Buy Gujrat NRE Coke; target of Rs 100: KRC

Event: Australian mine IPO of NRE No1 colliery to boost value   

Gujarat NRE Coke's (GNCL) Australian unit India NRE Minerals  (INML) has filed prospectus for the IPO of its first mine in Australia, viz, NRE No.1 colliery, having reserves of 300 MT. INML is offering 30 million shares at price of A$0.50 and is expected to list in July 2007. At the IPO price, the investment value of INML works out at Rs 35 per share for GNCL.

Update   

GNCL has transformed into an integrated coking coal company from a standalone coke producer. It is the first Indian company to acquire coking coal mines in Australia. The total reserves of the two mines acquired along with Elouera coal mine is 456 MT. The company has also made strategic investment in Pike River Coal Company Ltd. in New Zealand from where it will get the low-ash premium quality coking coal, from end 2007.   

We feel GNCL business can fetch better valuation because the coke prices are on an upswing, the spread is increasing and the increase in valuation because of the investments. The coke prices have moved from ~$230/ton in March'07 to ~$290/ton currently. The company's announcement to purchase BHP Billiton Elouera coking coal mine will provide additional coal reserves for at least 15 years of production.   

The investment value for GNCL in INML, Avondale & Elouera mines, Rey Resources and Pluton Resources comes to Rs 48 per share.   

We have revised our projection upward due to strong coke prices during the current year and the new coking coal mine aquired by GNCL that will provide immediate synergies with existing Avondale Colliery.

Valuations & Financials

GNCL will see good times ahead as it is steadily becoming a completely integrated coal mining company. Also, the improved coke prices and reasonable level of coking coal prices will help it to increase the spread. At the CMP of Rs 59, the stock is trading at 6x FY2008E EPS of Rs9.5 and 4.5x FY2009E EPS of Rs13.2. We hence continue with our STRONG BUY recommendation and a 12-month target price of Rs 100.