Continental Coal (COOL.L) Investec Securities Price: GBP 6.0 | Target: GBP 13.0 | Rec: Buy The recent decline in thermal coal pricing has been particularly swift and severe and we have adjusted our forward coal prices accordingly, as part of our regular quarterly review.

While resultant adjustments to earnings are noteworthy, we are concerned more with COOL’s ability, in the current climate, to finance development of its key DWC project.

The company continues to offer good value, but risk to this value is increasing. ¢ Following our recent quarterly review of our commodity prices, we have made adjustments to our forward coal price assumptions.

The most dramatic changes have been to short term thermal coal prices (down 10-20%), reflecting the current market in oversupply, but our medium to longer term outlook remains largely unchanged.

The decline in coal pricing is offset to some extent by a weaker South African Rand FX rate.

¢ The net impact of the changes has been to reduce our forward earnings, with FY12E EPS reduced from 1.1cps to 1.0cps, FY13E from 0.8cps to 0.7cps and FY14E from 1.5cps to 0.5cps.

¢ The changes have little impact on our COOL valuation, given that the bulk (74%) of our NPV is in the De Wittekrans Complex (DWC), which is longer dated and primarily coking coal.

However, reduced near term earnings and cash flow could impact negatively on COOL’s ability to finance this project (capex of US$220m) and bring it into production, thereby realising the value.

¢ Our target price (TP) is underpinned by our risked NPV.

In order to reflect the greater risk to DWC’s development, we have reduced our risk weighting on DWC from 75% to a nominal 50%, thereby reducing our TP from 16p per share to 13p per share.

The current share price appears to reflect a risk weighting to just 10%.

Ultimately, however, a decision on DWC is a binary outcome.


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