White Coal Technology close to reality

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

Summary

First coal sales bring revenue and growth options

WEC has developed and demonstrated a process which upgrades low value coal to high quality export thermal coal. The construction of its first 1Mtpa plant at the Tabang coal mine in Indonesia in partnership with Bayan is now complete. Commissioning is underway, targeting full production in Sept 2009. Successful start-up should bring the first revenues, and generate interest from new and existing partners. As such, Bayan has agreed to increase the scope of its JV with WEC to 15Mtpa from 5Mtpa.

Global footprint continues to expand

WEC initially chose to establish partnerships to build plants in Indonesia, the US, and China. Indonesia is a key growth region for meeting Asia’s growing coal demand, and the US is the largest producer of low rank coal. WEC continues to actively review other business development opportunities in these key countries and elsewhere globally. Two new agreements have been signed recently covering Mongolia and Africa.

Potential merger provides a funding solution

Now with extensive growth options, WEC is in need of additional capital. The US listed ASSAC has proposed a merger which would provide WEC with US$100m in cash, sufficient for all near term capex requirements, in exchange for dilution to approx. 65% ownership of the operating subsidiary.

Our near term price target of $2.50 is based on our valuation which only assumes a 3Mtpa plant for Bayan and 1Mt plant for NRG/Buckskin in the US, and has been diluted assuming the ASSAC merger finalises. However, in the medium term we expect further expansions to be undertaken, which could see a possible upside valuation in excess of $10/share.