March 31, 2005
The development of Pine Valley’s coal properties
has basically been pushed out three to four months, mostly due to factors
beyond Management’s control, including delays in equipment delivery, weather
and fuel price surcharges. In our last report we mentioned that there would be
bumps along the road in bringing the mine to its near-term productive capacity
of 2.2 million metric tonnes per year. Therefore, we are reducing our FY2005
and 2006 earnings per share estimates to 7 cents USD and 80 cents USD,
respectively. Our FY 2007 estimate remains at $1.15 cents per share.
Based in our FY2006 estimate, the stock trades at
about 5X earnings. We continue to see prices in the $12 per share area by Fall
2005 as a reasonable price target. PVM is one of only two profitable
metallurgical coal companies in North America. Fording Coal ( FDG-NYSE), the
other profitable met coal producer has had quiet a run itself, however, its
growth potential is limited as its main producing properties are mature with
relatively high strip ratios. If one wants to own a profitable growth stock in
the met coal arena, it is the “only game in town”.
Oil prices continue to be very strong and over the
long term we see plenty of room for higher prices especially in a weak USD
environment. The US currently consumes about 80% of the World’s savings in
order to maintain its gigantic twin deficits in trade and government spending.
Obviously, the US can’t consume more than 100% of the World’s savings so
something has got to give. We see a final break in the dollar, below the
decisive 80 level in the US Dollar Index as a certainty over the coming months.
The 80 level is equal to the previous lows over the last ten years and Central
Banks, with massive US Dollar holdings, have fought ferociously to defend this.
Oil price movements have mystified the gurus on Wall Street on a pure supply
and demand basis. The factor that is only coming to light is the depreciation
in the USD. Oil priced in Euros has seen much more modest increases due to the
almost 50% rise in the Euro versus the USD over the last three to four years.
PVM has seen severe price volatility to the
downside since the beginning of 2005 after its nearly 40-fold increase in price
during 2004. This is to be expected as early buyers take profits and major
developments, including a coal contract for fiscal 2006 and a move to major US
and Canadian markets by the Company, have been painfully slow to occur. Recent
additions to Management should help to speed these developments. Mac Arthur
Coal, the largest PCI producer in Australia and a major competitor in the PCI
market, recently announced a $102 per metric tonne price for its coal during the
upcoming coal year. We expect similar pricing when PVM announces its new
contract(s). PVM also will begin producing higher priced coking coal later in
the year. Insiders recently sold stock in a secondary offering after holding
the stock since 1999. This should relieve perceived overhead supply. The
Company also raised some equity capital, which will add some cushion to the
balance sheet. A previously announced debt consolidation should also clarify
the Company’s debt situation.
During the Company’s last conference call,
Management indicated that it will move to increase reserves and possibly
productive capacity, should the prices for met coal continue to be strong. We
see room to increase capacity to the three to four million tonne per year range
over coming years. This would call for increased capital investment from
internal cash flow and will probably mean that dividends will not be paid over
the near- term. Over the long-term we continue to see the potential for
substantial dividends.
Warren Buffet, the “Oracle of Omaha” believes the ideal holding term for a stock is forever. With proven reserves capable of producing at the 2.2 Million TPY rate for ten years, and the potential for up to 100 million tonnes of reserves, or 40 plus years of production, we believe this stock is one that will be a hold for many years. Energy prices, in our view, will only escalate over the next twenty years as consumption rises inexorably and production declines. The only real solution for the world lies in conservation and nuclear energy, two things that will be many years in the making.
For a full report on Pine Valley Mining please go
to microcapvalue.com or for more information go to pinevalleycoal.com.
The analysis contained herein is for informational
purposes only. It is not an offer to
buy or sell any security. The
information contained herein is believed to be accurate buy 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.