The Short Case For Corsa Coal

| About: Corsa Coal (CRSXF)
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Summary

Metallurgical coal is literally going gangbusters. Finding a pure-play met over the counter, OTCBB firm seems like a no brainer.

But I did really want coal to jump by $50, if it convinces management to spend $26m on reclaiming a high cost mine?

Analysts' reports couldn't address the question since: 1) they relied on samples that were shorter than super cycles, I grabbed data since 1890.

2) Historical and go-forward costs diverge markedly. It costs CRSXF $52/ton produce coal at their Acosta mine. Despite commanding the same price at FOB rail, it costs $92/ton to produce.

After addressing these deficiencies, and based on my analysis of CRSXF, I derived a target price of $2.09 a 38% discount to the market price of $3.39.

Elevator Pitch

The catalyst for the coal price surge was policy based and fleeting. If steel and therefore met markets are to sustain the recovery, they need to ride the coattails of fundamental economic drivers. Unfortunately, there are none on the immediate horizon. China has carried both industries for decades, unfortunately it is transitioning from an industrial to a service economy. But the biggest threat to met coal are EAF mills-they do not require met to produce steel. 47 of the 83 steel producing countries no longer operate OBCs. But currently listed firms will not last that long. Betting on met is a heads you don't win, tails you lose wager. The firms with leanest cost structures are titans like Arch and Peabody, who are reemerging from bankruptcy. They literally cut costs more than they could legally pre Chapter-11. Even if prices continue to climb, emerging firms and current titans, (Arch Coal (NYSE:ARCH), SunCoke (NYSE:SXC), RAMACO (NASDAQ:METC), Peabody (BTUUQ)), will boast a unassailable cost advantage. The threat to Corsa and all other currently listed (NYSEARCA:XME) entities is real and immediate. For a discussion on thermal coal please refer to my new article: Short Peabody. Long Live Pea'v'body.

Thesis & Catalyst For Corsa Coal Corp. (OTC:CRSXF)

The management's guidance for 2017 is based on alternative facts and unlikely outcomes. They expect to derive 100% of its sales from international markets, double the 2015 and 2016 levels. While its reported cash margins are attractive its actual margins are horrendous. It has posted negative gross margins for two years running. The management also has a proclivity for self-inflicted wounds; its operations are a revolving door of mines. Wasting expansion capex and incurring idling costs that run into the millions per mine.

Valuation

Based on my investment thesis and a lattice framework I derived an enterprise value of $224.12m for the NAPP segment and for $21.71m CAPP, for a total EV of $245.84m. Implying a target price of $2.09 a 38% discount to the Feb 13th price of $3.39.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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