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Universal Coal: Worth More Than Three Times Current Value Says Broker

Universal Coal (ASX: UNV) has received a buy recommendation from DJ Carmichael, with a target price of $0.83 - which is more than three times the last traded price of $0.24.

The following is an extract from the report:

UNV is an ASX listed, South African focused coal exploration and development company holding interests in three thermal coal projects in the Witbank Coalfield and three coking coal projects in the Limpopo Coalfield, with ownership structures varying from 30% to 70.5% on a staged earn-in basis.

UNV has responded to media speculation surrounding its coking coal assets and advises that it is reviewing the appointment of advisors to assist the company with any formal approach it may receive on these assets.

Our recommendation and price target remain unchanged but the response does indicate the level of interest in the coking coal assets and signals a high level of M & A activity in the sector in the year ahead.

Key points

The Combined Berenice / Cygnus coking coal project resource was vastly increased in 2H2012 to 1.32Bt of which 402.4Mt (30%) is in the measured and indicated categories. Of this amount, and after taking into account geological losses, UNV estimate mineable resources of 479Mt, chiefly composed of a middling product and a smaller percentage of high grade coking coal.

As a result of the resource upgrade, UNV s interest in the project has risen
to 40% from 22%. A Scoping Study was initiated in 2H2012.

As yet UNV has not received a formal approach but the company has now indicated that a number of Indian and Chinese groups have expressed interest in the coking coal assets and UNV has held a number of discussion from interested parties involved in energy and the steel sector.

The size of the coking coal projects is an attraction for groups seeking long-term feed into steel operations. The project is ideally situated with respect to rail and road infrastructure which increases the level of interest further.

We believe the development is positive for UNV and could result in a formal offer which could potentially inject cash into UNV and potentially provide a strategic partner already embedded within the industry to provide off-take or the financial capacity to play a significant role in project development, possibly both.

We await further news and in the meantime, maintain our current buy recommendation and $0.83 valuation, reduced slightly for the reduction in cash since our previous note.