A New Era in Coal is Here

Report Date: 28 October 2009

Analyst Details
Company: Southern Cross Equities
Analyst: Fleur Grose & David O’Halloran
URL: http://www.sceq.com.au/

Summary

WEC’s first commercial upgrading plant has been commissioned, and first coal sales are expected in December. This significant milestone for WEC marks the beginning of a new era for thermal coal. It is now possible to upgrade low value coal to increase its energy content but maintain the low impurities, bringing both economic and environmental benefits. WEC is ready to exploit this massive opportunity.

First plant is successful, and Bayan wants more
WEC has built its first commercial 1Mpta upgrading facility in a JV with Bayan Resources in Tabang Indonesia. The plant is now commissioned and coal briquettes are being stockpiled ready for sale in December. The JV is planning to expand this facility to 5Mtpa with a decision due in Q1CY10. Ultimately Bayan is looking to expand capacity to 15Mtpa, as the technology has the ability to increase the value of its coal. Shares in Bayan are up six fold ytd due to the production expansion opportunities, highlighting the value this technology brings to WEC and its partners.

Ready for the global roll-out
WEC’s next priorities are to progress the Tabang expansion to 5Mpta, and obtain the permits necessary to build plants in the US, initially one at the Buckskin mine and five in a JV with Peabody. We value 11Mpta of capacity at A$5.04/share and 61Mtpa of capacity at A$21.75/share. With only 1Mpta of capacity constructed, we remain conservative and have set a short term price target of A$3.50 to account for development risks. However we maintain a Speculative Buy, and the view that the company is likely to transform into a substantial growth stock over time.