Cline Mining Corporation T.CMK

Jenning capital cmk 12-Month Target:$3.00

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CLINE MINING CORPORATION 12-Month Target:$3.00

(TSX-CMK$1.23) Risk Rating: ABOVE AVERAGE
INITIATING COVERAGE


Summary – We are initiating coverage on Cline Mining Corporation with a SPECULATIVE BUY recommendation and 12-month target price of $3.00. Cline is developing the New Elk Coal Mine, an underground coal mining project in Southern Colorado. CMK plans to restart production of metallurgical coal in Q4/10 (ending November 30), and is targeting 1.2 million tons (all references are to short tons unless otherwise noted) of production in FY 2011. The Company would then work toward reaching a 3.0 million ton/year production level by FY 2013. We view CMK as a play on growing demand for metallurgical coal (and therefore steel), with considerable production growth potential.

The Coal Resource – The most recent 43-101 estimate (March 2010) reported Measured & Indicated coal resources of 78.9 million tons of coal. While this is sufficient for a 20-year life of 3 million tons/year, the estimate reflects only the near-term mine plan. The May 2008 43-101 estimate reported Measured & Indicated coal resources of 315.0 million tons, which could potentially support a coal production capacity of 6 million tons/year.

Project Status – Cline recently received MSHA approval to start underground rehabilitation of the mine, which is expected to be completed in July 2010. There are several plant and equipment initiatives to be completed prior to commencing production, including rehabilitation and expansion of the preparation plant, equipment procurement and upgrades to the power supply. Management expects to begin production by the end of Q4/10 (November 30).

The Coal Industry – Metallurgical coal has traditionally sold for a premium over thermal coal, which has increased 40% over the past several years. In our view, this reflects stronger relative supply/demand dynamics for metallurgical coal, which we expect to persist for the foreseeable future. Benchmark spot prices have retreated slightly to approximately US$220/metric tonne (or mT), but recently reached the US$240-$250/mT level owing to a recovery in demand combined with supply constraints from key markets, particularly Australia, the U.S. and Russia.

Valuation – Our NAV estimate (10% discount rate) suggests a value of $2.88/share. We note that CMK offers significant leverage to coal pricing, with current benchmark pricing supporting a target of over $5.00/share. We estimate that each US$25/mT variation from our benchmark coal price assumption changes our per share valuation estimate by approximately $1.20/share. Moreover, the recent acquisition offer for MacArthur Coal (rejected by that Company’s board) implies a three-year target of over $10.50/share based on production capacity. We therefore believe there is considerable upside to our estimates and valuation.


Sector: SPECIAL SITUATIONS Analyst: RUSSELL STANLEY, CFA, MBA


e-mail: [e-mail] Tel: [phone] Fax: [phone]Associate: GRACE VONG, CA


e-mail: [e-mail] Tel: [phone] Fax: [phone]

Cline Mining Corporation is a mine development company focused on the exploration and development of metallurgical coals in Canada and the U.S. The Company is currently developing into production its 100% owned New Elk Coal Company Statistics52-Week Range $2.75 to
.30Basic Market Cap ($MM)$160.6Basic Shares O/S (MM)130.5Fully Diluted O/S (MM)147.5Cash ($MM)*$45.0Total Debt ($MM)*$21.3Major Shareholder I - Pinetree Capital*13%Major Shareholder II - Mitsui Matsushima*14%Earnings SummaryFYE: November2010E2011E2012E2013EAnnual Production (st)0.00.62.33.0Net Sales ($MM)$2.4$71.7$276.8$326.9EBITDA ($MM)($12.1)$13.9$115.0$161.2EBITDA Margin (375.5%)14.6%30.6%35.3%Diluted EPS (
.08)
.04
.40
.57Operating CF PS(
.06)
.05
.42
.59EV/EBITDAnmf9.8x1.2x0.8xP/Enmf28.1x3.1x2.2xP/CFnmf25.6x2.9x2.1x* Q2/10E Estimates, reflecting April 2010 financing.Please see important disclosures on pages 37 and 38.


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