RESEARCH NOTE – PATERSONS SECURITI ES LIMITED 1 All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof. RESEARCH NOTE COUGAR ENERGY LTD $2.1m loss for the half Cougar energy has reported a $2.1m loss for the December half, which was 45% higher than last year but inline with our expectations. Interest revenue was down 28% to $189k while expenses were up by 40% as the company gears up for its pre-production burn. Cougar has earlier announced that practical completion of its pre- production plant at Kingaroy was achieved at the end of January and that commissioning work and training of plant operators would be completed by the end of February. Crucially UCG ignition will “follow immediately thereafter” and is now imminent. Confirmation of a successful ignition, consistency, and gas quality should follow a few weeks thereafter. From our point of view this is one of those rare occasions when there is a predictable calendar event that we expect will provide the catalyst for a substantial uplift in investor sentiment. The review of the interim report by the Auditor has highlighted that in order achieve all of its ambitions and remain a going concern Cougar will have to raise more capital. We are fully aware of the need for additional project funding and note that on a plain look at the CXY Balance Sheet, the company has $13m in cash while it has only $1m in total liabilities – so no danger of insolvency or cash crunch. In addition CXY has recently signed an Equity linked Line of Credit with YA Global for a total of $10m. The price for the funding will be based on the equivalent number of CXY shares at a VWAP calculation. Over the next 12 months we expect that CXY will spend about $10m. CXY is considering revising its 400MW power station programme. An initial plant of about 5MW could be installed to generate electricity from the pre-production burn, rather than just flaring the gas, which would substantially offset the cost of the pre-production phase. Secondly, rather than going straight to a 200MW first phase, CXY is studying the viability of starting with a smaller unit, of between 30- 50MW in size, comparing whether the loss in economies of scale will be more than made up by profitable production arriving sooner. Our NPV on conservative future electricity prices is 19c and we attribute very little to the large coal resources and additional projects that CXY has in the pipeline outside of Kingaroy. For example, using similar assumptions for the Wandoan project as we have used for Kingaroy would yield a further 15cps depending on the start-up date. 1 March 2010 12mth Rating BU Y Price A$ 0.13 Target Price A$ 0.20 12m Total Return % 53.8 RIC: CXY.AXBBG: CXY AUShares o/s m 919.1 Free Float % 95.0 Market Cap. A$m 119.5 Net Debt (Cash) A$m -13.0 Net Debt/Equity % na 3m Av. D. T’over A$m 0.27 52wk High/Low A$ 0.13/0.05 2yr adj. beta1.58Valuation: Methodology DCFValue per share A$ 0.19Analyst: Andrew Harrington Phone: (+61 2) 8238 6214 Email: [email protected]Patersons Securities Limited acted as lead manager to the placement t hat raised $8.29 million at 8 .25 cents per share for Cougar Energy Limit ed in September 20 09. I t received a fee for this service. 12 Month Share Price Performance $0.02 $0.04 $0.06 $0.08 $0.10 $0.12 $0.14 $0.16 20 60 100 140 180 CXY (LHS) Rel. S&P/ASX 200 RES Performance % 1mth 3mth 12mth Absolute 18.3 19.6 111.5 Rel. S&P/ASX 300 19.8 21.3 50.6 On the verge of ignition. Year End J une 30 2009A 2010F 2011F 2012F 2013F Reported NPAT ($m) (2.9) (3.7) (4.3) (11.9) 6.4 Recurrent NPAT ($m) (2.9) (3.7) (4.3) (11.9) 4.4 Recurrent EPS (cents) (0.4) (0.4) (0.4) (1.3) 0.5 EPS Growth (%) na na na na na PER (x) (32.6) (33.6) (29.2) (10.4) 28.1 EBITDA ($m) (2.1) (3.0) (2.1) (1.9) 31.4 EV/EBITDA (x) (42.0) (40.0) (77.2) (178.8) 13.1 Capex ($m) 8.1 11.0 50.1 166.2 79.7 Free Cashflow (10.3) (19.6) (55.4) (179.2) (68.4) FCFPS (cents) (1.4) (2.1) (5.8) (18.8) (7.2) PFCF (x) (9.2) (6.3) (2.2) (0.7) (1.8) DPS (cents) 0.0 0.0 0.0 0.0 0.0 Yield (%) 0.0 0.0 0.0 0.0 0.0 Franking (%) 100.0 100.0 100.0 100.0 100.0
Transcript
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RESEARCH NOTE – PATERSONS SECURITI ES LIMITED 1
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibilityor liability on any account whatsoever on the part of this firm or any member or employee thereof.
RESEARCH NOTE
COUGAR ENERGY LTD
$2.1m loss for the half
Cougar energy has reported a $2.1m loss for the December half,which was 45% higher than last year but inline with our expectations.Interest revenue was down 28% to $189k while expenses were up by40% as the company gears up for its pre-production burn.
Cougar has earlier announced that practical completion of its pre-production plant at Kingaroy was achieved at the end of January andthat commissioning work and training of plant operators would becompleted by the end of February.
Crucially UCG ignition will “follow immediately thereafter” and is nowimminent. Confirmation of a successful ignition, consistency, and gasquality should follow a few weeks thereafter. From our point of viewthis is one of those rare occasions when there is a predictablecalendar event that we expect will provide the catalyst for asubstantial uplift in investor sentiment.
The review of the interim report by the Auditor has highlighted that inorder achieve all of its ambitions and remain a going concern Cougarwill have to raise more capital. We are fully aware of the need foradditional project funding and note that on a plain look at the CXYBalance Sheet, the company has $13m in cash while it has only $1min total liabilities – so no danger of insolvency or cash crunch. Inaddition CXY has recently signed an Equity linked Line of Credit withYA Global for a total of $10m. The price for the funding will be basedon the equivalent number of CXY shares at a VWAP calculation. Overthe next 12 months we expect that CXY will spend about $10m.
CXY is considering revising its 400MW power station programme. Aninitial plant of about 5MW could be installed to generate electricityfrom the pre-production burn, rather than just flaring the gas, whichwould substantially offset the cost of the pre-production phase.Secondly, rather than going straight to a 200MW first phase, CXY isstudying the viability of starting with a smaller unit, of between 30-50MW in size, comparing whether the loss in economies of scale willbe more than made up by profitable production arriving sooner.
Our NPV on conservative future electricity prices is 19c and weattribute very little to the large coal resources and additional projectsthat CXY has in the pipeline outside of Kingaroy. For example, usingsimilar assumptions for the Wandoan project as we have used forKingaroy would yield a further 15cps depending on the start-up date.
1 March 2010
12mth Rating BUY
Price A$ 0.13
Target Price A$ 0.20
12m Total Return % 53.8
RIC: CXY.AX BBG: CXY AU Shares o/s m 919.1
Free Float % 95.0
Market Cap. A$m 119.5
Net Debt (Cash) A$m -13.0
Net Debt/Equity % na
3m Av. D. T’over A$m 0.27
52wk High/Low A$ 0.13/0.05
2yr adj. beta 1.58 Valuation:
Methodology DCF
Value per share A$ 0.19 Analyst: Andrew Harrington
Pate rsons Secur i t ies L im i t ed ac ted as l e a d m a n a g e r t o t h e p l a c e m e n t t h a t ra ised $8 .29 mi l l i on a t 8 .25 cen ts per sha re fo r Cougar Energy L imi t ed in Se p te m b e r 2 0 0 9 . I t r e ce i v ed a f e e f o r th is se rv ice .
12 Month Share Price Performance
$0.02
$0.04
$0.06
$0.08
$0.10
$0.12
$0.14
$0.16
20
60
100
140
180
CXY (LHS)
Rel. S&P/ASX 200 RES
Performance % 1mth 3mth 12mth
Absolute 18.3 19.6 111.5
Rel. S&P/ASX 300 19.8 21.3 50.6
On the verge of ignition.
Year End June 30 2009A 2010F 2011F 2012F 2013F
Reported NPAT ($m) (2.9) (3.7) (4.3) (11.9) 6.4
Recurrent NPAT ($m) (2.9) (3.7) (4.3) (11.9) 4.4
Recurrent EPS (cents) (0.4) (0.4) (0.4) (1.3) 0.5
EPS Growth (%) na na na na naPER (x) (32.6) (33.6) (29.2) (10.4) 28.1
EBITDA ($m) (2.1) (3.0) (2.1) (1.9) 31.4
EV/EBITDA (x) (42.0) (40.0) (77.2) (178.8) 13.1
Capex ($m) 8.1 11.0 50.1 166.2 79.7
Free Cashflow (10.3) (19.6) (55.4) (179.2) (68.4)
FCFPS (cents) (1.4) (2.1) (5.8) (18.8) (7.2)
PFCF (x) (9.2) (6.3) (2.2) (0.7) (1.8)
DPS (cents) 0.0 0.0 0.0 0.0 0.0
Yield (%) 0.0 0.0 0.0 0.0 0.0
Franking (%) 100.0 100.0 100.0 100.0 100.0
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All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibilityor liability on any account whatsoever on the part of this firm or any member or employee thereof.
First Half FY10 result and commentary
Spending for the pre-production burn
Cougar energy has reported a $2.1m loss for the December half, which was 45% higherthan last year but inline with our expectations. Interest revenue was down 28% to $189kwhile expenses were up by 40% as the company gears up for its pre-production burn at theKingaroy site.
Practical Completion Achieved
The key element for CXY is the imminent ignition of its pre-production facility at Kingaroyfollowing the practical completion of the site development. Cougar had earlier announcedthat practical completion of its pre-production plant at Kingaroy was achieved at the end of January (see photos below) and that commissioning work and training of plant operatorswould be completed by the end of February. Crucially UCG ignition will “follow immediatelythereafter”.
Though ignition is now due for March, later than our initial expectations of Jan-Feb 2010, itis now imminent. Confirmation of a successful ignition, consistency, and gas quality shouldfollow a few weeks thereafter. From our point of view this is one of those rare occasionswhen there is a predictable calendar event that we expect will have a big positive impact on
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All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibilityor liability on any account whatsoever on the part of this firm or any member or employee thereof.
the share price of a company. we believe that ignition will provide the catalyst for asubstantial uplift in investor sentiment.
Qualification from the Auditor
The review of the interim report by the Auditor has highlighted that in order achieve all of its ambitions and remain a going concern Cougar will have to raise more capital. Though we
are fully aware of the need for additional project funding we were somewhat surprised bythe qualification statement as it would be true of many small companies with big plans. Ona plain look at the CXY Balance sheet the company has $13m in cash and equivalents while
it has only $1m in total liabilities – so no danger of insolvency or cash crunch. Over thenext 12 months we expect that CXY will spend about $10m during this pre-productionphase and will likely need to raise more capital to move to its first phase of commercialproduction.
Equity funding arranged
In addition CXY has recently signed an Equity linked Line of Credit with YA Global for a totalof $10m. We view this as a very flexible and cheap source of funding for CXY. The optionand timing to drawdown is completely in the hands of CXY and the price for the funding willbe based on the equivalent number of CXY shares at a VWAP calculation. In this waydilution is minimized while any working capital shortfalls can be easily met.
Earlier cashflow from smaller plant possible
CXY is considering revising its 400MW power station programme to include more than 2stages and bring cashflow forward with a smaller initial plant during this pre-productionphase. An initial plant of about 5MW could be installed to generate electricity from the pre-production burn, rather than just flaring the gas, which would substantially offset the costof the pre-production phase.
Secondly, rather than going straight to a 200MW first phase, CXY is studying the viability of starting with a smaller unit, of between 30-50MW in size, comparing whether the loss ineconomies of scale will be more than made up by a smaller capex requirement andprofitable production arriving sooner. We have not yet altered our modelling assumptionbased on a 2-phase project to 400MW but we believe that project funding from financialinstitutions may well be easier in smaller lumps and will prove continuity of production withless risk.
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibilityor liability on any account whatsoever on the part of this firm or any member or employee thereof.
The electricity futures curve on the SFE has risen slightly since we initiated coverage onCXY but our starting assumption of $50/MWh and $70/MWh for baseload and peak loadelectricity prices respectively from 2013 is intact. At commercial production rates we expectthat Cougar will have power costs of under $30/MWh while selling at prices well over thatlevel (see above).
The contained energy is undervalued.
As we have highlighted in the past, compared with its peers on a contained energy basisCXY is very under-valued. CXY trades at a multiple of less that $0.02/GJ. LNC and CNX
trade at about $0.07 and $0.04/GJ respectively, while CSG companies trade at $0.40/GJ.We recognize that the market has yet to fully accept the UCG industry but we believe thatwith CXY trading at an energy multiple of only 5% of the CSG companies there is largescope for an upward re-rating as the pre-production burn takes place and the BFS iscompleted.
Valuation unchanged.
Our NPV on conservative future electricity prices is 19c and we attribute very little to thelarge coal resources and additional projects that CXY has in the pipeline outside of Kingaroy. For example, using similar assumptions for the Wandoan project as we have usedfor Kingaroy would yield a further 15cps depending on the start-up date. See diagram
below for the other Australian based UCG projects.
Figure 4: CXY project locations
Source: CXY
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All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibilityor liability on any account whatsoever on the part of this firm or any member or employee thereof.
Cougar Energy 0.130 Year End June 30Valuation A$m A$/sh Commodity Assumptions 2009A 2010F 2011F 2012F 2013F
Acorn Capital 42.7 4.6 RatiosMichael Dalling 1.1 0.1 Net Debt/Equity (%) na na 105.4% 837.6% 863.7%
Malcolm McAully 0.6 0.1 Interest Cover (x) na na na na 1.4
Andrew Metcalfe 0.3 0.0 Return on Equity (%) na na na na 19.2%
Kingaroy
Wandoan
Latrobe EL4416
0
500
1,000
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2 0 0 9 A
2 0 1 0 F
2 0 1 1 F
2 0 1 2 F
2 0 1 3 F
2 0 1 4 F
2 0 1 5 F
2 0 1 6 F
2 0 1 7 F
2 0 1 8 F
( G W h )
0
10
20
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( A $ / M W h )
All Projects (GWh) Power costs (A$/MWh)
Electricity Price (A$/MWh)
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All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibilityor liability on any account whatsoever on the part of this firm or any member or employee thereof.
