CIC Energy Is An Interesting Speculation In The Micro Coal Space

| About: Cic Energy (CIEGF)

With coal in the dumpster, and the market temporarily forgetting how integral the black gold is to powering the world's energy and steel needs, looking at the industry with a long (perhaps very long) time horizon could yield some rewards. The junior (and major) coal sectors look like a civil war battlefield with companies lying all over the place getting no respect from the market whatsoever. For some of these, the price might very well be warranted, but for others, it just makes you scratch your head. Given the short-term outlook for China (it certainly appears hard landing) and the coal sector in general, there is the very real possibility that investing in the coal space (and particularly the juniors) could result in dead money for sometime. There do remain those that might be a worthwhile speculation, however.

For those interested, a few notable microcaps to take a look at include Cline Mining (CLNMF), Cardero Resources (CDY), Prophecy Coal (PRPCF), Aspire Resources (ASPXF), Fortune Minerals (FTMDF), and the focus of this article: Canadian and Botswana listed CIC Energy (CIEGF). It is important to keep in mind, though, that CIC and the others listed above are just a few of the perhaps dozens of cheap resource plays littering the market.

For interesting takes on both sides of the spectrum, check out the following well done pieces from SA contributors:

The Darkest Star in the Commodities Boom

Fascinatingly Negative Point of View from a Bernstein Report on the China Coal Situation

Coal Fundamentals:Straight from thr Experts

Investment thesis

CIC's share price has been under quite a bit of pressure due to a failed buyout and a current strategy revision focused originally on supplying coal to two planned power projects, and now, trying to find the best way to export the stuff. These factors, as well as the negative consensus about anything coal-related, have led to a 55% drop in the share price over the past 52 weeks. It has rebounded sharply, however, the past two weeks, jumping up around 40%. The Canadian-based version has decent volume, while its OTC equivalent is very thinly traded, and only one analyst covers the stock.

Like the others mentioned above, CIC is sitting on a lot of coal and is debating the best way to get it out of the ground, and perhaps the biggest rub against it of lacking the necessary infrastructure, to get it to market. In effect, perhaps the company is not unlike a vault without a key.

Perhaps the big question is, if no other potential suitor comes to the surface, and production is several years away, at what price does it become too cheap to ignore? A $10 million private placement by Energy trading giant Vitol in January at prices 37% above the current share price helps to confirm that the price has become detached from the true worth of the company's assets. If you believe that everything has value if the price is cheap enough then CIC might be worth a look.

The asset

CIC's flagship asset is the 2.4 billion ton Mmamabula Coalfield in Botswana. Of the 2.6 billion tons of coal (99% in the measured and indicated category), an estimated 1.5 billion tons are extractable. The Mmamabula field itself is part of the larger Waterberg Coal field forming the western section of it. The Waterberg field is quite vast, accounting for around 40% of all of South Africa's remaining coal resources. After beneficiation, CIC estimates that the 1.5 billion tons of mineable coal would translate into 112 million tons of thermal coal for domestic on-site power generation and 900 million tons for export. It is estimated that getting the mine into production could take around 3-4 years or so.

The company's original long-term plan was three pronged:

  • Power Projects
  • Export Coal
  • CTH Project

The Power Projects were the original focus of the Company, with one or more thermal power station projects planned. This changed, however, when the South African Department of Energy published its Resource Plan for Electricity in 2010, predicting a dramatic reduction in coal for power usage. CIC Energy's planned Coal-to-Hydrocarbons [CTH] Project intends to convert coal to low sulphur diesel fuel and associated products. CIC Energy does not anticipate significant further expenditure on the CTH Project until such evaluations have been completed.

Failed buyout

In November 2010, India's JSW Energy offered $422 million for the company, or around $7.42 a share. After talks fell through, the share price began a steep decline that it has yet to recover from, leaving the company with a current market cap of around $77 million, or a loss of some 82% from the proposed acquisition price. At its takeover price of $422 million, this worked out to $0.28 per ton for the 1.5 billion tons of mineable coal in the ground. Since shedding close to 87% of its share price, the value now assigned to the coal in the ground is about $0.051 per ton.

Was the failed buyout reason enough for the stock to lose 82% of its market value?

It was noted that the reasons why the acquisition failed was that the government of Botswana didn't renew one of the two mining licenses held by CIC in March of 2011, as well as JSW wanting to set up a power plant in Botswana for the rail links to the ports to be functional. It wanted all outstanding issues with Golden Concorde (a partner of CIC), to be settled before the deal was signed. CIC and Golden Concord had agreed to build a power station and develop a feeder mine at Mmamabula, but later fell out over the terms of the power purchase and coal supply agreement.

On the surface, it sounds quite bad. However, the license that was turned down was for Mmamabula South. This field contains roughly 311 million tons, whereas Mmamabula East's license (which holds the brunt of the coal at 2.3 billion tons) was renewed for two more years. Mmamabula South had previously been renewed twice before being rejected in March.

The company further noted that despite the bad news, they are applying for another renewal, and also noted that the coal at Mmamabula South would have been quite difficult to mine anyway.

The deal with Vitol has apparently shifted the focus to exporting out of Mozambique, where the energy trader in January bought a 35% stake in Grindrod's Matola Coal Terminal.

Is a picture forming before our eyes?

It is difficult to say if Vitol genuinely views exporting coal out of Mozambique a likely scenario or if they simply view $10 million a tiny sum they are prepared to part with for the chance to make multiples of that if things work out. The prospect of Vitol taking CIC out is always a possibility too. In light of events over the past few months, it certainly appears that Vitol is looking to export coal out of Mozambique, and CIC could prove a good proxy to do so. The deal signed with CIC gives Vitol the right to market 60% of any future export coal from CIC's Mmamabula project. CIC has stated this figure could reach 20-million tons a year, provided a rail and logistics solution is found.

Around the same time Vitol signed the deal with CIC, they announced a 35% interest in the company which holds the concession for the Matola Coal Terminal from Grindrod Limited, that could provide access to international markets for exporting. Vitol and Grindrod also announced that that they would conduct a feasibility study for an expansion of capacity at the Matola Coal Terminal by 20 million tons per year, which is the same 60% given Vitol under the contract with CIC.

As it all relates back to CIC, perhaps their best hope is to wait for a buyout from Vitol if they are successful in expanding the capacity at the Matola coal terminal. That said, it could still be dead money, despite the recent events. This is just one junior coal play in a field of many prospective speculations, but it is one I'm keeping my eye on.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.