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Xceed Resources: A Cash Backed Coal Developer Worth Double Says Old Park Lane

Xceed Resources (ASX: XCD) has received a buy recommendation from the UK based Old Park Lane Capital, with a target price of $0.22. This target is more than double the last traded price of $0.10.

The following is an extract from the report.


Xceed Resources Ltd is an emerging coal explorer and developer with a portfolio of projects located in South Africa. Xceed is listed on the Australian Securities Exchange under the ticker ASX: XCD.

Xceed plans to bring its flagship Moabsvelden thermal coal project into production by late 2013 producing 3Mtpa ROM coal for sale to the domestic, industrial and export markets in South Africa. The company's South African projects are fully BEE compliant.

· Low cost transition to producer. A modest capital expenditure plan and industry competitive operating costs should see Xceed rise to the ranks of producer with a robust coal operation. Moabsvelden is a long life (66Mt JORC resource, 95% Measured), low-strip ratio, open pit operation which our modelling demonstrates to be highly profitable.

· Not dependent on Richard's Bay port allocation. As well as producing local power station coal, Xceed has identified strong demand in the industrial market and from 3rd party exporters at competitive mine-gate coal pricing vs. export sales on a FOB basis, negating the need to secure allocation at RBCT, which is a major obstacle for many operators.

Moabsvelden is located much closer to the industrial market customers than the majority of other operating coal mines.

· Cashed up and ready to go. With A$9.5m cash in the bank and no debt, Xceed is in a strong financial position, being fully funded through to the start of construction at Moabsvelden in late 2012. No further resource drilling is required.

· Deeply discounted coal play. Our analysis indicates that Xceed is trading at a significant discount on an EV/t basis compared to its peers in the Southern African coal sector. In part this reflects development and funding risk, but also that XCD is at present, a single project developer. We expect the company to re-rate as key hurdles are achieved.

· Take-over target. With Moabsvelden racing towards production and XCD's strong cash position we view the company as an attractive take-over target. Our analysis of XCD and recent coal sector M&A transactions, suggests that a current takeout value for XCD should be in excess of A$0.20/sh.

If XCD is successful in obtaining permits, off-take and funding we expect the stock to command multiples as a compelling target within a consolidation of the South African coal space.

· Compelling valuation. Our NAV for Xceed Resources is A$49m or A$0.35 per share fully diluted, indicating that the company is trading at a significant discount with a current P/NAV of 0.32. We set our target price at A$0.22/sh after adjusting our NAV for financing and development risk. We view this target price as conservative.

· Key Catalysts. Moabsvelden feasibility (March 2012), key permits, off-take and financing (in next 12 months) We initiate coverage on Xceed Resources Ltd with a BUY recommendation and a price target of A$0.22/sh. Our valuation suggests material upside if Xceed is successful in developing Moabsvelden on-time and according to current plans.

Valuation summary:

Net asset value - A$0.35 per share

Our net asset valuation (NYSE:NAV) for Xceed Resources is A$49m or A$0.35 per share, fully diluted. This is based on a discounted cash flow valuation of the company's primary project, Moabsvelden, using a 12% discount rate.

Our base case model is more conservative than management estimates and in particular we have used higher capex inputs and assume a 6-month delay to the start-up of first production at Moabsvelden. Our valuation implies that Xceed is currently trading at a P/NAV discount of 0.32, presenting a compelling opportunity for capital growth against the current share price.

Target price - A$0.22 per share

We set our target price at A$0.22/sh. We derive our target price from our base case NAV of A$0.35 and then make a series of adjustments for the required equity financing to produce an adjusted postfinancing NAV (A$0.29), which after adjustment for development risk, drives our target price.

We assume that Xceed will need to raise A$19m in equity based on a 60:40 debt to equity split applied to our total funding assumption of ZAR 330m including working capital and rehab costs. Our capital cost assumption is conservatively 25% higher than management estimates.

We assume the new equity is raised at A$0.20 per share at a premium to the current share price and factor in the dilution as a result of the issue of 95m shares. We assume the equity raise in mid-2013, and believe that by this point, Xceed's share price should have benefited from any de-risking as a result of the company meeting development hurdles, and thus we deem a raise at 20¢ achievable.

Finally we apply an NAV multiple of 0.75 to reflect development, funding, timeline and other risks to derive our final price target of A$0.22. Our target price implies a 97% return to the current share price.