Bandanna Energy 19 May 10

No light at the end of the tunnel

Dingo West will be the first cab off the rank in 2-3 years time. Production will be small at 0.5-1.0 million tonnes per annum but at least Dingo West is favourably located on the Blackwater rail line in the Bowen Basin. Work has started on a pre-feasibility study to develop a 15-20 million tonne per annum mine in the South Galilee Basin but this hinges on the efforts of others. With a 40% resource rent tax in the offering any decisions to develop new coal projects will get delayed and possibly for a long time.

The troubles of Greece and the probability of contagion spreading to Spain, Portugal and Italy has pounded markets with only gold and the dollar winners, at least in the short term in the case of the dollar. Investors have fled high risk investments and fearing the worst economic outlook for Europe, metal prices have all but collapsed and now there is fear of China slowing faster than expected.

In the face of mayhem Bandanna’s share price has fallen but not as fast as the broad market. Large coal resources will put a floor under Bandanna’s share price but the catalysts for a strong recovery might be some way off. In the in between time, the gold price is soaring as investors become increasingly worried about the worth of paper currency.

We see Bandanna as a solid long term play. In the short to medium term we see the company as an opportunity cost. We are selling Bandanna from the Portfolio and we are switching into Newcrest Mining.


SHARE PRICE CHART AND COMMENT:

Taking a look at the daily chart of Bandanna Energy we can see that the share price has pulled back from the recent high of AU$0.97 which was made on the 8th of April 2010.

Since making this high the share price has broken down, breaking through the AU$0.80 support which was provided by the January 2010 high. The share price has since continued lower, breaking the 50 day moving average which would have been expected to provide some support.







As the share price has now broken through many support levels and is currently testing its uptrend we would now target a move towards support at the AU$0.55 horizontal level or the 200 day MA which comes in just above this horizontal level. With the rate at which the share price is breaking down it may be time to take profits.



STATE OF PLAY

Members might recall that the company has grand plans in the Bowen Basin that ideally involve developing three mines that form the apexes of a triangle immediately north of Rolleston in Central Queensland. Arcturus is a potential 3-4 million tonne per annum open cut mine, whilst the Springsure Creek and Arcadia would be underground mines, each with production of 5-9 million tonnes per annum.

A map showing the locations of the company’s Bowen Basin and Galilee Basin interests is shown in the following figure taken from a recent company presentation.





During 1Q09 the JORC resource at Springsure Creek were increased to 304.7 million tonnes. Some 34.7 million tonnes are indicated resources and the balance are inferred. Unusually wet cyclonic weather halted exploration for most of the quarter delaying a 38-hole drilling program to probe the Aries 2 seam. A concept study to consider an integrated underground longwall thermal coal mine has or is about to commence.

No work was carried out at Arcadia during 1Q10 but at Arcturus the concept study to develop the Pollux seam continued. The current drilling programs call for the completion of a further nine drill holes ahead of the initial study that is expected to be completed around mid-2010.

Development of any of these mines is contingent on access to port and rail infrastructure. As we have previously pointed out before Bandanna is a shareholder in WICET (Wiggins Island Coal Export Terminal), along with many other companies.

The other shareholders in WICET include:

  • Anglo Coal Australia
  • Aquila Resources
  • BHP Billiton
  • BHP Billiton Mitsubishi Alliance (BMA)
  • Caledon Coal
  • Cockatoo Coal
  • Felix Resources
  • Jellinbah Resources
  • Macarthur Coal
  • Northern Energy Corporation
  • QCoal
  • Rio Tinto Coal Australia
  • Syntech Resources
  • Vale Australia
  • Wesfarmers Curragh
  • Xstrata Coal Queensland

Being a member of WICET does not guarantee any particular allocation with respect to volume that will be allocated to any particular member. We expect the major miners like BHP, RIO, Vale and Xstrata to argue for the biggest slices of the pie.

WICET is being built in stages with Stage-1 having a port capacity of 25 million tonnes per annum scheduled to be operating in 2013. The coal loading facility will be expanded in steps to 75 million tonnes per year which will double Gladstone’s capacity to 150 million tonnes per annum.

Bandanna hopes to receive a port allocation for Stage-1 but this is not guaranteed and the company might have to wait for another 1-2 years for the next expansion. It is difficult to plan for coal production when the timing of access to infrastructure is unknown as are the volumes that will be allocated.

Nobody knows what the future cash flows will look like which makes the company impossible to value with any reasonable degree of conviction.

All the junior companies can do is keep beavering away so that they are ready to go when they receive rail and port allocations.

The froth and bubble in the coal sector that formed amidst the takeover scramble for McArthur Coal has burst. Until the prospect of a resource rent tax for the mining industry is sorted not much is going to happen on the corporate front and many commitments to new projects will be delayed.

This brings us to consider Bandanna’s South Galilee Basin project. A pre-feasibility study is underway and another 145 drill holes are aimed to increase the confidence level of the inferred JORC resource of 922 million tonnes and the indicated JORC resource of 60 million tonnes.

This work is being done without any cost to the company. AMCI (Alpha) Pty Ltd is earning up to a 50% interest by funding A$25 million of JV activities.

South Galilee is the third project under consideration for the Galilee Basin. The two other projects are owned by Hancock Prospecting Pty Ltd (Gina Reinhardt) and Resourcehouse Limited (Clive Palmer).

Hancock Prospect is pondering spending up to A$7.5 billion on a project that would involve developing a 30 million tonnes per annum open pit mine and construction of a 400 kilometre rail line to Abbott Point, plus a new port and coal handling terminal. The new port would be expandable to 80 million tonnes per annum.

Clive Palmer is also planning a major development and it makes perfect sense for Gina Reinhardt and Clive Palmer to talk about sharing the cost of the required infrastructure. The Government of Queensland will demand common access to rail and port facilities. This will be a boon to Bandanna because without piggy-backing either or both Reinhardt and Palmer, the South Galilee Project is dead in the water.

The government is expected to announce soon the preferred builder of the new railway to Abbott Point. However, with the uncertainty of a 40% resource rent tax there is unlikely to be any major investment decisions made soon.

Bandanna has JORC resources of 1.3 billion tonnes. There is no disputing that the company has adequate resources for 30-40 million tonnes of annual production for over 20 years. However, the issue that remains to be settled is how and when will the resources be commercialised? And this still remains unknown.

Bandanna is being valued at slightly below A$0.20 per resource tonne. This certainly is not expensive but there has to be a trigger for a re-rating of the company’s share price.

There are a number of catalysts for a re-rating. An announcement is pending concerning who is picked to construct the railway from the Galilee Basin to Abbott Point. If or when Clive Palmer IPOs Resourcehouse Limited in Hong Kong, a price will be established for Galilee Basin coal resources – this could be very beneficial to Bandanna.

WICET Stage-1 allocations might be a positive surprise for Bandanna otherwise the company will have to wait for the next expansion. The concept study to develop the Dingo West Project has been completed and production will probably be from multiple open pits.

The company believes that Dingo West could be developed without a formal new port allocation. Production from Dingo West would be small but it would provide the company with a modest cash flow to fund other projects. Dingo West could be producing in 2-3 years and good news on this front would be well received by investors.

We like Bandanna as a long term story but struggle with the outlook for the company in the short to medium term and we see more risk than reward. It probably makes sense for a competitor to make a play for the company but that cannot be guaranteed.

At this point in time we see a lot more upside for gold than coal. Accordingly we are recommending Members SELL Bandanna and switch into Newcrest Mining Limited.


 

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