US Edition Caledon Resources
34¾p+¾
Questor says BUY
It looks like a buying opportunity has been presented in Australian coking coal producer Caledon Resources. Its shares have plunged more than 40pc over the past 10 days after the end of a potential bid situation making it an attractive addition to the more speculative part of your portfolio.
Caledon’s output from its Cook Mine in Queensland is used in the production of steel. The company also has exploration upside – it owns the nearby Minyango exploration concessions and has conducted a number of drilling programmes in preparation for a feasibility study.
On December 8, Caledon said its business was no longer up for sale. The group received an approach in January this year and invited other companies to run their slide rules over its business.
However, no party came through with a final and binding offer, so the group ended the process after 10 months of talks.
Mark Trevan, Caledon’s managing director, told Questor that, although discussions had been positive, expectations about the valuation of the business changed over the period of the offer talks.
As the outlook for coking coal prices improved, expectations of the company’s valuation also improved and the potential acquirers did not come back with a formal offer. Caledon then moved to end the uncertainty, but this has punished the share price.
The outlook for coking coal is upbeat. More than 50pc of global steel production takes place in China, while India is also ramping up production. Queensland has significant coal resources, with all the major players in the industry such as BHP, Xstrata and Vale having operations close to Caledon’s mine.
Another positive for Caledon is the fact that it already has railway infrastructure that goes to Cook and this railway passes through its prospect at Minyango. Infrastructure in this part of Australia is real problem, but the fact the group does not need to build a railway is a real boon.
However, there are issues with Australia’s ports. Along the Queensland coast, ships queue at the port in order to load up. Australia trade magazine the McCloskey Coal Report said this week that 13pc of the world’s bulk carrier fleet is currently tied up off the coast of Australia.
A new port is being built at Wiggins Island, but it will be 2013 until this is ready. Obviously, if this infrastructure issue is not sorted out by the Australian government then this could cause problems for Caledon.
The group expects to increase coal production at Cook to an expected 485,000 tonnes in 2009 to 700,000 tonnes in 2010.
The group expects a net loss of A$3.5m to A$5m (£1.9m to £2.8m) for the second half of 2009 as it battles against a stronger Australian dollar but coking coal’s positive outlook should counteract this.
Coking coal prices are set in the annual round of negotiations in April, the same as with iron ore. This April, there should be a substantial increase in the price of the contracts as China continues to soak up raw materials and coking coal is extremely important in construction. This year one tonne of coking coal was sold at about $128 (£78). Citigroup expects this to rise to $200 in April and Macquarie sees contract prices at $185.
Although it does not pay a dividend and is not without risk, Questor believes a speculative investment using a small amount of cash in Caledon Resources could yield impressive returns.
As one of the few independent coking coal plays anywhere in the world, the stance is buy.
Serco
523½p +1
Questor says BUY
Outsourcing group Serco, which runs the Docklands Light Railway and the National Physical Laboratory, yesterday reiterated its confident guidance, saying it expected to meet full-year forecasts. Revenue growth is expected to be in the double-digit area and profit margins are expected to rise by 30 basis points. Full-year results will be published on February 26.
The UK is swamped with debt and the next government – whichever party gets into power – will have to make some tough choices. In his pre-Budget report last week Chancellor Alistair Darling said: “We will sell those assets that can be managed better by the private sector.” Outsourcing businesses such as Serco should benefit significantly from this.
The company has now won contracts worth £5bn this year, compared with the £4.5bn announced at its update in November. Serco continues to look for new business in the UK and abroad and it has a pretty full bid pipeline. It is applying for contracts in the UK to help long-term unemployed and US defence contracts, among many others.
The shares are trading on a high multiple, but Questor feels this is justified. The December 2009 earnings multiple is 18.7, falling to 16.1 in 2010.
The yield, at 1.2pc, is nothing to get excited about, but the dividend is more than four times covered by earnings so there is ample scope for an uplift in the payout.
Shares in Serco were recommended at 455.9p on September 2 and they are up 15pc compared with a market up 10pc. The shares remain a buy.