Pine Valley Mining (PVM) is a metallurgical coal producer with operations based in Northeastern British Columbia, Canada. For further detail regarding the Company’s operations please refer to our previous report at microcapvalue.com or the Company’s web site at pinevalleycoal.com.
Pine Valley has recently completed the transition from a development stage exploration company to a significant metallurgical coal producer. In January, PVM announced that it had completed Phase I of construction that brought monthly production from about 45,000 metric tonnes per month (540,000 tonnes per year) to a level of 110,000 tonnes/month (1.3 million TPY). The Company expects Phase II of construction is to be completed in June, bringing monthly production to 167,000 tonnes per month (2.0 million TPY). Based on a 15% discount (historical) to recent settlements of hard coking coal (Fording, FDG-NYSE, announced last week that they would be selling their hard coking coal for $125/tonne), PCI prices should be in the area of $100/tonne for the Coal Year beginning April 1 of this year.
The Company believes that total capital expenditures through June 2005 will be approximately $22.5 million based on the most recent Company press release in late December. The Company has raised approximately $17 million to date through debt financing and warrant exercise. The remainder should be funded from internally generated cash flow. Overall, we expect PVM to be debt free by the end of calendar 2005. PVM could be paying dividends perhaps as early as the calendar 4Q of this year. An annual dividend of 15-20 cents per share USD should be readily supportable even at half the current coal prices.
We don’t expect things to proceed without some glitches along the way. All mining operations are subject to the whims of Mother Nature and other unforeseen problems. It is absolutely remarkable that a 2 million TPY metallurgical coal mine could be put into production with such a relatively small amount of capital. This is primarily due to the location of the Mine, which had all major infrastructure in place prior to start-up. Most coal production operations of this size require between $100 and $200 million+ in capital expenditures with the attendant debt burden and/or equity dilution.
PVM reported an operating profit for the calendar 3Q 2004, with only one month in production. This is quiet an achievement. Most mines don’t make profits for many months after start up; some don’t attain profitability for years. Graham Mac Kenzie, CEO, a seasoned mine manager, has done an excellent job. He is a tireless worker, intent on making the Mine operate at peak efficiency. We expect the Company to hire more seasoned professionals to beef up Management. PVM should be listed on the Senior Toronto Stock Exchange before the end of this quarter. The current Directors are mostly holdovers from the period before mining operations began and contribute very little. The Company is also very weak in its investor relations efforts. This has helped to create the current opportunity on a price-to-fundamentals basis. Based on our forecasts, the Company should post return-on-average equity and assets in excess of 100% during FY 2006.
The new Chairman, Jeffrey Fehn, seems to be a very good businessman and is intent on bringing in the necessary talent on both the Management and Director levels. Barring any major problems, PVM is, and should continue to be, a money making machine due to its position as the, if not one of, the lowest cost metallurgical coal producers in the world. Some “experts” believe that the current economic boom in China, which has driven commodity markets worldwide, may soften along with the world economy over the shorter term. We tend to agree with this assessment but over the longer term we believe that higher energy prices in general are here to stay. Even with diminished growth rates in China, secular trend-driven aggregate energy demand should remain strong. Coal, even met coal, is energy. Worldwide, we consume about 97% of productive oil capacity, which seems to be fine with everybody. Someone could “slip on a banana peal” and we would be in deficit.
Based on our EPS estimate for FY 2006, and a conservative P/E multiple of 12-15X, a stock price in the area of $12-15 by Fall 2005 is well within reason. However, with the superior margins, production growth and a debt free balance sheet expected by year-end, PVM could enjoy a higher multiple. Although the stock has seen spectacular gains over the last year, the risk profile of PVM has been coincidently reduced as most of the major hurdles facing the Company have been overcome.
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The analysis contained herein is for informational
purposes only. It is not any offer to buy or sell any security. The information
contained herein is believed to be accurate but its accuracy is not guaranteed.
Thomas B. O’Brien, the author of this report, was previously CEO of Pine Valley
Mining for a period of 11 months in 2000-2001 following the death of Orville
Gillespie, the founder of Pine Valley Mining and its predecessor companies. He
holds a BA in Geology, worked and was trained by Phillips Petroleum Company and
an MBA in Finance. He holds approximately 2.3 million common shares of Pine
Valley Mining. Affiliates of Mr. O’Brien hold large positions in the common
stock of Pine Valley Mining. Mr. O’Brien is not an officer, director or insider
of Pine Valley Mining. Pine Valley Mining did not compensate Mr. O’Brien in any
way, for the preparation of the report. This is not a complete analysis of any
company or industry. God bless Orville Gillespie, without his tireless work,
Pine Valley Mining would not exist. Thanks.