Xceed Resources (ASX: XCD) has received a buy recommendation and $0.30 price target from the UK brokers Old Park Lane Capital. The target price is close to three times Xceed's last traded price of $0.11.
The following is an extract from the report.
Xceed has received and accepted a fully approved offer of project development finance for the development of the company's Moabsvelden thermal coal project in South Africa.
The project debt facility offered by Standard Bank is for R179m (~A$ 20m) which represents 67% of the anticipated development cost of Moabsvelden.
Together with the R65m (A$7m) funds from the Thebe Mining Resources ("TMR") investment, the combined facilities represent 91% of the estimated R268m (A$29m) capital cost of the project.
We view this as a major milestone and re-rating event as a result of significant risk being removed from the table.
The Standard Bank offer amounts to R179m (~$20m) for the main project finance debt facility and an additional R15m (~A$1.6m) for a cost overrun facility.
Rolled up interest for the main facility over a five year tenor amounts to R24m (A$2.6m) and the facility will be provided in Rand. Standard Bank is the largest bank in South Africa in terms of assets and market capitalization.
The facility is subject only to standard conditions precedent such as permitting and off-take commitments.
Moabsvelden's projected R268m (A$29m) capital cost including EPCM and contingencies is now fully covered. The Standard Bank project finance covers 67% of this, with 24% covered by the A$7m TMR funds currently sitting in escrow.
The balance of approximately A$2m will be covered by the company's existing cash resources although the company may need to raise modest funds for working capital and associated non-development purposes.
Key piece of the puzzle.
Critically the offer of debt satisfies one of the three conditions precedent covering the proposed ZAR 65m (A$7m) investment into Moabsvelden by Thebe.
The Thebe funds are sitting in an escrow account pending the satisfaction of the remaining two conditions which are the granting of a Mining Right by the Minister of Mines and the approval of the investment under Section 11 of the Mineral and Petroleum Resources Development Act 2002.
Xceed has been advised that its application for a Mining Right is now awaiting consent of the minister in Pretoria.
Three impressive aspects are:
1. The debt covers ~70% of the capex requirement which is above the norm for this type of greenfield project.
2. Moabsvelden has now been through exhaustive technical and commercial due diligence by the lender and passed with flying colours.
3. Debt funding together with the Thebe investment means that $27m of the $29m project capex has been secured without suffering dilution which is of great benefit to shareholders.
The offer of debt funding materially de-risks the development of Moabsvelden and underpins the value of Xceed. We continue to see compelling value accretion in XCD and as a result of revisions to our model, our NAV has increased to $0.39/sh and we have increased our target price to $0.30/sh.
We believe further upside is likely to be driven by higher thermal coal prices on the back of Eskom's current supply shortage and growing competition with the export market.
We view the offer of debt finance offer as a major achievement and a considerable vote of confidence in both Moabsvelden and Xceed's management team.
This reflects the simplicity and quality of the project and securing project finance removes a major obstacle to the development timeline.
With the project substantially de-risked and production now on the horizon in 2014, we reiterate our buy recommendation and expect further price appreciation from current levels.
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