Small Caps | Dec 05 2011
– Citi initiates with Buy Rating on Bathurst Resources
– High quality output an attraction
– Bathurst also a potential M&A target
– Permit approvals the main issue in Citi's view
By Chris Shaw
Bathurst Resources ((BTU)) is a developing coal play with a coking coal operation at South Buller in New Zealand. Production is expected to commence in FY12 via an underground mine at the Escarpment project, with output of around two million tonnes per annum the initial target.
Stockbroker Citi has picked up coverage on Bathurst, rating the stock as Buy, High Risk. The risky part of the recommendation is while Bathurst lacks scale at its individual operations, the company has a number of high quality smaller assets.
This leads Citi to suggest regulatory permits will be of great significance to Bathurst, as plans to develop the Escarpment project have met with some opposition. This may mean another nine months of court hearings and determinations before construction at the project can commence.
Initial production at Escarpment is expected to be around one million tonnes per year. As part of a staged development process, Citi notes management's longer-term goal is production of around four million tonnes per year.
Making up for the small and short-life nature of Bathurst's assets, in Citi's view, is the fact output will be a very clean coking coal that is low in ash and phosphorous. This makes the output from Bathurst ideal for blending, something Citi expects could deliver a premium to benchmark prices of 5-15%.
At present the plan is for Bathurst to produce all hard coking coal over the first five years, which should see strong margins initially. Other assets will add semi-soft coking coal and possibly thermal coal to the mix in the future.
With high quality output to come, Bathurst is something of a target for M&A activity in Citi's view given the quality of its coal provides the company with a different strategic attraction. Citi notes metallurgical coal company transactions average US$240-$350 per tonne of annual production, which would imply a value of US$550-$800 million for Bathurst. This compares to a current market capitalisation of around US$480 million.
The permit issue for Bathurst continues to impact on what was an aggressive project development timetable. As Citi notes, initially Bathurst had expected to commence production at Escarpment late this year and ramp-up to one million tonnes per annum by 2013 and two million tonnes per year by 2014.
Given the delays to approvals at Escarpment, first production will now come from the Cascade and Coalbrookdale projects, while Citi sees the purchase of Whareatea West as offering Bathurst some additional flexibility until Escarpment can start. The Deep Creek project is now likely to be pushed out to the end of this decade.
One further issue stemming from the delays at Escarpment relates to Citi's view that commodity prices have now peaked. This means the delays to start-up will have a greater impact on earnings for Bathurst the longer output is delayed.
Factoring in both the risks and rewards for Bathurst, Citi sees value at current levels. This is reflected in the broker's $0.90 price target. Others in the market agree, as the consensus price target according to the FNArena database now stands at $0.97. Targets range from Citi at $0.90 to UBS and Credit Suisse at $1.00.
Citi points out a positive for investors is Bathurst has solid daily turnover in its shares of around $5 million per day. This is well above all peers with a similar market cap and compares favourably to larger cap plays in the sector.
While current resources of 85 million tonnes and reserves of 17 million tonnes are small, Citi notes management has targeted an increase of 55-94 million tonnes of resources as Bathurst continues with its exploration program.
UBS agrees Bathurst shares offer solid upside potential at current levels as new projects come into production, so UBS also rates the stock as a Buy. Credit Suisse is more cautious given the risk of project delays stemming from the approval process and so rates Bathurst as Neutral.
Shares in Bathurst Resources have traded in a range over the past year between $0.545 to $1.30. The current share price implies upside of around 40% to the consensus price target in the FNArena database.
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