China Tracker - Details for Puda Coal (PUDA)

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 Puda Coal
 Analyst Coverage
2011-04-11Rodman & RenshawDowngradeTerminatedn/a

Termination of Coverage Effective immediately to allocate resources more efficiently within our coverage universe. Upon termination of coverage, any of our prior financial projections on Puda should not be considered reliable.

2011-03-30Brean MurrayReiterationBuy$21.00
2011-03-16Brean MurrayReiterationBuy$21.00
2010-12-20Brean MurrayReiterationBuy$20.00

On Dec. 9th, Puda Coal received approval from the Shanxi government, officially allowing it to transition from a coal washing to a coal mining company. In our view, it's an extremely important milestone that Puda is now permitted (beginning January 1, 2011) to mine coal from its Da Wa mine. In addition, Puda also recently completed a roughly $100 million capital raise to fund the rest of its previously-announced thermal coal mine acquisitions (as well as the expansion of those mines). In total, we expect Puda to produce roughly 2 million tons annually from its thermal coal mines (based on its % ownership in these mines) when they are fully up and running. In terms of our new estimates, we are slightly decreasing our 2011 EPS figure, largely based on the new increased share count. However, we are also raising our target from $18 to $20, to reflect the reality of finally being able to call Puda a coal miner, not just a coal washer.

Da Wa Coal Mine to Begin Production on January 1st, 2011: On Dec. 9th, Puda received approval from the Shanxi Coal Mine Industry Bureau to begin production at the Da Wa coal mine on January 1st, 2011. Da Wa is the larger of the two coal mines that comprise the Pinglu Part 1 project. The company estimates that the capacity expansion at Da Wa will take between 8-12 months. During that time, the mine can produce up to 290k metric tons of thermal coal. After the expansion is completed, the Da Wa mine will have a capacity of 600k tons per year. (We'd note that our detailed 2011-2013 production schedule for all of Puda's mines is laid out on page 2.) In our view, the Da Wa approval is a huge milestone for Puda, as it transitions from a coal washer to a coal miner.

Financing in Place for Development of All Puda's Thermal Coal Mines: Puda recently raised just over $100 million for the purchase and development of the rest of its thermal coal mines (Pinglu Part 2). With the financing for all of its thermal coal mines fully in place, Puda can now focus on working to get the necessary permits to ultimately produce up to 2 million tons of thermal coal on an annual basis.

Thermal Coal Markets Continue to Tighten: The global thermal coal markets continue to tighten. Just last week, Dow Jones Newswires reported that Coal India is in advanced discussions with Peabody Energy (BTU $60.53, Buy) to buy a 15% stake in an Australian thermal coal mine, which would value that mine (which produces 2.1 million metric tons of coal annually) at $800 million. In addition, prices in Pinglu County in Shanxi have increased over 10% during the past month.

Valuation: We are maintaining our Buy and are increasing our target from $18 to $20. Our target is based on a detailed DCF model and a 3.5x estimated 2012 EV/EBITDA multiple. We moved our target year from 2011 to 2012, which we have also recently done with some other names in our universe (for example International Coal Group (ICO $7.00, Buy)) In Puda's case, we felt this was appropriate, as 2012 more accurately reflects its expected coal production levels, when its mines are almost all fully running. However, we significantly discounted our target 2012 EV/EBITDA multiple to reflect the reality that Puda still has a lot of work to do between now and then. We'd note Puda is currently trading at just 2.2x 2012 EV/EBITDA. 

2010-11-16Brean MurrayReiterationBuy$18.00
2010-11-03Rodman & RenshawReiterationOutperform$16.00

Puda Coal announced today it entered into mining rights and mining assets transfer agreements with Shanxi Pinglu Renling Coal Industry Ltd. ("Renling Coal") and Pinglu County Donggou Coal Mine ("Donggou Coal"), both located in Pinglu county of Shanxi province. Pursuant to the agreements, Puda (and its co-investors) will pay Renling Coal an aggregate purchase price of RMB205 million (approximately $30.65 million) and Donggou Coal an aggregate purchase price of RMB77.5 million (approximately $11.59 million), both in cash. Puda agrees to pay 50% of the purchase price within three days of signing, 40% of the purchase price within 30 days after assets transfer is completed and the mining permits and property deeds are transferred, and the remaining 10% six months after the completion of the transfer. Puda plans to increase the combined annual capacity of the two coal mines to 900,000 metric tons (MT) from the current aggregate annual capacity of 450,000 MT, after the transfer is completed and upgrade permit is received.

Together with another two coal mines (Xuhutuo Coal and Daqi Coal) with which the company entered into mining assets and mining rights transfer agreements on October 20, Puda has signed asset acquisition agreements with four thermal coal mines, reaching an important milestone in the Pinglu phase II project. This signals that the company has passed the half way point for its Pinglu phase II project, as Puda intends to consolidate six thermal coal mines for the project with a combined proven and probable reserve estimated at 145.7 million MT. Upon receiving the upgrade permit, Puda will increase the total annual production capacity to 2.7 million MT from the previous 1.2 million MT. We continue to expect Puda will reach agreements with two remaining coal mines before the end of 2010.

Please recall that Puda will contribute 40% of the total investments for the Pinglu phase II project. The remaining 60% will be contributed by two co-investors, Mr. Ming Zhao and Mr. Jianping Gao. Thus the total purchase price of the four thermal coal mines (Renling Coal, Donggou Coal, Xuhutuo Coal, and Daqi Coal) that the company actually needs to pay is $28.38 million. This appears to be right within the range that the company previously estimated. (It estimated the total purchase price for 100% ownership of six coal mines would be in the range of $130-150 million, implying $52-60 million for 40% ownership.) With $70.2 million of cash at the end of Q2 and what we expect will be ~$30 million of operating cash flow within the next 12 months, we do not believe the company should have any problems paying for these acquisitions.

2010-10-25Brean MurrayReiterationBuy$18.00
2010-10-10Rodman & RenshawInitiationOutperform$16.00

The shares of Puda are currently trading at 8.1x and 1.7x our 2010 and 2011 EV/EBITDA estimates, compared with respective peer group averages of 8.6x and 7.2x. Other valuation metrics, such as P/B, P/CF, and P/E, also suggest that Puda is trading at large discounts to its peers. We believe the company’s expansion into coal mining has not been fully factored into the share price, and the Street is still largely treating Puda as a coal washing company. In our opinion, the current valuation is compelling and represents an attractive entry point for investors looking to gain exposure to China’s robust coal industry. Our $16 price target is based on 4x EV/EBITDA over our 2011 EBITDA estimate of $75.5 million, implying 103% share price upside from the current level. We believe the company easily justifies such a multiple, as 4x EV/EBITDA is more than three turns lower than the average multiple of 7.2x currently commanded by Puda’s Chinese coal peers.

2010-08-17Brean MurrayReiterationBuy$18.00

For the second quarter in a row, Puda reported very strong 2Q10 results from its coal washing business. Adjusted EPS was $0.36 (excluding $1.3 million in non-cash gains related to the fair value of derivative warrants), well above our EPS estimate of $0.24. Puda’s coal washing business saw significantly higher prices per ton ($137/ton versus our estimate of $123/ton and 1Q10 of $123/ton) and volumes (601,000 tons versus our estimate of 505,000 tons and 503,000 tons in 1Q10) than we had expected. Gross margins were above 15% in 2Q10, almost double 2Q09 levels. Importantly, Puda generated over $16 million in cash from operations in 1H10 and had $70.3 million in cash as of June 30.

2010-05-14Brean MurrayReiterationBuy$18.00

We are maintaining our Buy rating and are raising our target price from $17 to $18. We are also increasing our 2010 EPS and 2011 EPS estimates from $0.87 and $2.18, respectively, to $1.17 and $2.31, respectively. In addition, we are also raising our 2010 EBITDA and 2011 EBITDA estimates from $33 million and $85 million, respectively, to $41 million and $98 million, respectively. These increases are mainly due to Puda’s very strong 1Q10 margins in its coal washing business, which flow through to the rest of 2010 and 2011.

2010-04-06Brean MurrayInitiationBuy$17.00

We are initiating coverage with a Buy rating and a target price of $17 per share (based on a detailed DCF model and a 5.0x estimated 2011 EV/EBITDA multiple). With Puda currently trading at 1.75x EV/EBITDA for 2011, we believe it is extremely attractive here, offering 91% upside from current levels.

READ: Score Cards Explained
DETAILS: Safety/Risk Model for PUDA
Current Price:  n/a
F10k Day (2005-11-02): -100.00%$16.11
2009 Close: -100.00%$7.35
2010 Close: -100.00%$14.25
2011 Close: -100.00%$0.24
High (2012-04-27): -100.00%$0.29
Low (2012-04-11): -100.00%$0.02
Market Capitalization: n/a
Total Shares: 30.02 mill
Float: n/a
Avg Volume: n/a
Short Interest: 5.20 mill
Short Ratio: 25.41%n/a
Last Quarter: 2010-12-31
Revenue (MRQ): 90.53 mill
Net Income (MRQ): 4.11 mill
Op. Cash Flow (MRQ): -5.76 mill
all financial data provided without warranty