Ann: MCC Increase in Coal Resources , page-7

MCC selects Codrilla as 4th mine and sells down 13.76% of its interest

MCC announced it has selected Codrilla to be the 4th mine (inline with our expectations). In addition, MCC announced that Codrilla (MCC 85% interest) will be sold to the Coppabella Moorvale JV (MCC 73.3% interest). MCC will receive $74.88m for the dilution of their interest from 85% to 73.3%, valuing 100% of Codrilla at $640m. The consideration will be paid in three instalments; 20% upon the transaction becoming unconditional, 40% by 31 March 2013 and 40% by 31 March 2015. We estimate the NPV of this payment steam is $490m (at a 10% d.r.).

Operationally, the sale makes a lot of sense as the 3 mines (Coppabella, Moorvale and Codrilla) can be managed as 1 entity, which ensures synergies can be unlocked in shared use of current operating infrastructure, resources, skilled people, as well as blending.

The Codrilla project, is located ~30km east of the Moorvale Mine. It is expected to produce approximately 3.2Mtpa of low volatile PCI product for export through existing contracted port capacity at Dalrymple Bay Coal Terminal. We assume first production in 2013.

As a result of the selldown, MCC have revised upwards their FY11 NPAT guidance from $185-205m to $240-260m, implying a $55m profit on the sale. Operationally, MCC's profit guidance is unchanged from that released to the market on May 4.

Earnings changes
Including the selldown of equity in Codrilla for $76m increases our NPV by 1% to $12.33ps. Our earnings are largely unchanged, as first contribution from Codrilla is assumed from 2H FY11e.

Investment view
We have heard some reports that weakness in Japanese coking coal demand has impacted spot semi soft and PCI spot prices. A recent article from Platts suggests a spot semi soft cargo was sold for US$225/t cfr.

We have a Neutral rating on MCC. The prospect of declining spot metallurgical coal prices as the Australian coal industry recovers post the wet season and the potential for near-term volume impacts from the Japanese steel industry as it recovers post the earthquake suggests to us that the stock is fairly valued at current levels.