L&L Energy appears on track to report excellent on target Q4 (April) results. The company is a small but ambitious coal producer with operations in central China. It's managed by an American management team. The territories L&L Energy operates in are undergoing a forced consolidation that's being supervised by the Chinese government. The region is full of under capitalized operators that control vast reserves, but don't have the money or the know-how to exploit them cost effectively. The regulations require coal producing companies either to achieve a 1.0 million tons per year rate of production, or merge into a qualifying holding company. Over the past year L&L Energy expanded its production rate through a series of clever transactions to approximately 1.8 million tons per year. An estimated 60% is thermal coal. The balance is metallurgical, which is a higher quality coal used in steel production. The latter sells for a higher price. The former is in greater demand. Steel production has leveled off since the new government took control this year, in part due to policy decisions (slow the economy and keep inflation under control). Weak export markets have contributed further ennui. The build up of China's internal economy has continued to drive demand for thermal coal higher.
We estimate income advanced about 50% in the April quarter, bringing the full year total up to $.90 a share. Coal prices strengthened modestly during the winter. Then they fell modestly as the warmer weather set in. Through it all L&L Energy has continued to reduce its cost of production by introducing greater mechanization, wider tunnels, better distribution infrastructure, and improved safety measures. The whole industry was shut down a few years ago after a spate of deaths. L&L Energy wasn't responsible for any of those disasters but it did have to wait for the government to inspect its mines before they could resume operation. Hence the downturn in results. The company now has a clean bill of health and volume continues to build as existing mines produce more coal.
L&L Energy plans to expand with acquisitions. Excluding any such maneuvers, organic sales growth of 34% to $275 million appears achievable in fiscal 2014 (April). Our estimates assume a minor improvement in margins, yielding an earnings estimate of $1.25 a share (+39%). A stronger performance is possible.
A major purchase in northern China is likely. The company has been negotiating with an experienced operator to purchase a 1.0 million ton per year mine. The seller has extensive operations in the area and is looking to merge with L&L Energy as a diversification move. A significant part of the consideration, if the deal is consummated, probably will be issued in stock. That's an attractive currency in China because L&L Energy's shares are listed in America, enabling holders to skirt China's currency regulations and get money out of the country. The company recently hired a Pennsylvania based mining consultant to review the property. The two sides already have agreed on the basic parameters of a deal. The expert's opinion will help establish the final price. Production costs are below normal, for a variety of reasons. Selling costs also are low, though, because transportation expense is greater. Overall margins are viewed to be similar. The transaction would be highly accretive to earnings based on L&L Energy's current stock price. Our ballpark estimate is that income could benefit by $.25-$.50 a share, depending on the proportion of stock and debt used. That mine is believed to have significant expansion potential, as well. So the leverage created by the deal could recur into the future.
Meantime, L&L Energy expects to list its shares on the Taiwan Stock Exchange in the fall. KPMG is conducting an audit of the company for the sponsoring underwriter. Assuming that pans out and the transaction with the gigantic Chinese coal company reaches fruition, the listing might be accompanied by a sizable public offering. That probably would be followed by a period of stability while the company made sure its financial objectives were realized. Even so, that could put earnings into the $2.00 a share range. With that under its belt, more transactions could follow.
The long term outlook is good. The world economy has expanded tremendously over the last 15 years. Despite all the talk, global temperatures have not increased AT ALL during that time. CO-2 concentration has jumped, to be sure. It could be the oceans have gobbled it up and disaster lies light around the corner. Based on the current evidence, though, third world countries like China are unlikely to sacrifice economic development for theoretical global warming concerns. There is substantial push back in China concerning pollution, same as there was in Pittsburgh in 1970. L&L Energy recently teamed up with a clean coal company in Taiwan to explore the potential for selling scrubbers and other technologies to coal burning utilities. That probably won't generate significant revenue but it could position the company favorably as China rolls out existing technologies to curb pollution while continuing to generate a majority of its energy from coal.
L&L Energy is run by a group of smart people. The opportunity is large. Working in China is fraught with risk. But the company's management team speaks Chinese. It's been involved in the business for quite a while now. It has no accounting problems. This company's earnings are rising quickly. They could trade trade at a significantly higher P/E multiple as time goes on.
https://internationalgrowthstocks.blogspot.hk/2013/06/l-energy-nasdaq-llen-plans-to-take.html