From Concept to Reality

Report Date: 08 March 2010

Analyst Details
Company: Southern Cross Equities
Analyst: Fleur Grose

Summary

Coal sales from WEC’s first commercial coal project in Indonesia are expected in April. This significant milestone marks the beginning of a new era in the coal industry. It is now possible to upgrade low value, high moisture coal to increase its energy content but maintain the low impurities, bringing both economic and environmental benefits. WEC is poised to benefit from this opportunity.

Slow to ramp up, but the technology works. WEC has built its first commercial 1Mpta facility in a JV with Bayan Resources in Tabang Indonesia. The plant is not yet producing at full capacity. However, the core process works and briquettes are being produced. An upgrade of the dust extraction system is due to be complete in May which will allow ramp-up to full capacity thereafter. The first product sales are expected in April, so that together with the recent addition of WEC into the S&P/ASX 300 index, should be key catalysts for the stock.

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 one in a JV with Peabody. In the next 5 years WEC plans to have 45Mtpa worth of capacity in place. We conceptually value 45Mpta of capacity at A$17.35/share. With only 1Mpta of capacity constructed, we remain conservative and have set a short term price target of A$4.00 (previously A$3.50), equivalent to a valuation of 6 working plants. We maintain a Speculative Buy, and the view that the company is likely to transform into a substantial growth stock in time.