Top Gainer: Bathurst Resources (BTU)

 Closing price  $1.075
 Change  +0.025
 % change  +2.4%

Phenomenal gains have been made on companies that specialise in the hottest commodities, such as coal explorer Bathurst Resources (BTU), whose shares have risen from just 19 cents to $1.07 – an incredible gain of 500 per cent over the past year. BTU is a New Zealand-focused coal miner with a spot in the Buller coalfield on New Zealand’s South Island. On a day that saw more pain for the wider market on Thursday it was the day’s top gainer, up 2.4%.

Investors should always consider the company, sector and global outlook before buying shares. In the case of coal – thermal for generating electricity and metallurgical or coking for steelmaking – the outlook appears relatively bright.

According to the Australian Bureau of Agricultural and Resource Economics and Sciences, world thermal coal trade is projected to increase by 4 per cent a year to 962 million tonnes in 2016. Increasing thermal coal imports into developing economies – particularly India and China – will drive growth, and growing demand will be met by Australia, Indonesia and Columbia.

And in its 2011 March quarterly report on Australian commodities, ABARES says global metallurgical coal trade is forecast to increase at an annual average of 5 per cent to reach 341 million tonnes in 2016, with emerging Asian economies lifting imports. Coal companies may be a welcome addition to any balanced portfolio, and State One Stockbroking’s John Rawicki offers his value selections for investors to consider.

Rawicki’s list focuses on explorers and junior producers, as he believes they offer the most upside in percentage terms if all goes to plan. That’s the point – potentially bigger gains carry substantially higher risk, which investors should carefully weigh before buying stocks with promising objectives. And BTU was firmly on the list.

BTU plans to start producing high quality coking coal from its Bulla project in New Zealand late this year. “The company’s coal is top quality as its low in ash and sulphur and high in carbon,” Rawicki says. “Another benefit is the coal is near the surface and occurs in thick seams.” He says Bathurst has a JORC Resource of 47.1 million tonnes and will spend most of 2011 trying to shore that up towards its planned exploration target of between 60 million and 90 million tonnes.

CSLA Markets has a buy on BTU with a price target of $1.50, saying that it is cheap based on CSLA’s NPV valuation with substantial upside. “Bathurst is trading at a 53% discount to our A$1.50 target price, which includes a development of the Buller Coal Project to 2.1mtpa,” it says. “Longer term there remains a possibility to increase production to 4.0mtpa, albeit with significant uncertainty around timing. Factoring in an expansion to 4.0mtpa from 2016 would see our valuation increase by 75% to A$2.50, representing around 150% upside to the current share price.” You can read their comprehensive report here.

Other brokers are also bullish on the coal explorer, with both E.L & C Baillieu’s Adrian Prendergast and Goldman Sachs’s Neil Goodwill placing a $1.40 price target. However Prendergast warns that there are risks to the coal miner in terms of weather because the area where they intend to mine is subject to heavy rainfall year round. “The company has designed its pits adequately but can not prevent some fines from being washed away,” says Prendergast. “Also, given the project is in the mountains, operations are at times brought to a standstill by clouds touching down, creating dangerous zero visibility at site.” You can read E.L & C Baillieu’s report here

Meanwhile Goldman Sachs has a positive outlook for coking coal and BTU. “We think BTU is attractively priced given its coal production profile, coal quality and our coking coal price forecasts and, as a commodity, it is geologically scarce,” it says. “While there are always start-up/construction risks with new projects, we regard these as relatively modest for BTU and, given the longer duration of the coking coal story, any such delays will not significantly affect the valuation, in our view.” You can read Goldman Sachs’sreport here.

The Goldman Sachs Resources Fund is also overweight BTU.

Based on Thomson Reuters data, 100% of analysts have a buy on BTU (3 analysts).

 

Stock code: BTU

Charts: Bathurst Resources Limited

More news: Bathurst Resources Limited

Investor Centre: Bathurst Resources Limited

 

Biggest Loser: Bow Energy (BOW)

 Closing price  $1.06
 Change  -0.12
 % change  -10.2%

 

Broker Calls

WilsonHTM: BUY, price target of $1.80

Deutsche Securities holds 5% of BOW

Merrill Lynch holds 5.1% of BOW

Starting the week at $1.02, Bow Energy (BOW) has certainly been in the spotlight throughout the week. After taking out the top gainer’s spot two days in a row amid takeover talk with Monday’s whopping 10% gain and Tuesday’s 8.5% increase, BOW has since seen its share price retreat back to $1.06. It was the day’s biggest loser on Wednesday with a 10.2% hammering of the share price today.

After hitting a 12-month low of 73.5 cents in mid-May BOW had bounced strongly, soaring 60% over the past two months to hit $1.215 on Tuesday.

According to its website, BOW’s “primary business is the discovery and commercial production of oil and coal seam gas fields with projects in several of Australia’s producing Basins”. The focus is on exploration of coal seam gas (CSG), although it is also involved in oil exploration. It has eight CSG projects in Queensland within the Bowen and Surat basins. The next step for BOW is to become a fully fledged producer to supply gas to local and international markets.

With two of the world’s largest investment banks as major shareholders – both Deutsche and Merrill Lynch own 5% of BOW – there’s some serious weight behind the company. And with its announcement on Jul 19th that certified 2P reserves by 60%, the company seems to be moving in the right direction. CEO John De Stefani says that the new gas reserves at Blackwater are a further step towards achieving its goal from the current funded work programs. “Pilot programs are continuing on the Blackwater CSG Field with a series of pilot wells aimed at obtaining further reserve upgrades,” said De Stefani.

If you’re interested in more background information on BOW and where the company currently sits, you can read the Quarterly Activities Report, released on Friday.

Back in February this year John Young, Wilson HTM resources analyst had a $1.80 target on BOW. “Rerating catalysts include achieving commercial flow-rates at its Blackwater and Norwich Park projects, conversion of 3P to 2P reserves and securing major gas supply contracts,” he said. Although it’s a year old now, you can access one of Young’s previous reports from last year on the Bow Energy website:

Bow Energy Limited – Reserve targets and RSPT

Based on Thomson Reuters data, 100% of analysts have a buy on BOW, no change from 3 months ago, although it must be noted that there are only three analysts covering the stock. 

 

Chart: Share price over the year to 04/08/2011 versus ASX200 (XJO)

Stock code: BOW

Charts: Bow Energy Limited

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Investor Centre: Bow Energy Limited