The following is a summary of a Dundee Securities initiation report on Phoenix Coal dated September 5, 2008
Overview
Phoenix Coal is a coal producer based in the United States. Its assets lie in the Illinois
Basin of Western Kentucky.
Investment Summary
Phoenix is a seller of bituminous coal with sulphur and low chlorine content. Having attained its numerous properties through the purchase of other operators, management service agreements, and by leasing from mineral land companies, Phoenix has come to be the controller of 11 properties, 2 in Henderson and Webster counties and 9 in Muhlenberg County, Kentucky. As of December 31, 2007 Phoenix had reported “43.7 million tons of proven and probable coal reserves and 113.3 million tons of measured and indicated resources.” (Dundee
Securities Report)
Here’s the important stuff: Phoenix is expected to triple its production by 2011, from “2.1 million tons of saleable coal last year, to 2.6 million tons in 2008E and over 7.4 million tons by 2011E.” (Dundee Securities Report)
Phoenix is metamorphosing from an operator of several small surface operations with poor economies of scale to a company with 2 major underground operations namely Pratt and Panama South. Pratt and Panama South are very important to Phoenix’s future and Dundee analyst Harish K. Srinivasa assigns approximately 67% of his DCF valuation to these projects. Pratt and Panama South are expected to ramp up as early as mid-2010.
With Phoenix now having the ability to adequately capitalise many of its projects, old equipment is being replaced by new machinery which is expected to reduce downtime, increase productivity and production capacity and should also lower maintenance and decrease cash costs of these surface operations.
As older legacy coal contracts begin to expire, Phoenix should start realizing higher prices for its coal starting in 2010. As Phoenix’s current contracts are lower than spot prices of $72.50/ton, higher prices will positively impact Phoenix’s margins. Dundee analyst Harish K. Srinivasa expects “Phoenix to continue to enjoy readily accessible markets for its coal as more scrubbers are installed at existing power plants making high sulphur Illinois Basin coal increasingly desired.”
Financial Summary
“Phoenix reported cash and cash equivalents of $71.2 million, working capital of $60.8 million and 150 million shares outstanding as of June 30, 2008. In addition, there were 33.25 million common share purchase warrants, and options to purchase up to 13.46 million shares of Phoenix, resulting in 196.71 million shares on a fully diluted basis. Approximately 31.4 million of the warrants are exercisable at C$2.25 by June 30, 2010.”
Valuation and Target Price
Srinivasa of Dundee Securities initiated coverage on Phoenix Coal with a BUY rating, High Risk and a 12 month target price of C$2.20/sh. He pegs Phoenix’s NAV at C$2.23 per share, assigning “C$1.95 for the company’s after-finance
cash flow per share discounted at a rate of 10% and C$0.27 per share for cash and cash equivalents at the beginning of the year.”