Pine Valley Mining Corp.

All dollars in USD unless otherwise noted

 Recent Price:  $0.35 bid                                  Shares outstanding: 43 million                       Market Capitalization: $15 Million                Book Value/Share: $0.27            

(GBTXF-OTC  GTX-CDNX)                       (fully diluted, common equivalents basis) 

 

          Earnings Per Share                                                                 P/E                                                         Cash Flow Per Share*                                             P/CF

2003A  2004E  2005E  2006E   2007E          2003A   2004E   2005E   2006E   2007E       2003A  2004E  2005E  2006E  2007E             2003A   2004E   2005E   2006E   2007E

  (.09)    0.05      0.12       0.16     0.22                N/A      7.0X      2.9X      2.2X      1.6X             (.08)     0.07     0.19      0.24     0.30                    N/A        5.0X     1.8X      1.5X     1.2X

              (F.Y. March)                                 

·         Earnings Before Interest Taxes Depreciation, Depletion and Amortization

April 21, 2003

 Summary

Pine Valley Mining Corp. ( the Company), formally known as Globaltex Industries Inc., is a start-up metallurgical coal producer. The mine produces a high BTU, low sulfur bituminous coal. The coal is best suited for producing steel. The Mine has produced about 100,000 tons in the form of trial cargos over the last two years. To put this in perspective, that is enough to fill about 1000 coal cars. The Japanese buyers were extremely pleased with the performance of the coal in their furnaces.

 

The Company was founded in the mid-eighties by Orval Gillespie, a grass-roots prospector. He intended to capitalize on the infrastructure created in concert with the British Columbia Government to put two major coal mines in production ( Quintette and Bullmoose ) in the area which are now shut down. Overall, about $400 million was spent for rail lines and a port facility in N.E. BC. The property, located about 650 miles north of the US border, is bisected by the rail line, a river, the main highway, power lines and natural gas lines. Thus, infrastructure costs are about 15% of that of similar mines in British Columbia and neighboring Alberta. Luscar ( now owned by Sherrit ) and Consol Energy have projected the infrastructure would cost over $150 million to put the Chevriot Mine in Alberta in production.  It is located adjacent to a national park and may never get permitted. They have been attempting to permit the Chevriot Mine for six years. This highlights the value of a mine permit in this day and age. The Company’s mining permit alone is very valuable based on the cost, and more importantly, the time involved in permitting. New coal mine permits in the US are almost impossible to obtain.  The low capital cost to put the Company’s mine in production is a huge advantage.

 

The Company entered into a joint venture agreement with government-owned BC Rail and Mitsui Matsushima in 1996 in order to share costs and gain a transportation partner and a coal marketer in Japan for the fledgling company. Soft prices and joint venture partner uncertainties prevented development at that time. In January 2001, the Company bought out BC Rail’s 1/3 interest and recently negotiated the purchase of Mitsui’s 1/3 interest.  After the completion of the buyout of Mitsui’s interest scheduled to be on or before December 10, 2003, the Company will own 100% of the mine.

 

Seasoned management, formerlly with Peabody Energy, the world’s largest coal producer, has come on board. These coal industry experts also “put their money where their mouth is” by investing $800,000 in the Company. As major shareholders, new management has a strong incentive to minimize future dilution and maximize shareholder wealth. The stage is now set to put the mine in full production over the next two to three years. Management indicates that the potential exists for the mine to produce two to four million tons per year, which would make it a major North American metallurgical coal mine. Outside engineers have pegged total potential coal resources in the 60-100 million ton range. Over time, the intention of new management is to transform the Company, through development and acquisition, into a major force in the Pacific Rim metallurgical coal business. Chinese steel production has been increasing in the 20% annual range over the last two years and is expected to continue to grow at high rates for decades to come in order to satisfy export as well as burgeoning domestic markets.  We expect this incremental demand to support the Pacific Rim metallurgical coal markets over the long-term.

 

Based on our FY 2005 earnings  projection of  12 cents per share the stock now sells for about 2.9X projected earnings. Based on an earnings  multiple of 18X, the stock has the potential to appreciate five fold from current levels over the next twelve to eighteen months. Currently listed on the Canadian Venture Exchange and OTC , management plans on first listing on the Toronto Stock Exchange then the NASDAQ National Market. The Company meets all listing criteria for the NASDAQ and AMEX except for unit price. The new CEO, Richard Palmer, indicates that the market for the Company’s coal is tight and that contracts to sell all of the Mine’s output over the next one to two years are attainable at very profitable prices. There are risks, including an inability to obtain financing, unexpected Mine problems, or a severe economic downturn, that could hurt the stock, however, at current prices, we believe those risks are more than built into the stock price. The stock also represents a share of hard energy assets, a hedge against a falling US dollar, and vaporizing paper assets. In any event, the Mine is economic on its own merits. The Company represents one of the few true growth opportunities in the coal industry in North America.  This is a speculative stock.

 

 

Company Description

 

The Company’s mine is located 30 miles west of Chetwynd, British Columbia, Canada. Total coal leases comprise over 32,000 acres. The coal can be transported to either the Ridley Terminal on the northern BC coast or to Vancouver, BC which are both about 650 miles from the Mine. The Mine is fully permitted and is in full compliance with all provincial and federal regulations.

 

The Ridley Terminal is the closest deep water port to Japan and Korea in North America. With the shutdown of the nearby Bullmoose and Quintette Mines there is more than ample skilled labor force available. The first one million tons of production will come from the Peninsula Pit which was opened for the previous trial cargos. Initial production can be marketed on an unwashed basis enabling improved coal recoveries and lower operating costs. This will enable the Mine to produce substantial cash flows during the first year that can be reinvested in Mine development. Management believes that raw coal production beginning in the December quarter of this year (subject to financing) should produce positive cash flow of  about $750,000 per month. This raw coal production will eventually give way to coal coming from multiple pits to a centralized wash plant producing substantial amounts of high quality PCI ( Pulverized Coal Injection) coal.  Hard coking coal currently sells for about $45 per metric tonne (1.1 tons) while a price for the planned raw coal should be in the area of $33-34 per tonne. We believe that this cost discrepancy will put upward pressure on PCI coal as Asian steel producers seek to lower costs. The supply of hard coking coal  is much more limited than steam coal which lacks the chemistry necessary to produce steel. The Company plans on exploiting this PCI niche market. In general, a falling US dollar and sharply rising Australian dollar (Australia is the major competitor), should put upward pressure on metallurgical coal prices. We believe the coal from the developed mine in 2005-06 time frame will be selling in the $40-45 per metric tonne range. The world is finally coming to the reality that energy is not an unlimited resource. Four years ago virtually no one saw natural gas going from $2 per MMBTU to $10, much less the over $20 recent spot price. Oil markets are also tight. We believe that over the next ten years overall energy prices will make steady gains notwithstanding a fall in the US dollar.

 

Richard Palmer, the Company’s new CEO, is highly educated and extremely astute coal industry executive. (see press release at  www.globaltexinc.com ). During the last six months, he has negotiated the buyout of Mitsui and lower rail and port charges. Mr. Palmer holds a BE in Mine Engineering and an MBA. At the age of 39, he is young and energetic enough ( and thoroughly incentivized )to transform the Company into a global coal company. His specialties include strategic development and Mergers and Acquisitions. Mr. Palmer has a proven track record in identifying undervalued coal assets. He has invested a major portion of his life savings in the Company. We find him to be a shining example of a quality CEO in this greed and scandal ridden environment.  In fact, he is probably the best possible CEO for the Company. His honesty and integrity are impeccable.

 

Graham MacKenzie, the Company’s new Vice President, was Mine Manager at the Bengalla Mine in Australia, which is a world-class coal operation. Based on a thorough review of the Company’s Mine, he left Peabody and joined the Company. He also invested in the Company. Both gentlemen are excited about managing a growth company where they can bring all their skills to bear.  Common sense tells us that these two highly competent executives  would not have taken these jobs, let alone invested significant amounts of money in the Company, if they did not thoroughly believe in its prospects. Both have signed long-term contracts that are long on stock incentives. We believe this is the best indicator of the Mine’s credibility.

 

The Company needs financing. About $15 million will be needed to put the Mine in initial production and pay out Mitsui. This financing will be some combination of debt and equity. The debt markets are currently attractive in this low interest environment. Even with 100% debt financing of the required $15 million, at 12%, cash flow coverage would be very adequate ( 4X+) with excellent asset protection for a potential lender. This approach would not be dilutive to shareholders. We have used a 50% debt, 50% equity scenario in our earnings projections. Obviously, projected EPS would improve materially in an all-debt scenario. We have employed a P/E ratio of 18X, a 20% premium to the average of other coal companies. We feel this is conservative given the projected rapid growth in revenues and EPS in our forecast and the superior management now in place.

 

In industry terms, capital needs for the Mine are a pittance . Future development will be financed from internal cash flow. In our opinion the current stock price is completely out of line with the future potential of this Company.

 

		2003E*	2004E	2005E	2006E	2007E
Revenue:		1620	16500	42000	66600	85800
Production Cost:		975	6500	16200	24300	30888
Transportation Cost:		648	6350	15240	23400	29700
Gross Margin:		-3	3650	10560	18900	25212
DD&A:		N/A	500	2200	3300	4000
G & A:		39	550	800	1000	1200
Interest:			350	700	700	700
Pre-Tax Profit:			2250	6860	13900	19312
Taxes:			200	300	4865	6759.2
Net Income:			2050	6560	9035	12552.8
EBITDDA:			3100	9760	13035	17252.8
Avg. Shares Out:		29128	42000	52000	55000	57000
EPS:			0.0488095	0.1261538	0.1642727	0.2202246
EBITDDA/Share:			0.0738095	0.1876923	0.237	0.3026807
Stock Price at 18X EPS:			0.8785714	2.2707692	2.9569091	3.9640421

*As of this writing, fiscal 2003(March 31) financials were not available.

These are estimates.

	Assumptions:   Price/tonne: $33 2003,  $35 2004,  $37 2005,  $39 2006 Production (tonnes): 500,000 2004,   1.2m 2005,  1.8m 2006,  2.2m 2007 All figures in USD in thousands except per share figures. Tax loss carryforwards total $10 million Total effective tax burden after using carryforwards = 35% Does not include any acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

Macro Overview

 

In general we believe that a sea change is taking place in the world markets. The 75% decline in the NASDAQ since the peak three years ago probably marked the end of the twenty year bull market in paper assets. The declines in many stocks to single digits and sometimes to zero shows that assets and book value do matter, and they offer downside protection. Everyone is now aware of the despicable behavior of many, too many, managements and boards of directors. The “New Economy” and “Productivity Miracle” embraced by even our FED Chairman three years ago are now nothing more than jokes. We also believe that bear markets don’t end with P/E for the S & P 500 in the 30X range or infinity for the NASDAQ ( no net earnings).

 

The current $31 trillion current total debt in the US is about $300,000 per non-government worker. The FED has been cranking out money out of thin air at alarming rates. We believe the “real” government deficit this year will be over $500 billion and the trade deficit will be similar. The US dollar is cracking and will continue to decline. It is important to be in some kind of US dollar denominated hard asset. We particularly like hard energy assets. The Commodities Research Bureau ( CRB) Index has moved up over 25% in the last year. The “smart money” is moving out of paper assets like general equities and the US dollar and into hard assets and foreign currency leaving John Q public to hold the bag.

 

This stock represents hard energy assets with the potential for very strong returns based on internal and external (acquisitions) growth. Stocks like that are very, very, difficult to find.  We believe that this is also something we can hold for the long-term. It has higher risks but high return potential. Short-term treasury funds are returning virtually nothing after expenses and income tax and represent negative real returns after adjusting for inflation. The last time we had significantly negative real interest rates was during the great commodities bull market of the mid to late 1970’s. Housing, health care, insurance, education, food and energy prices and all virtually all commodities are showing signs of significant inflation despite “official” statistics.

 

The Company should prosper during the current difficult world economic situation and perform even better in an economic upturn as demand for steel increases.

 

 

 

 

Conclusion

 

This is a speculative stock that has significant risks over the next year, including the ability to obtain reasonable financing, unforeseen mining problems, a weak World Economy and ultimate reserves. These risks are mitigated by superior management and tremendous demand from China. The Company’s coal does represent an attractive partial substitute for hard coking coal. Therefore,  the Company’s coal sells into an attractive niche market.  We believe the supply of this particular type of coal will not increase significantly without substantially higher US dollar prices. There is also a long lag time to bring new supply to market due to many factors including infrastructure costs, regulatory hurdles, huge capital costs overall, construction time and other issues.  Again, the fact that most of these hurdles have been overcome by the Company is a huge advantage. We believe that there are very few, if not any other mines with large productive potential, that can been opened in so little time and capital cost in North America and probably Australia. New Management is intent on growing this Company into a major international coal producer by internal and external (acquisition) growth. Therefore, the stock has the potential for very significant gains over the near and long term. We believe that returns of 10X+ are possible over the next three to five years. It also represents ownership of hard energy assets against a backdrop of overpriced general equities and the declining US dollar. Therefore, it has defensive characteristics.

 

 

 

                         

This is not an offer to buy or sell any security. It is not a complete analysis of any company or industry. It is for informational purposes only. The information contained herein is believed to be accurate, however, there is no guarantee as to its accuracy. The author was not compensated in any way by the Company for preparation or distribution of this report. Mr. O’Brien holds 806,500 shares of the Company’s common stock. Affiliates also hold large positions.

 

About the Author: Thomas O’Brien holds a Bachelors degree in Geology and an MBA in Finance. He has been previously employed by a major Wall Street securities firm as a Senior Industry Analyst and in a geologic and geophysical capacity by a major oil and gas company.