Significant Progress with Chandgana Power Plant. In November 2011, the company received a power plant licence from the Mongolian Energy Regulatory Authority. In January 2012, Prophecy Coal Corp. (PCY) announced a positive feasibility study for the Company’s 600 MW Chandgana Mine-Mouth Power Project in Central Mongolia. The feasibility study states that based on a 70%-30% debt to equity capital structure and discount rate of 12%, the project generates post-tax NPV of US$364.7mn.
The company expects to conclude a Power Purchase Agreement (PPA) with Mongolian authorities and sign EPC contract in 2Q 2012. We believe that once PPA and EPC contracts are in place, the company will be in a strong position to secure long term project financing for power plant construction that is expected to commence in the beginning of 2013. PCY is planning a two-phase development, where second phase will seek to add significant power capacity to supply electricity to Chinese market.
Strong Growth Potential. We expect the company to post positive net income in 2015 and subsequently demonstrate significant growth in both revenue and net income numbers. In 2018, the company is planning to generate 3.2mn MWh of power and produce close to 4Mt of coal from its Chandgana and Ulaan Ovoo coal deposits generating healthy profit margins for the company. Coal from Chandaga will be sold to the power plant with roughly US$5/t margin, while Ulaan Ovoo’s coal will be shipped to Russian buyers through Zheltura border crossing, 15 km to the north from the mine, with about US$5-6/t margin.
Low Cost Operations. PCY’s coal assets have one of the lowest strip ratios hence one of the lowest production costs in Mongolia and globally. The Ulaan Ovoo property hosts a single massive coal seam of 45-80 m thick with an average strip ratio of 2:1. With expected pre-tax mining cash cost of US$17/t at Ulaan Ovoo and selling price of $25/t, based on an owner operated model, PCY will be able to realize strong margins and successfully compete in the region. No washing and preparation plant is required for the first 20Mt. The Chandgana coal deposit has strip ratio of 0.5:1 resulting in a production cost of about US$10.5/t.
We reiterate our BUY rating with a 12-month target price of C$1.25/share. The market is not pricing in value of PCY’s power plant project and coal deposits with over 1Bt of high quality coal resources. PCY’s net asset value, after stripping out the company’s 42% stake worth US$87.7mn in Prophecy Platinum, is currently valued at US$3mn. This does not include PCY’s power plant project and coal assets’ net present value. Our NAV estimate for the company’s assets is US$317.7mn or US$1.33 per share representing over 175% upside to current share price of C$0.475 (17.02.2012). The company’s NAV estimate is based on 50% of power plant’s project NPV (US$182.4mn), coal assets NPV (US$74.9mn) and investment portfolio’s market value (US$92mn). We set the 12-months target price at C$1.25 which represents over 163% upside to current PCY’s share price. We expect numerous stock price catalysts in 2012 including signing power purchase agreement, EPC contract and securing project financing for power plant construction.
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Associate, Metals & Mining
Associate, Mongolian Equities