Coal of Africa (Price: 10.5p | Target: 20.0p | Rec: Buy) CZA’s Makhado definitive feasibility study (DFS) quantifies the potential of the group’s flagship project.

The study estimates a NPV of close to US$700m for what is effectively a starter operation in the midst of a substantial new coal field.

We have revisited our numbers and, while our longer term coking coal forecasts are below those used by the group in its studies, we believe the project has merit.

Our TP, based on a risked NPV, has increased to 20p and our recommendation is upgraded from Hold to Buy accordingly, although we stress that CZA remains very much an asset play. * DFS highlights: CZA’s definitive feasibility study has highlighted a NPV (8%) of US$697m for the Makhado mine.

This assumes a 12.6mtpa run of mine (ROM) operation, producing 2.3mtpa of coking coal and 3.2mtpa of thermal coal.

CZA uses a US$205/t long term coking coal price and assumes the thermal coal credit which takes net operating costs down to US$88.70/t.

Capex is estimated at US$406m, with a peak funding requirement of $433m. * Funding is the key challenge: CZA has demonstrated the value of Makhado and now, like many other companies in the sector, must find the funds to bring its flagship asset into production.

The project currently has no BEE involvement and the company is in talks with potential partners to fulfil this role.

Strategic partners are also being sought.

The group aims to complete its financing by H1 2014 in order to be in full production from 2017.

While CZA offers significant value, we caution that it may continue to trade at a discount to its potential, until a pathway to funding is delivered. * Target price.

Our previous TP for CZA of 15p per share had already included a risked 25% valuation for Makhado and the Greater Soutspansberg Project (GSP).

The DFS provides greater surety around the production parameters with the result that our TP has increased to 20p per share, with the GSP now risked to 35% of our valuation.
To access the full note please click here Analyst: Louise Collinge
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