Interesting Metallurgical Coal Play?
Sun, Apr 22, 2012
Nobody can deny we are in a very tough Junior Resource Market which looks it will stay tough for the foreseeable future. In this environment you need to be flexible and agile in your asset allocation towards different companies you invest in. I like to focus on producing assets and cash flow to mitigate risk but find a company deeply discounted with potential catalysts to keep the market and investors excited and poised for rapid gains when the market starts to care again.
I have found a deeply discounted producing company with potential catalysts coming down the pipe which I believe will separate this company from its peers and possibly outperform the market.
The company is Novadx Ventures (TSXV: NDX)
Novadx Ventures is a HIGH quality metallurgical coal producer in the United States. The company has two properties, Rosa Mine in Alabama and Rex # 2 Mine in Tennessee.
Coal stocks have been taking a beating but its important to not lump all coal producers together and here is why.
The simple of coal is this. There are two main types of coal, metallurgical coal and thermal coal. Within those two categories there are numerous types, qualities and grades – some of these are very sought after and some of these are struggling. . Thermal Coal for example is competing against natural gas prices right now and shows very low margin for most thermal coal producers. Met coal producers on the other hand are getting much higher margin, and more value for their coal reserves for shareholders.
Novadx produces a high quality metallurgical that they sell in speciality coal markets including the activated carbon market, silicon metals market, and the traditional coke market. The coal they produce is also extremely clean, with less than 2% ash content. These types of coal fetch an extremely healthy price of between $170-190 per ton rather .
NOW that we know Novadx has extremely high quality and sought after coal, let’s talk about how they are undervalued and how we can make money.
Right now Novadx is trading at $0.22 per share and has roughly a $18M dollar market cap on an issued and outstanding basis.
Currently Novadx produces on avg. 10K tons / month from their Rosa operation in Alabama. Rosa coal sells on avg. at $175 / ton. The company receives a 50% profit margin on this coal. To save you all the math this will translate into roughly $5-8M in EBITDA this year. When Rex # 2 mine comes online the company will add an additional 20K tons /month and is expected to get on avg. $150 / ton with a ~43% profit margin. Again to make the math simple for you, with both Rosa and Rex up and running for a combined 30k tons / month the company would generate roughly $18M in EBITDA.
If Novadx can continue to receive a valuation of 3X current year EBITDA and get their production up to 30K tons /month INVESTORS SHOULD HAVE A 3 BAGGER ON THEIR HANDS!!!!!!!
Of course this is factoring in zero dilution to the stock and contingent upon them adding an additional 20K tons per month by year end.
Now with that being said – what is the status of adding an additional 20K tons / month?
Novadx currently has all the underground work and development completed on the Rex Mine and has recently received a Notice of Technical Adequacy report from the Office of Surface Mining (OSM) to construct the wash plant. Without the wash plant Novadx would have to sell raw unwashed coal which does not generate the lucrative 43-50% margins. Novadx currently has all the permits needed for mining; they simply need an amendment to the wash plant construction permits!!! All Novadx has to do now is post a bond and should receive final permits shortly thereafter. Which in my opinion significantly de-risks the Rex Mine.
Management has said in the past they believe once final permitting (which could come any day) is given; construction on the wash plant will start ASAP and should be complete within 3-4 months. Once complete, the wash plant should take roughly 1 month of production to work out the kinks before they can announce full commercial production. This means if they have until July to get final permits to keep on schedule for $18-20M in EBITDA next year – which looks like they should accomplish no problem.
One other thing to note is management’s ability to source quality projects like Rosa and Rex. Management has commented in the past that they are always actively looking for more quality metallurgical coal properties and I feel they will pounce on the right opportunity when it becomes available.
Before I leave you to do your own due diligence on Novadx, I wanted to tell you I plan on completing a quick comparable sheet on a few acquisitions in the coal space and also a few other ways of valuating Novadx’s assets which I believe will paint a picture for this stock to go a lot higher. I will post shortly at www.juniorreport.com.
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