■ MCC released its SepQ production report, the 1.266Mt of sales for the quarter annualises to 5Mt, in line with guidance and our forecasts for FY11. MCC has been able to absorb recent heavy rain largely by drawing down inventories. This has left MCC (and most QLD producers) susceptible to further poor weather as we believe inventories are now low throughout the coal chain. It is also worth considering that QLD coal companies normally build inventories over January-March to prepare for the traditional wet season. This year MCC will need to re-build inventories to get back to "normal levels" prior to stockpiling for the regular wet season – DecQ will be important.
■ FY11 remains on track for now. MCC is on track to achieve 5Mt sales guidance for FY11, although weather remains a wild card that we will continue to watch. MCC has a dual challenge of "catch up" overburden mining as well as normal coal mining. ROM coal production at Coppabella of 689kt was the lowest since March 2009 (traditional wet season), while overburden removal of 9.948bcm remained high. This is partially caused by the impact of recent wet weather (dragline can continue mining, but limits trucks and excavators), but it is also a function of the financial downturn when MCC stopped mining over burden to save cash.
■ Weather in QLD is the near-term catalyst for met coal prices and MCC.
■ Our valuation and rating is unchanged. We have increased FY11 earnings by 2.8% (Figure 2), which reflects actual results for SepQ. We continue to like the medium-term met coal thematic but believe MCC is fully valued at current levels of 16.4x and 12.7x of FY11 and FY12 earnings – our earnings forecasts assume a A$20/t increase in realized coal prices in 2H10. We would see a pull back in the MCC share price as a buying opportunity.
ROYAL BANK OF SCOTLAND:
1Q11 sales ok despite the weather 1Q11 sales of 1.3Mt were in line with our forecast despite intermittent wet weather inhibiting mining access. MCC supplemented mined tonnes by drawing down on ROM and in-pit coal stockpiles leaving 2Q sales more vulnerable to unseasonal weather should it continue. The Bowen Basin has suffered from unseasonably high rainfall filling catchments and site water storages, particularly in the Southern Bowen Basin where some mines have declaring force majeure (Rolleston) or are having difficulty managing coal quality (German Creek). There is definitively a feeling of fragility among producers, traders and customers alike coming into the summer wet season, which could result in a spike in tension and therefore pricing.
Changes to forecasts We have downgraded our FY11-13 earnings by 14-22%, based on recent upgrades to our currency price deck (FY12 up 14%) and moderation to our short-term met coal prices. The impact to our valuation is partially offset by a lift to our long-term coal price assumptions (hard coking coal up 16%), which are now more closely aligned with the market. We are encouraged that MCC is still achieving a 96% PCI sales split (RBSM:90%) suggesting the marginal Chinese buyer of poorer quality PCI coal is still active. Hopefully, currency impacts are absorbed by seasonal price tension into the summer. Preference remains for GCL in metallurgical coal
We anticipate seasonal strength in metallurgical coal pricing. However, MCC is already trading at a roughly 10% premium to our valuation. For leverage to this thematic, we continue to prefer Buying GCL which is still trading at a more than 10% discount to our valuation. As a NSW based producer, GCL faces lower risk to sales disruption due to weather, in our view, but would still enjoy the leverage that rising prices would provide.
UBS:
Weather results in run down of stockpiles EVENT: MCC reports September quarter production The quarterly was slightly weaker vs our estimates due to wet weather, but the market was aware of the weather impacts and so result appears reasonable.
Production was 1.30Mt, -2% vs UBSe, sales were 1.27Mt, -5% vs UBSe. Wet weather impacts were managed by running down ROM stockpiles, so likely to be a greater impact on December quarter production/shipments if rain persists through the December quarter. PCI coal represented 96% of sales for the quarter.
IMPACT: Downgrading FY11e NPAT 9% to $274m on lower shipments
We have downgraded our production forecasts for the December quarter to account for wet weather impacts. We are now forecasting sales of 5.0Mt for FY11e, down from 5.3Mt and now back inline with MCC guidance. We had previously thought MCC?s guidance for 5.0Mt was conservative in light of their sales performance in FY10e of 5.3Mt. We have also made minor changes to our cost assumptions, interest revenue assumptions. Our FY11e NPAT is downgraded 9% to $274m.
ACTION: Neutral, prefer GCL for met coal exposure We believe the market may be anticipating the potential for wet weather to disrupt QLD coal supply and boost coal prices in the QLD wet season. While MCC may benefit GCL provides better exposure as it will have less volume risk as NSW does not have a monsoonal wet season in Dec-Mar like MCC.
VALUATION: $12.29 (DCF, 10% d.r.) Our price target is based on our 1 year forward NPV.
DEUTSCHE BANK:
Macarthur released solid September Quarter results with Coppabella production in line with DBe at 733kt and Moorvale 567.3kt (vs DBe 577kt); overall production was 1,300kt. It was positive to note that during the quarter Low Vol PCI sales were at 96% of total sales indicating high met coal leverage. Sales were 1,267kt which was a 4% decrease from the corresponding period, mainly due to some wet weather issues which also caused Coppabella ROM stocks to decrease. Moorvale production was also impacted by some unplanned maintenance which reduced equipment availability.
Exploration expenditure for the quarter was $3.4m as six rigs focused on the Willunga exploration program, Monto project and the continued drilling at the Olive Downs North mining lease. Middlemount mine remains on track with the first coal processed in September after a long-term take or pay contract for 3mtpa was signed with Pacific National.
Our target price is set at a 20% premium to NPV valuation to reflect the metallurgical coal leverage as well as the potential underground growth options.
Our NPV is DCF derived (WACC 10.2% to life of mine cashflows; Beta 1.3, CoE 12.43%, CoD 7%, and gearing (long term) of 30%). Downside risks are operational shortfalls and further rain events through summer. With sales already maximised, upside risk is limited to early delivery of the Middlemount mine or higher than forecast realised coal prices. We retain our Hold rating and price target of $13.00/sh.
MORGAN STANLEY:
Quick Comment ? FY11 Coal Sales on Target: MCC?s September coal sales of 1.3Mt (equity share) was impacted by unseasonal wet weather during the quarter. Therefore, coal sales of -4% on the previous quarter was a solid result for the company. Coal sales remain on target to achieve the company?s guidance of 5.0Mt for FY11 (MS est. 4.99Mt).
PCI Pricing Remains Soft: With steel production remaining subdued, demand for lesser-quality coking coal products, such as PCI, also remains soft. We understand spot pricing for PCI is at US$150/t FOB, slightly higher than the current benchmark price for the quarter of US$147/t. This puts at risk our Q1-2011 PCI estimate of US$184/t.
Infrastructure Improving, But Remains Below Full Capacity: Planned maintenance and commissioning works have been completed to increase the rail capacity to meet the DBCT port capacity of 85ktpa. We forecast DBCT throughput performance for the remainder of this calendar year at above the 70Mtpa rate. The year-todate throughput rate for DBCT is currently 65Mtpa.
Middlemount Development On Schedule: MCC continues to progress an EIS to approve an increase in production at Middlemount up to a maximum of 5.4Mtpa.
It expects approval to be obtained in the December half of 2011. The rail spur to the Middlemount mine remains on schedule to be completed in the December half of 2011. Construction of the Goonyella-Abbot Point Expansion project continues to progress on schedule and budget. We estimate that coal sales from the Middlemount mine will begin in early 2012.
MCC Price at posting:
$12.67 Sentiment: Hold Disclosure: Held
