Stanmore Coal Limited : Stanmore Coal Ltd - Broker Research Report

Equities | Australia | Energy

17 February 2012

12 month view and may not suit your investment needs or timeframe. The basis it is prepared on is summarised on the last page of this report. PLEASE CONTACT YOUR ADVISER

TO DISCUSS THIS GENERAL RECOMMENDATION BEFORE ACTING ON IT.

TP A$1.60 (from A$2.03)

SMR120217

RBS Refiner

Price (close 16 Feb) A$0.890
3M high/low A$0.950/0.700
Market cap A$142.28m Av (12M) turnover A$0.23m Freefloat 55% Reuters SMR.AX Bloomberg SMR AU Net debt (cash) FY11 -A$18.18m
3yr EPS CAGR 12-14F 31.8% Income (2013F div yield) (0.0)%Source: Bloomberg, RBS Morgans

RBS vs consensus

NPAT (A$m) RBSM Cons % diff

2012F -2.9 -7.9 36%
2013F -4.1 -6.1 67%

2014F -5.7 -0.6 949%

Source: Capital IQ, RBS Morgans

Price performance

(1M) (3M) (12M)

Price (A$) 0.79 0.94 1.29
Absolute (%) 13.4 -5.3 -31.0
Rel to mkt*(%) 12.4 -3.8 -18.7

*S&P/ASX200

Source: Bloomberg

Key events

Date Event

1H12 Possible Wandoan approvals
1H12 Possible JV deal

1H12 WICET2 allocations

Source: RBS Morgans

Analysts

Tom Sartor

+61 7 3334 4503 tom.sartor@rbsmorgans.com

Stanmore Coal

Ready to take the next step

2012 is shaping up as a pivotal year as SMR looks to build confidence in its ability to transition from an explorer/developer to a producer by 2015. We believe the company would generate instant market confidence if it executes a JV sell-down of The Range on attractive terms, partially de-risking the +A$600m capital burden ahead of export production. SMR's modest market cap implies 78% upside to our risked valuation of A$1.60ps, with key funding (JV?) and infrastructure milestones (WICET Stage 2, SBR) the key catalysts to watch for.

Event: SMR well placed for another busy year

2011 was a productive year for SMR. The financial viability of The Range was confirmed via completion of the pre-feasibility study (PFS) ahead of a nine-month bankable feasibility study (BFS) that has just commenced. The company's JORC Resource inventory grew to 467Mt (from

318Mt) and confidence (38% Indicated) ,including the definition of 94Mt of marketable reserves at The Range and initial resources at Tennyson and Belview. SMR holds about A$27m in cash to fund The Range BFS, initial infrastructure commitments and ongoing drilling through 2012. In our view, funding obligations are a key opportunity and risk for investors.

Forecasts: Funding and access look heavily reliant on Wandoan progress

Our modelling values The Range (100%) at A$395m on an unrisked basis, but applies layers of conservatism versus the PFS as our analysis highlights the sensitivity of returns to achieved costs. Upside from a current market cap of A$154m is clear, but investors are wary of the

+A$600m in funding required to support mine and infrastructure capex. SMR is currently soliciting possible JV partners, and we believe a successful 10-30% sell-down of The Range (preferably on premium terms, ala Narrabri and Maules Creek) would build instant confidence in the project and the company. However, we believe potential partners may wait until Xstrata's Wandoan project is approved (possibly 1H12), confirming a timeframe for basin development in conjunction with export allocation to juniors, including SMR.

Valuation: 100% owner of a significant coal portfolio; a clean target

We have raised our valuation for The Range following the receipt of the positive PFS, offset by a reduction in our valuation for Mackenzie and dilution. Our valuation adjusts to A$1.60ps (from A$2.03ps) and equates to our target price. We are attracted to SMR's significant QLD coal portfolio and modest market cap. The Range offers a strong opportunity for the company to develop an export business with the help of strong strategic interest in long-life thermal coal supply. Meanwhile, aggressive drilling in the Bowen Basin offers SMR further discovery potential. SMR has looked unloved while the market has been pre-occupied with short-term macroeconomic risk rather than the compelling outlook for seaborne thermal coal. We think this dynamic could rapidly reverse as economic conditions improve, as occurred in 2009. We also believe that, if the market does not value SMR properly over time, potential acquirers ultimately will.

Key forecasts

year to Jun FY10A FY11A FY12F FY13F FY14F Reported net profit (A$m) -1.75 -2.09 -2.86 % -4.11 % -5.69 % Normalised net profit (A$m)¹ -1.75 -2.09 -2.86 % -4.11 % -5.69 % Norm fully diluted EPS (c)¹ -1.34 -1.59 -1.83 % -2.63 % -3.65 % Dividend per share (c) 0.00 0.00 0.00 0.00 0.00
Dividend yield (%) 0.00 0.00 0.00 0.00 0.00
Normalised PE -66.5 -55.8 -48.6 -33.8 -24.4
EV/EBITDA -79.4 -59.8 -30.3 -18.2 -12.6

Roger Leaning

+61 7 3334 4554 roger.leaning@rbsmorgans.com

Use of %& indicates that the line item has changed by at least 5%.

1. Pre non-recurring items and post preference dividends

Accounting standard: IFRS

Source: Company data, RBS Morgans forecasts

www.rbsmorgans.com

Produced by RBS Equities (Australia) Limited, ABN 84 002 768 701, AFS Licence 240530

Important disclosures regarding companies that are the subject of this report and an explanation of recommendations and volatility can be found at the end of this document.

RBS Equities Essentials: Stanmore Coal

Stanmore Coal (SMR) is a QLD-focused coal explorer/developer with projects across the Surat and Bowen Basins. The company is progressing a strategy to grow value through exploration drilling at multiple targets across these basins, while also progressing feasibility studies at its key thermal coal project at The Range in the Surat basin. SMR has lodged applications for 19Mt of export port capacity via

WICET (7Mtpa FFFA Rights) and Dudgeon Point (12Mtpa conditional agreeement).