March 29th, 2009

When writing about Goldsource Mines, I realized that it's hard to really get a good grip on the pricing of coal. All coal deposits seem to have different characteristics, but by doing some fairly simple comparisons one can perhaps estimate a reasonable price. Below are excerpts from Homeland Energy and Goldsource Mines - about their coal quality:

HEG.TO: "up to 26,000 kJ/kg, 12-13% Ash, 53% FCC (fixed carbon content), 4% H2O, low sulphur"

GXS.V: "20,640 kJ/kg (8,874 Btu/lb) to 23,358 kJ/kg (10,042 Btu/lb) on a "dry" basis. The seam has raw ash values ranging from 11.4% to 18.7% and moisture contents from 24.8% to 37.9% on an "as received basis". Once air dried, the moisture contents drop significantly to as low as 4%."
(FCC was on average ~44%)

In the 3Q of 2008 HEG signed a contract to deliver coal at $88/tonne. The comparison above shows that the HEG coal is a bit better than the one of GXS, but the difference is not that great and besides GXS is still in a very early stage. So as an addition to my previous post, I would claim that $50/tonne for the GXS coal isn't unreasonable.

Now that that's out of the way we can look closer at Homeland Energy. This company is operational in South Africa with one producing mine, two mature projects and a couple of exploration properties. The exploration properties have not yet yielded significant results so I will not get into those. The position of this company is a bit similar to that of GXS, their shares have crashed from about $2 this summer to $0.2 today. The mcap is ~$30M.

The operational mine (Kendal) began deliveries of coal in October 2008 (as mentioned above) at a rate of about 500,000 tonnes a year. The production rate will be ramped up to about 1.8M tonnes and the EBITDA-result is expected at ~$15M in 2009 and as production increases, ~$20M in 2010/11. The resource at Kendal is today at 34M tonnes, the expansion-potential of the resource-base currently looks limited.

The mature projects (soon to be in production) are the Northfield and Eloff projects. Northfield is an old shut down very high-quality coal (coking coal) mine that has a tiny resource left, but will give a small profit for a few years, when operated (cash-costs to get it going are ~$1M).

What's really interesting in terms of resource is the Eloff project. It has an estimated resource of about 500M tonnes of coal with about the same quality as Kendal. It's projected to begin production in 2011/12 for a initial cost of ~$100M, but this would be a very large, very profitable operation that would be running for many years. Profit from Eloff is expected to end up above $32M EBITDA per year.

I should mention that HEG also has a holding of 42% of the Homeland Uranium corporaton. The cash-position of the company today is ~C$8M. What's a little worrying is that they have about $36M of liabilities, but most of these can be written off as the company starts making money (unrealized gains).

As I've mentioned in my post about PGM's, I'm not too optimistic about the situation in South Africa. However, the state-run energy company Eskom is mainly running on coal, so really the outlook for a SA coal miner might actually be quite good (unless the state confiscates the mines). Well, they haven't really confiscated anything yet as far as I know, but things could get crazier in this country, just bear that in mind when investing there. HEG is expecting a $46M EBIDTA-profit in 2011 and although I'm certainly no seer of coal price development, I think it's a fair estimate.

The uncertainty of the South African situation is a pretty large cloud in the sky, but I wouldn't worry too much. HEG has a comparatively very low valuation today and a large proven resource with production already bringing in plenty of money. In conclusion I would say that there's easy money to be made in this company, unless some very unfortunate development brings down coal prices heavily.