the bull says jal - stock of the week

By Tim Morris | 10.08.2009

Company: Jameson Resources Ltd
ASX Code: JAL
Share Price: $0.56
Market cap: $33.5m
Recommendation: ‘Buy’


Recovery is now front of mind for most economists and investors, and energy, a key issue prior to the financial meltdown, appears to be returning to fashion. Oil is the most liquid indicator of global energy demand and has more than doubled off its lows near US$30/bl earlier in the year. The action in coal markets has also been promising. Spot prices out of Newcastle (the biggest coal export terminal in the world) have risen from lows of US$60/t, to current levels of US$76. However should this recovery continue gaining traction, there’s still a long way to go before coal prices can reclaim their former glory, with their mid 2008 peak sitting way above at US$192.50/t.

Speculation aside, the recovery we’ve seen thus far is good news for emerging coal producer Jameson Resources. Having taken advantage of the financial crisis and depressed asset prices to secure a quality ‘brownfields’ coal project, we expect the stock will start to creep onto more investors radars over the coming months.

Right near the depths of the bear market, Jameson managed to secure the rights to the Basin Coal Project in British Columbia, Canada. The project came with an existing open pit mine and a defined resource of 19million tonnes of bituminous thermal coal. Its previous owners were producing at a rate of 75,000tpa, however with the right infrastructure in place, Jameson has plans to produce up to 1mtpa.

Infrastructure is a key attraction of the Basin project. Having been previously mined, the presence of existing roads and processing facilities should dramatically lower start up costs. No doubt some investment will be required to upgrade these facilities to a level where they can support 1mtpa, however we expect the upfront costs to be modest relative to the project’s potential. Upfront capital cost estimates should be available once the recommissioning study currently underway is released in the coming months.

So why was the mine ever decommissioned? Basin was previously mined from 2002-06. Production was halted when a provincial lobby banned the use of coal fired power stations in British Columbia. So with fewer domestic customers to sell to and spot prices around 40% lower than current depressed levels, the project economics painted an entirely different picture. Enter 2009, and the current coal pricing regime means power demand in British Columbia isn’t the ‘be all and end all’ for local coal producers. Export markets in Asia are hungry for coal. And with Basin being one of the closest deposits to Canada’s Westshore Terminal – the biggest coal export facility on the West Coast of North America – servicing these markets is within close reach.

With forecast operating costs of US$60/t, Jameson stands to make a $16 margin on each tonne at current prices. Relative to its current market value of $34m, the potential cashflows on offer appear very attractive. Coal prices are of course the key risk, however with production expected as soon as next year, the threat of the market landscape changing dramatically is significantly reduced. Apart from near term production, we expect the coming recommissioning study to be a key share price driver. Having just upgraded its resource base by 515% to 117mt, Basin could become a very lucrative long life asset, which is why we rate Jameson Resources a ‘Buy’.

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