Australia | Jul 30 2010
By Chris Shaw
Riversdale Mining ((RIV)) reported solid June quarter coal production, output of 151,000 tonnes in the period largely matching market expectations. But as Credit Suisse points out, the quarterly result was largely immaterial as it is the future growth of the company that remains of most interest to investors.
In the Credit Suisse model most of the value of the company lies in post-2015 cash flows, as while Riversdale has a huge resource base and mine potential, more meaningful production volumes are about five years away at present.
This implies a great deal of volume, cost and coal price uncertainty in coming years, something the broker suggests makes it difficult to be positive on the stock in the meantime. Citi agrees, suggesting there continues to be downside risk to Riversdale's development and production profile over the next few years.
There are also infrastructure issues the company must deal with and Citi sees these as limiting Riversdale's export potential in coming years. So while the target may be to export 10 million tonnes of coal by 2013, the broker doesn't see this as feasible.
Barging material is the most capex and unit cost effective method for Riversdale's Benga project in Citi's view, but as the Environmental Impact Study for this approach won't be given to the government until early next year, meaning a decision later in 2011 at best, barging capacity is unlikely to be in place before 2013 at the earliest.
What this means in Citi's view is while Riversdale could be valued at between $10-$14 per share assuming development and production plans are met, there is significant risk in the company's ability to meet its production hurdles in the medium-term.
This suggests a period of disappointment in the development of Riversdale's production capabilities, something that is likely to weigh on sentiment and hence the share price. The other issue for Citi is the development plans don't include any allowance for infrastructure spends.
As Citi points out, this implies Riversdale is effectively expecting other parties to finance the cost of construction for its infrastructure corridors and its port capacity. Even if this proves to be the case, transportation costs for the expanded capacity are not locked in, leaving Riversdale at the mercy of the owners of the infrastructure assets.
What this means is there is a big difference between Citi's bull and bear case valuations for the stock, the range being $16.80 to $9.79. Given Riversdale is trading near its bear case valuation and allowing for the risks the company faces in lifting output and exports in coming years, Citi suggests a Hold rating is appropriate.
Credit Suisse has a valuation of $15.30 on Riversdale and has set its price target at $10.50 to factor in the risks it sees in coming years. With the stock trading near this target despite these risks, the broker has gone more negative and downgraded to an Underperform rating from Neutral previously.
RBS Australia takes a more positive view though and retains its Buy rating, as in its view production at Benga is still on track to commence in the second half of next year. While RBS also sees infrastructure access costs as an issue for Riversdale going forward, it estimates a 10% change in the cents/tonne/kilometre cost would only impact on its valuation by around 4%.
UBS also sees long-term value in Riversdale and like RBS rates the stock as a Buy. While Citi rates Riversdale as a Hold given the expected medium-term issues the company will face, it does point out the quality of the resource base in the Moatize basin means the stock has long-term attraction. As well, Citi sees good potential for the company to be involved in further merger and acquisition activity in the sector over time.
The FNArena database shows a total of two Buys, three Holds and one Underperform rating for Riversdale, with an average price target on the stock of $11.77. Shares in Riversdale today are stronger and as at 11.20am the stock was up 9c at $10.29.
Over the past year the shares have traded in a range of $5.17 to $11.35, while the current share price implies upside of around 14% to the average price target in the FNArena database.
