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www.eastenergy.com
52wk High $1.18 Low 42 cents
Shares outstanding: 34 million
No Debt / Approx. $9 million cash (26 cents/share)
First, it’s important to note that the company has seen a (typical) delay in getting formal joint venture approval for its large coal project in China. Unfortunately the CEO does not know when this will come. It could be a month, it could be three months, or it could be sometime in 2008 - or maybe not at all. This is the risk of doing business in China.
However, in light of this risk and because there are so few small public companies within this sector, we are prepared to initiate coverage for the following reasons:
1) China Shenhua Energy went public in October and jumped 87% on its first trading day (Shanghai Exchange). The company has many energy interests but they are also China's largest coal miner. China's largest oil producer (Petro China) recently announced it will sell $5 billion worth of stock. China Shenhua raised $9 billion. Basically the Chinese energy and coal plays are in huge demand for the very reasons Hambro and Barron’s mentioned months ago.
2) EEC's coal project has the potential to be incredibly valuable. It is mining coking coal used in the manufacture of steel - critical to China. Coking coal commands the highest price of all the coals. EEC’s project at this stage has 311 million tonnes - EEC's 12.74% interest is 40 million tonnes (coking coal realistically sells for approx. $100 per tonne in the region).
3) The government needs to make formal approval of their joint venture. However, after speaking to Howard Ratti (East Energy's CEO), it is obvious they are not dealing with micky mouse companies in China. EEC’s partner is China Minmetals (www.minmetals.com.cn). Minmetals is a Chinese multinational that does almost $17 billion in annual revenue. Impressive partners for little EEC, and both parties are just as eager to get formal approval.
4) The coal basin EEC is sitting on is estimated at 1.7 billion tonnes. About 20km to the west is another basin of approx. 1.4 billion tonnes that is actively being explored by major corporations and the Chinese. The growth and production potential of this region is enormous. The Chinese government is also actively working to put infrastructure like rail, etc. in place for development.
So why would such a large corporation (Minmetals) want to work with someone so little as East Energy?
The simplest answer is, management.
Luscar Ltd. was the largest coal mining company in Canada before being bought out by Sherritt (with strong backing from the Ontario Teachers Fund). Howard Ratti (East Energy's CEO) was the senior Vice President at Luscar with almost 30 years of hardcore mining experience. He has intimate knowledge of all aspects of running large coal mining companies (both profitably and safely) - the Chinese are desperate to get western mining methods and standards in place (especially in the coal industry).
Ratti saw the potential to run (and grow) his own coal mining company so he jumped on board with East Energy. Along with him came the former VP of Finance for Sherritt, and behind the scenes a fellow who retired from Luscar as their VP of Marketing. Along with these key individuals came a highly experienced Chinese National named Dr. Cai, another fellow who served five years as Canada's Ambassador to China and Mongolia (Howard Balloch), and Richard Buski, who was a managing partner at Pricewaterhouse in Russia (very strong international experience).
This group is more than capable of building this small company into a serious international coal mining concern. Management is key to most of these smallcap and microcap companies and typically this is just as important as the projects.
The company's strong cash position reduces the need for financing well into 2008 - unless it lands something big and requires the funds at higher prices. If EEC gets government approval for this current project, the stock will respond quickly. However, the company is also looking at more projects throughout China and Canada so it will eventually have strong diversification.
Personally I believe the potential with this management group is exceptional, whether that comes on the heels of the current coal project, or another. It’s the type of stock you tuck away for three to six months and wait for patiently. Since falling back from a dollar in May, the stock tested the mid 70-cent range recently, but with weakness in the market, it’s now consolidating in the 50-cent range again. It can be tightly held down here but tax loss selling over the next 30 days should create decent liquidity.
Disclosure: Danny Deadlock owns 20,000 shares of East Energy Corp. (TSX: V.EEC).