry is not looking too clever, so I would probably stay away at this point.

StrollingMolby

15th Jul '10

Another offer made for Caledon Resources Plc (LON:CDN), and price up 33%

http://www.investegate.co.uk/article.aspx?id=201007151003033961P&fe=1

marben100

23rd Jul '10

Busy day for bids & deals, after KNOC's announcement re Dana Petroleum Plc (LON:DNX) earlier today. Caledon announce that the offer they received was at 68p in today's quarterly report:

Further to the announcement of 15 July 2010 Caledon advises that the unsolicited offer received for the Company was at 68p per share which the board has determined was highly conditional and significantly under values the company and as such will not be supported.

[my bold]

Might be a good time to get some more 47.5p converts away, to deal with the company's short -term financing needs. ;0)

Moving to the production numbers... ROM production for the half year of 325kt is slightly below my forecast of 330kt made in the article. However, saleable output is a little disappointing at 236kt vs 248kt forecast:

CHPP recovery and coking split for the quarter was lower than is normal for Cook but is expected to improve with an increase in the proportion of higher yielding secondary extraction coal going forward.

Caledon are still maintaining a 700kt FY saleable production forecast, which implies a near doubling of saleable output in the second half! Well, I guess we'll believe it when we see it. ;0)

Looks like the coking coal price is softening a little, as foretold by the BDI (however, the latest BDI readings are thought to be distorted by a number of new vessels becoming available): http://www.platts.com/RSSFeedDetailedNews.aspx?xmlpath=RSSFeed/HeadlineNews/Coal/8937477.xml

Neverthless, prices being quoted are still around my base-case pricing assumption for 2H10 of A$200/t for Cook coking coal.

Cheers,

Mark

31st Aug '10

Somewhat disappointing interim results released this morning.

Particulary poor is that the FY10 production forecast has been reduced from 700kt of saleable coal to 600kt, when on 23rd July Caledon announced:

The Company expects productivity to increase in the second half and continues to target 700,000 tonnes of saleable production for 2010.

This represents a 21.5% drop in second half forecast production from 465kt to 365kt. However, given the company's poor track record in meeting forecasts, my own financial forecast in the header was only forecasting 586kt of saleable production from FY10. This is now reduced to 573kt, in the light of rather poor coal recoveries from ROM production. These are expected to improve in the second half, per today's announcement:

Coal processing performance was impacted by the lower proportion of feed sourced from secondary extraction, which delivers much higher recovery than does development coal. Secondary extraction coal comprised 17% of feed in 2010 vs 24% of feed in 2009. Performance was also affected by the need to take a thickening band of shale in the roof in the down dip area of the South Argo development panels. Future development panels are being planned to avoid the need to take as much of this shale.

It is to be hoped that these measures plus an increasing proportion of secondary extraction will improve recovery in the second half. Nevertheless, I feel it prudent to adopt more conservative expectations. Costs also came in higher than my expectations in the first half, so I have also reflected these in forward expectations, though some costs, such as higher than normal equipment maintenance costs may prove exceptional.

Here are updated figures to reflect actuals and forecast updates, for comparison against the figures originally presented in my article:

				Base	Bull	Bear
	1H09	2H09	1H10	2H10e	2H10e	2H10e

Production ('000 tonnes)

ROM production	304	301	325	450	550	350

Coking Coal (CC)	209	196	195	284	358	210
Thermal Coal (TC)	40	38	40	54	66	38.5

Proportion CC within ROM	68.8%	65.1%	60.0%	63.0%	65.0%	60.0%
Proportion TC within ROM	13.2%	12.6%	12.3%	12.0%	12.0%	11.0%

Total coal sales	229	250	235	338	424	249
Coal sales % ROM	75.3%	83.1%	72.3%	75.0%	77.0%	71.0%

Assumed coking coal price (A$/tonne)				200	230	175
Assumed thermal coal price (A$/tonne)				125	140	115


P&L (A$m)

Revenue	39.6	28.1	39.4	63.5	91.5	41.2
Cost of sales	39.1	32.7	43.1	44.0	44.0	44.0

Gross profit	0.5	-4.6	-3.7	19.5	47.5	-2.8

Adjusted overheads (1)	7.7	5.7	6.3	6.5	6.5	6.5

Adjusted EBIT	-7.2	-10.3	-10.0	13.0	41.0	-9.3

Finance costs	3.5	3.4	2.0	3.5	3.5	3.5

Adjusted pretax profits	-10.6	-13.7	-12.0	9.5	37.5	-12.8

Nevertheless, these results have little impact on Caledon's medium/long-term valuation, as long as the promised production improvements ARE delivered by the end of this year. The one bright spot is confirmation of Caledon's WICT allocation:

Caledon has been advised by Wiggins Island Coal Export Terminal Pty Ltd that its application for 4 million tonnes of capacity in Stage 1 of the proposed new coal terminal has satisfied the initial due diligence requirements for prospective users.

At the current share price, however, the risk/reward is much less attractive than it was when I posted the original article and the SP stood at 26.5p (though still good enough for me to retain a holding). Caledon also needs to resolve the issue of repaying Polo's loans, as 31st October draws closer.

Regards,

nigelpm

I must admit I cut and ran this morning. Couldn't believe there was no reaction to the news.

loglorry

In the words of Balantyne "I'm ooot" - made a few quid and left it alone. Have plenty of exposure via Polo though.

Log

17th Sep '10

Offer for Caledon just announced.

Here is the RNS but doesn't say much

http://www.investegate.co.uk/Article.aspx?id=201009171008088772S

Glad I kept a few. ;0)

Despite all the false starts previously I suspect something's going to happen this time. All of us here were surprised by the SP not falling back after the previous bid was called off and a rather poor interim announcement. I think we now know why there was support for the shares, despite those factors.

I still maintain my original thesis that fair value is above 100p and that's where a bid will succeed. Nevertheless, the current price (63.5p) does reflect the likelihood of such an event and the shares could fall back sharply if this bid fails, yet again. That's especially the case if Caledon doesn't get finance in place to repay Polo by the end of October.

There has been further commentary on FT Alphaville this morning:

11:54AM
NH Right
NH people were asking about Caledon earlier
BE IN bid talks again I see.
NH seems the price spiked in Oz overnight
NH prompting today's statement
NH and the idea seems to be
NH that an Asian steelmaker could be thhe interested party
NH here's some context for that remark

"We often look at the Caledon Resources share price and wonder what is going on. It was a pretty weak day yesterday, yet Caledon shares were up over 5% and were up 7.5% in Australia overnight. The Australian coal space is full of speculation again. Bloomberg quoted Southern Cross Equities, a Sydney based broker, on Tuesday saying Macarthur Coal, Whitehaven Coal and Aquila Resources Ltd may be takeover targets."

"I love brokers that state the obvious. The sector has been alive with M&A activity pretty well all year. Asian demand for coal, either thermal or coking, is insatiable. There are horrific bottlenecks within China. Firstly, the rail network simply can’t transport enough around the country, and secondly a large proportion of Chinese mines have run too close to the safety envelope in terms of gasification in the mines. They have to import, they have no choice.

Now, Caledon isn’t really well followed in Australia, so I can understand why Southern Cross didn’t focus on this name, so I’ll do it for them. Caledon has a large undeveloped resource at Minyango and improving production at Cook. Most importantly of all, they have a four-million tonne allocation at the Wiggins Island Port Facility, Phase 1 of which is due to start operating in mid 2013."

"If you were an Asian steelmaker who needs to feed its furnaces with high quality coking coal why wouldn’t you buy the only independent producer in the Bowen Basin? You’d be mad not to!"

BE Sector watcher?
NH yep
NH and he's got something to say about Polo Resources too

"Of course, the other way to play the coal story is Polo Resources. I attach the NAV chart this morning as I haven’t done it for a while, and I see that it is trading at a 35% discount. Amazing value or what? I guess everyone has forgotten about Steve and Neil now that they have pocketed their 3p special dividend. But looking at the two remaining holdings, Caledon and GCM Resources, one is a takeover target and the other is a potential “multiple bagger” if the Bangladeshi government announces it’s coal “policy” as expected any time now. The country is woefully short of power and the government has stated that it will have to start building coal fired power stations to address this issue. Giving the go ahead for companies like GCM to develop their coal deposits is the next stage.

I wouldn’t want to be selling any of these stocks right now."

Having taken profits previously, I am happy to sit on the last tranche of my holding & see what happens. If we fall back significantly and financing is sorted out, I'd be inclined to re-add pending the September quarter production announcement (due before the end of October).

Cheers,

Mark

Debra Turton Flower

26th Sep '10

Does anyone know Polo average in Caledon? as Polo deal in USD and the pound gone down, I cannot quite make out what Polo average, on reading bb's some say 80p, some say 1.00, and some say figures between the 2.

My other thought is, if CDN cannot repay the loan Oct, could Polo extend rather than have any more dilution with CDN shares which would help them repay the loan.

My last question or what I am thinking is, what if any offer is not what Polo wants and I think I have to say that it is Polo that holds the key on whether CDN is sold or not of course depending on the offer, could they come back with a merger offer again if 1. the price is not acceptable and 2. if the loan cannot be repaid.

I look at Dattels past, a great company builder and money maker and cannot see him wanting to accept anything under £1.00 for Polo's share but with loss targets and CDN debt would any company want to pay more? especially with financial climate? and that would also mean 30p not sure in terms of % would the rise equate.

Although I am unsure of Polo's average, whether its 80p. 90, etc. I look at Polo holding of I believe 62.1 if Polo were to make around 12 mil profit, is that enough for Polo? its not as if CDN has got to be sold, unless there is something we do not know lol..

Regards

Debra,

I agree that Polo holds the key to any successful bid for Caledon. Without Polo's agreement any bid is unlikely to proceed. As you say, Polo COULD extend the loan if it chose to do so.

Here is my calculation of Polo's average purchase price, based on RNSs. Bear in mind that many of the figures are estimates, based on prevailing prices as purchase prices were not disclosed in many cases.

Dates	No. shares (m)	Price (p)	Cost (£m)

Averages	62.09	92.64	57.53

Old	0.80	45.00	0.36
03/03/2008	11.00	46.75	5.14
06/03/2008	0.43	55.00	0.23
10/03/2008	-0.30	56.00	-0.17
14/04/2008	1.38	55.00	0.76
28/04/2008	5.78	65.75	3.80
06/05/2008	2.45	72.25	1.77
May-Jun	14.59	130.00	18.96
4-6 Jun 08	6.35	140.00	8.89
6-12 Jun 08	0.80	138.00	1.11
12-16 Jun 08	1.17	135.00	1.58
17-19 Jun 08	3.95	154.00	6.08
23/06/2008	1.11	153.00	1.70
24/06/2008	1.84	130.00	2.39
03/07/2008	0.88	115.00	1.01
18/09/2008	2.78	64.00	1.78
02/07/2010	7.10	30.00	2.13

If Polo are sensible, they should not allow their decision to be influenced by the price they paid. Rather, I'd expect them to be guided by their assessment of what Caledon is worth NOW. That, in turn, depends on their assumptions about the forward coking coal price; Caledon's ability to deliver; difficulty or otherwise of financing Minyango development; risk etc. All of those will have changed since Polo took most of their position in 2008.

27th Sep '10

Hi Mark,

Thank you for your reply.

What you are saying makes a lot of sense, I have often thought that Polo would not 'give' CDN away, but with the missed targets, debt and the financing of Minyango, perhaps it may be like you say for Polo to be sensible obviously they will not want a loss, as it will be almost 2.5 years of wasted money in a share and come out with any loss or to break even.

I did read somewhere that Polo were hoping that CDN would be in profit by end of the year, but it remains to be seen with missed targets, had they made some profit, i am sure it would help on negotiations.

I would like to think that1 to 1.20 bid, is realistic. but even that may be a bit optimistic.

Well another week, so heres hoping for some positive news.

Regards
Debra

alpenstock

5th Nov '10

Things are getting interesting at CDN.

Dattels resigned as Non-executive Director yesterday.This would seem to be linked to a bid- but is it positive or negative?! http://investegate.co.uk/Article.aspx?id=201011050807276894V

There are vague rumours of a GBP1.10 bid which probably explains the recent price move. (http://www.independent.co.uk/news/business/sharewatch/market-report-wolseley-warms-up-on-bullish-sector-comments-2124684.html)

The 3rd quarter results were released a few days ago on 29th October (http://investegate.co.uk/Article.aspx?id=201010290730072301V).

They achieved their targeted annual production rate of 700kt saleable coal per annum (ie. greater than 58kt saleable per month) from September, in September. However, they're going to close the mine to upgrade infractrucutre over Christmas and so will not achieve 700kt for 2010. So on the downside they're not going to achieve their forecast 700kt this year, while on the upside the infrastructure improvements may have the potential to boost production >700kt/a next year.

Their financing situation has improved but is still very much tied in to a potential take over. Polo have extended their loan facility for a fee of GBP550,000 until either 28/02/11, or 60 days after the end of the offer period (whichever is sooner). (http://investegate.co.uk/Article.aspx?id=201010290730072302V)

I'm still holding...

Ok so this paragraph from the Takeover rules (p251) might shed some light on the implications of the Dattels resignation-

35.1 DELAY OF 12 MONTHS
Except with the consent of the Panel, where an offer has been
announced or made but has not become or been declared wholly
unconditional and has been withdrawn or has lapsed otherwise than
pursuant to Rule 12.1, neither the offeror, nor any person who acted in
concert with the offeror in the course of the original offer, nor any person
who is subsequently acting in concert with any of them, may within 12
months from the date on which such offer is withdrawn or lapses either:—
(a) announce an offer or possible offer for the offeree company
(including a partial offer which could result in the offeror and persons
acting in concert with it being interested in shares carrying 30% or
more of the voting rights of the offeree company);

....

Many thanks to Spight over on iii who spotted this.

alpenstock,

Polo never made a formal, firm offer. If you check the rules, you'll find that in the case of indicative/mooted offers, a 6 months moratorium applies, rather than the full 12 month period for firm offers. Moreover Polo reserved the right to make another offer should an alternative bidder emerge.

However, I do not believe that another bid from Polo is likely because the value is no longer there at these price levels and Polo has much less cash to invest now, after the special dividend that they paid. IMO they are more likely to be a seller than a buyer. Also IMO Dattels' resignation is likely to be so as to allow SD to negotiate directly with bidder(s) on behalf of Polo and its large interest in Caledon without there being a CoI.

As Caledon's SP has risen, I've tended to switch more of my investment to Polo (as well as taking some profits), which is again trading at a big discount to its tangible asset value (~35%) and seems like a safer way to play the prospective Caledon bid to me.

Cheers,

Mark

OK thanks for that... I'll have a look into making the switch myself. Safer sounds better!

8th Nov '10

Potential offer announced for CDN at GBP1.12 by Guangdong Rising an Australian subsidiary of Guangdong Rising Assets Management (Chinese).

http://www.investegate.co.uk/Article.aspx?id=201011080713117657V

Caledon Resources Annual General Meeting, Part Two: Analysis & Valuation

Cook Profits & Valuation

Historic Figures

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