Deutsche Bank report:Project delivery the continued focus as MCC...

Deutsche Bank report:

Project delivery the continued focus as MCC aims for 9.2mtpa by 2014

Codrilla has been confirmed as the 'fourth mine' and concurrently MCC's share has been sold down to 73.3% (from 85%) for A$74.9m to give Codrilla the same ownership structure as Coppabella and Moorvale. Given the company has mentioned the fourth mine for sometime, it is already in our numbers; we assume Codrilla will contribute to production from the end of FY13. With current and potential production below available port capacity, we continue to see project execution as the key. Trading close to our valuation of $12.10/sh we retain a Hold.

Codrilla a potential 3.2Mtpa project with construction from CY12

With an initial reserve of 50Mt, Codrilla will be a conventional open cut mine. The new processing plant is expected to have a ROM production of up to 4Mtpa with 80% yield (for 3.2Mtpa). Given cost pressures since the initial capex guidance of $250-300m (over 12mths ago), we assume $360m over CY12 and 1H 2013 before first production in JQ 2013 (FIRB and environmental approvals remain risks).

Growth is available but can MCC deliver?

MCC recently increased resources at West Rolleston (thermal coal) from 80Mt to 369Mt and Vermont East/Willunga (majority low vol PCI) from 165Mt to 498Mt.

Combined with a $25m exploration program, there are opportunities available for growth. There are also port options available through Dalrymple Bay Coal Terminal or Wiggins Island Terminal expansion. We currently model 7.9Mt in FY14, lower than the 9.2Mtpa company guidance as we remain cautious on delivery. FY11 NPAT guidance $240 - 260m including sale proceeds (prev. $185-205m)

The Codrilla sale will see 3 separate cash inflows (20% post FIRB approval, 40% in FY13 and FY15). We currently model FY11 NPAT of $243m however after adjusting for the Middlemount coal payment ($41.9m) and Codrilla sale of $55m (after tax), our NPAT is A$146m. With the Codrilla sell down in-line with our expected proportional valuation, NPV was unchanged and the EPS impact minimal.

Target price $12.10 (unchanged); retain Hold

The target price is set in-line with our NPV of $12.10/sh. Our target puts MCC on an FY12 PER of ~8x, less than the 5yr average (see page 6). Our NPV is DCF derived and uses a 10% WACC, real LT PCI price of US$95/t and LT AUD 78c.

Downside risks are further sales losses on disruptions due to minimal stockpiles, and delays to the Middlemont commissioning