According to Dundee Securities:
BUY, Speculative Risk*
Dundee target: C$0.90
April 19, 2013
Funding uncertainty remains. Lowering target to $0.90/sh
Reiterating BUY rating but lowering target to C$0.90/share
CPT has already significantly de-risked the Vista project with the rail and port agreements and the updated $350M secured notes financing. However, development risk still lies ahead. A funding gap of roughly $100-125M remains and is a reflection of the difficult market environment, especially for thermal coal. Unfortunately CPT could not sign a JV or an off-take agreement with end users before construction begins (despite interest there was insufficient time) and we believe this increases the financing risk and as such we are lowering our P/NAV multiple from 0.8x to 0.6x. We are reiterating our BUY rating but are lowering our target to C$0.90/sh (down from $1.10/sh) based on a 0.6x multiple (down from 0.8x) to our NAV of C$1.43/share (down slightly due higher financing costs). Coalspur is still expecting to receive, this month, all regulatory approvals in order to begin construction at its large scale Vista thermal coal project in Alberta this summer.
CPT secures another $50M but we were expecting more
Coalpsur announced they increased their senior debt facility with EIG Energy Partners to $350M (up from $300M last December). We were expecting the company to secure more funding (~$400-500M debt and a JV/off-take) and as such we were disappointed by the news. We believe this reflects more the difficult market environment, especially for thermal coal, rather than the quality of the asset. That said, the company will be able to begin construction this summer as expected, but it will require more funding by the end of 2014 to complete construction. The company noted they are indeed continuing to advance JV, marketing and off-take arrangements with interested parties and CPT now has roughly 20 months to secure agreements.
Dilution for current shareholders but could have been worse
On the positive side, the company retains 100% of their Vista project and the company still has roughly 20 months to secure more financing (our estimate). On the negative side, the deal is dilutive for current shareholders. CPT will now issue 120M warrants to EIG, up from 100M when the facility was at $300M. What's more, the 120M warrants are all exercisable at A$0.55, while the previous arrangement was for 40M warrants exercisable at A$0.90 and 60M warrants at roughly 125% of VWAP. The interest rate on the debt remains the same at 11% (including 3% that can be capitalized). Borrowdale Park (CPT’s biggest shareholders which also previously granted a C$70M loan facility to CPT) will be issued 14M warrants with the same terms as the EIG Warrants for the restructuring of the $70M loan facility into a $30M subordinated debt obligation bearing a 10.5% interest rate (up from 6.25%).
Valuation - Stock down 57% since February 1st
All these new terms described above are less attractive than the previous ones, but CPT's stock is down roughly 57% since February 1st. The new terms will be subject to shareholders' approval which will be voted at a shareholders meeting in early June. CPT is now trading at 0.27x P/NAV multiple, down significantly from 0.63x P/NAV on February 1st. Over the same period, the Newcastle spot thermal coal price went down by only 9%.