Fuelling the future

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

Summary

Superior technology upgrades coal from low to high quality
Massive global market opportunity with significant margins
Strategic partnerships with major coal producers
Initiating coverage with a Speculative Buy and $4.50 target

Thermal coal arbitrage

White Energy Company is the exclusive worldwide license holder of the patented White Coal Technology, a mechanical process which uses drying and briquetting to convert poor quality coal into a higher value, cleaner product. The low cost process allows WEC and its partners to take advantage of the price differential between low and high quality coals.

Global footprint established. White Energy has reached agreements with major coal producers globally to commercialise the technology. A 1Mtpa plant is under construction in Indonesia in a JV with Bayan Resources (WEC 51%). An agreement has also been reached to build 1Mtpa plants in partnership with Adaro/Itochu in Indonesia, Datang in China, and NRG/Buckskin in the US. All partners have expressed interest in growing capacity rapidly beyond the initial level. BHP Billiton has secured the global marketing rights to the product sold on the export market.

Win/Win partnerships. Coal demand is rising rapidly as it is cheaper and more abundant than other fuels. However increasing regulation means coal needs to be cleaner to be viable, so there is a massive market opportunity for White Coal. At the same time there is a clear economic benefit. The current price differential between low and high quality coal in Indonesia is ~US$90/t, and at a cost of US$35/t to process, the profit of US$55/t provides a payback of less than one year on the initial outlay of US$45/t, which is compelling economics.

Commissioning of the first full scale plant to drive re-rating. Our price target of $4.50 is based on our 12 mth DCF valuation which includes a 1Mtpa plant for Bayan, Adaro/Itochu and NRG/Buckskin. The Bayan plant is due to be in full production by September 2009, and is expected to be a key catalyst for the stock over the next 12 months. However in the medium term, we expect further agreements to be signed, and expansions to be undertaken, which would see the company transform into a substantial growth stock with a possible upside valuation in excess of $15/share.