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What makes Wescoal different?

Trading statement and special dividend announcement point to company cut from a different cloth to other coal miners.

Wescoal shares were up by as much as 15.8% on Wednesday morning, after the company released a trading statement forecasting an increase of more than 350% in earnings per share for the six months ended September 30 2016.

Wescoal closed at R2.39 per share, up 11.16%.

Compared with the corresponding prior period, EPS was expected to be between 23.2 and 27.8 cents per share. Meanwhile, the company also declared a special dividend of 4.2 cents per share.

The company cited operational efficiencies as one of the reasons for its improved performance but, mostly, it is because of Wescoal’s flagship mine in Elandspruit, which is the goose that lays Wescoal’s golden eggs.

But what makes Wescoal so much better than any other mining company? Its share price has been on an upward trajectory for a long time. And, after a difficult period when the group was hit by boardroom ructions, a failed hostile takeover bid and non-renewal of critical Eskom long-term supply contracts because of its Black Economic Empowerment (BEE) ownership ranking, the company is poised to achieve great things.

“If you step back from the whole mining traditional environment and just consider the underlying assets, you start to understand why they have done well,” says Alpha Wealth fund manager Keith McLachlan, who has been bullish on the stock for quite some time.

“I always thought that the trading portion of the group was underappreciated. And their move into mining was well executed.”

Wescoal started off as a trading company buying from various producers and on-selling to end users – a high-volume, low-margin business model that the company has executed well, comfortably achieving positive cash flows and getting a return on capital. It is also a strategic business, because it gives it insight into the coal market.

No legacy issues

But what places Wescoal above other miners, in McLachlan’s view, is that it doesn’t have the legacy issues that many of the major mining companies do. He says there is a big difference between cost-cutting and driving efficiencies and Wescoal has done the latter. Also, having grown into a junior coal miner, Wescoal had no legacy.

Says McLachlan: “A lot of the other coal miners had legacy operations, which were structured for much higher prices and an inefficient process of capital allocation in a low-price and high-cost environment. And mines are not a very simple thing, once they’re built and running, to change…. Also, you need to have the right people, and before the mining even begins, you need to find the right resource.”

Orin Tambo, a senior investment analyst at Intellidex, says investors are starting to take notice of the stock because Wescoal’s ironed out a lot of issues that might have been considered red flags in the recent past. Particularly, the company has been doing empowerment deals to increase its BEE ownership and is more likely to secure much needed long-term coal delivery contracts with Eskom.

For “junior coal miners, 90% of their output is sold to Eskom (if they have they right empowerment credentials). In addition to having a better BEE ranking, Wescoal has now also secured an export contract, which will enable it to further take advantage of any upside in the coal price),” says Tambo.

Market was not looking

wescoal

Source: Moneyweb

The share has done well. On Wednesday the return on investment would have been more than 10%, whether one was looking at a five-year, one-year, week-, or even one-day horizon. It begs the question how investors could have missed the stock.

McLachlan says Alpha Wealth became bullish on the stock when Wescoal acquired Elandspruit a number of years ago, in a deal that the market priced as having no value. But, clearly, it was a very large and meaningful acquisition.

“Mining stocks and junior miners, in particular, had fallen out of favour at the time. Also as a small cap company, the big investors don’t want to look at it because it doesn’t justify their time. So it went under the radar because not a lot of people were looking at it,” says McLachlan.

He cautioned, however, that while Alpha might have been very smart in hindsight, there was still significant execution risk for the stock. A lot of things could have gone wrong along the way. But management was able to properly navigate challenges and deliver a successful mine.

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