Gujarat NRE Coke - Black Gold:: Macquarie Research,

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Gujarat NRE Coke
Black Gold
Event
 Gujarat NRE Coke (GNC) is India’s largest independent metallurgical grade
coke producer with capacity of 1.25mtpa. Coke oven batteries are located in
coastal states of Gujarat and Karnataka.
 To escape the volatility of processing margins, the company acquired three
coking coal mines (only raw material) in NSW, Australia and is the only Indian
company with mines in Australia. These mines contain nearly 650mt of
primary hard coking coal, which are still in scarcity and whose prices went up
more than three times last year. The coal mines are owned through its
subsidiaries – Gujarat NRE Minerals Limited (ASX: GNM).

Impact
 Mine development – most critical and remains on track: Mine
development is the key to unlocking value at GNC. Long-wall mining has
commenced in the company's Wongawilli Colliery. This is an important
milestone, as it leads to doubling of the company's production and reduces
the cost of production by 30%.
 Also, GNC has recently ordered the second wall. GNC remains on track for
reaching 6mtpa production in next 3 years and we estimate production to be
2.3mt in FY11 and 3.0mt in FY12.
 Fundamentals remain strong in 2011: We expect GNC to earn US$259m in
EBITDA in FY12, compared to US$154m in FY11. The metallurgical coal
market fundamentals remain relatively attractive in the current environment,
and GNC is set to benefit from tightness in supply. We are forecasting FY11
price for coking coal at US$215 and FY12 forecast at US$251/t.
 Sensitivity to coal prices: A 10% increase in coke and coking coal prices
will increase earnings for GNC on consolidated basis by 35%. Also, GNC has
a small steel making capacity, and a 10% increase in steel prices will increase
consolidated earnings by 2%. This high leverage to coking coal prices is the
key to unlocking value for GNC in the next few years.
Action and recommendation
 We believe GNC remains the best stock in which to invest to take advantage
of the upturn in the coking coal cycle. GNC has good quality reserves and an
excellent location, and we believe it is well on its way to becoming one of the
world's top-ten producers of prime hard coking coal in next three years. The
stock is trading at an attractive valuation of around 5x PER on FY12E.


Gujarat NRE Coke Aide Memoire
What is their view of the prices of LAM coke and coking coal going forward?
Indian operations:
1. What would be the replacement cost of the current coking coal to coke conversion facilities?
2. Future capex plan for next three years?
3. Capacity expansion schedule and production plan for next three years?
4. What is the breakeven margin?
5. Long-term debt equity ratio? Current debt repayment schedule? Cost of debt?
6. Freight cost from Australia to India currently? Why purchasing own ships?
7. Why did they set up the steel plant? Forward integration – does it make sense?
8. Power plans from waste heat and wind energy? Investments and logic?
Australian operations:
1. Cost of production of coking coal in Australian mines, type of mining, proven reserves? Fixed cost and variable cost?
2. Difference between long wall mining and board and pillar mining? What will the difference in cost for GNM as compared to
other producers?
3. What is the thickness of coal seam in its mines? What is the strip ratio?
4. How long will it take for second long wall to start production at full capacity?
5. Will GNM have any production left for selling in the export market? What will be the price for captive?
6. Production plan for mines?
7. What will be the impact of Henry Tax on operations? What is their view on implementation?
8. Life of mining assets? Depreciation?
9. What is the current Debt to equity ratio? Debt repayment schedule? Cost of debt?
10. Freight cost for shipping of coking coal?
11. Future capex plan?