Continental Coal (ASX: CCC) looks set to complete a deal comprising either a direct investment in or an outright acquisition of one or all of its South African thermal coal mining assets by the end of the year, with several non-binding offers received.
Significantly, if implemented the proceeds would be more than sufficient to meet the company's forecast working capital requirements for the next 12-24 months.
The company has received several approaches from India-based coal and power utility companies, as well as major global commodity trading and private equity groups, interested in acquiring all or part of the company's South African thermal coal mining business.
These discussions are well advanced and indicate that the company's assets are currently trading at a significant discount to market value.
Continental has now formalised a due diligence and bidding process with its advisors in South Africa, and has received very encouraging indicative non-binding bids including offers several times Continental's current market cap. of A$16 million.
Don Turvey, chief executive officer, commented: "While occurring concurrently with the other initiatives being progressed by the company, the Board is well advanced in these discussions and are encouraged by the strategic importance of its South African assets to the prospective bidders.
"The indicative non-binding offers received from these parties and the values that they have attributed to our South African thermal coal mining business suggests that our assets are currently trading at a significant discount to market value."
These bids have been reviewed and a final short-list of parties have been pre-qualified by Continental to complete final due diligence.
Final binding and committed offers are scheduled to be received by Continental at end of the September 2012 quarter and, subject to the offers received, the company anticipates completion of the transaction by the end of the year.
The investment in or acquisition of one or more of the company's South African thermal coal mining assets is part of the company's focus to strengthen its balance sheet and increase working capital.
Importantly, proceeds from these initiatives, once successfully completed, should be more than sufficient to meet the company's forecast working capital requirements for the next 12 to 24 months.
Annual corporate costs are forecast to reduce by 60% to $3.6 million in the 2013 financial year, from about $9 million, excluding SIOC-cdt transaction costs, in the 2012 financial year.
The initiatives have centred on the reduction of non-essential expenditure, potentially utilising cash balances in South Africa to fund corporate working capital, and the finalisation of its formal process regarding a significant direct investment and/or acquisition of one or more of its African thermal coal mining assets.
Sale of non-core assets
Continental has received further non-binding expressions of interests to acquire a number of its non-core thermal coal exploration projects in South Africa.
To date this has included proposals to acquire 100% of the company's interests in the Vaalbank, Project X, Wesselton II, Leiden and Mooifontein Coal Projects in South Africa.
Proposals to acquire and/or earn a joint venture interest have since expanded to include the Serowe and Kweneng Projects in Botswana following the results of Continental's Phase 1 drilling program and the definition of a 2.2 billion tonne Inferred JORC Resource.
Continental is looking to finalise negotiations regarding the disposal of its non-core assets by the end of 2012.
The company is also continuing to finalise the settlement of its proposed sale of its shareholding in Vanadium and Magnetite Exploration and Development Co (NYSEMKT:SA) to a Chinese steel manufacturer.
Although Continental and Vanmag remain committed to working with the Chinese buyer to complete settlement of the acquisition, the company has received further non‐binding expressions of interest to both acquire its shareholding in Vanmag and also to develop the asset through a 150,000 tonne per month contract mining operation supported by two off-take agreements and to be fully funded by third parties.
Continental anticipates being able to make an announcement on the status of this early in the December 2012 quarter.
Extension of Mashala Resources acquisition
Continental has agreed to extend the settlement of the acquisition of outstanding minority interests in Mashala Resources to 30 November 2012, and can be further extended to 28 February 2013.
The settlement of the acquisition of the outstanding minority interests was scheduled to be completed by 30 September 2012, for a final consideration of A$8.6m.
There was the option to complete the balance of the Mashala Resources transaction with either cash or shares, at the election of the minority shareholders. These shareholders have sought to receive their settlement amounts via a cash payment.
Settlement is anticipated to be made from proceeds expected to be received from either the sale of non-core assets or from the successful conclusion of a transaction with one of several parties regarding a direct investment in or acquisition of its South African coal assets.
The interest of the company's principal South African subsidiary in Mashala Resources, through which a number of its key coal project interests are held, is currently 86%.
Continental is well advanced in underground mine development activities at the Penumbra Coal Mine, its third mine in South Africa.
First coal production is forecast for the end of October 2012 with a ramp up to the full 750,000 tonnes per annum run of mine production expected by the end of June 2013.
The forecast total capital cost for this project is ZAR328 million (A$38.6m), with ZAR90 million spent by Continental to date from cashflow and cash reserves in South Africa.
The company will further fund ZAR8 million of capital costs from its existing cash balances and has set aside a contingency amount of ZAR17.5 million) from existing cash reserves to fund potential cost overruns.
The remaining balance of mine development costs are fully funded from a secured project finance debt facility from ABSA Capital of ZAR253 million, including a further cost over-run facility of ZAR17.5 million.
Continental is on target to meet its funding requirements for the Penumbra Mine development and with first coal production due to begin at the end of October 2012, the company is seeking to complete its first drawdown under the ABSA Capital secured project finance debt facility by 1 October 2012.
The move towards funding the Penumbra Mine development from the ABSA Capital debt facility allows the company to utilise its cash for other mining and exploration activities, and working capital requirements in South Africa.
That Continental Coal is undervalued has been axiomatic, today's announcement moves closer to crystallising and harnessing this value for CCC investors. It also validates the attractiveness of its assets to industry players.
We believe that the CCC valuation is still worth many more times the currently valued by the market.
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