An Extremely Hidden Asset Just Got More Interesting
One of the first articles I ever wrote up was titled “An Extremely Hidden Asset”.
The asset is a small coal mine. It produces around 2.5 million tons of thermal coal per year.
The company has a share price of $0.08 cents and a market cap of $15.5 million. There is $21.3 million of debt on the balance sheet for an enterprise value of $36.8 million.
I tweeted about this company last night. Over Valentine’s Day. When I was waiting for my girlfriend to get ready to go out.
The coal asset is interesting because not too many people would know about it unless they have read the financials of an obscure financial company that invested in non-conforming residential mortgage loans.
What makes the asset “hidden” is that this financial company added a single paragraph at the bottom of their last annual report saying they bought a coal mine.
That single paragraph got me interested. Very interested.
After some digging I realized this coal mine could generate some serious cash for this enterprise.
Even better, you can find mine employment and coal production data from government websites that shows this mine’s annual production — which was around 2.5 million.
After getting production data you just have to plug in a few assumptions to your model and you can value this asset.
My original assumptions were that the company was going to be generating 2.5 million tons of thermal coal and selling the tonnage for around $15 per ton.
Assuming the company made around $4 dollar per ton of margin, the asset should generate $9.6 million of mine level EBITDA per year.
Back out $2 million of corporate and $1 million of capex, you get a mine generating $7.6 million of free cash flow per year.
Not bad for an enterprise value of $32 million (the enterprise value when I originally wrote the company up).
But here is where things get better.
After spending more time looking at the data. It appears the company is actually selling the thermal coal for $50 per ton.
In addition, it appears as if the company could have $500 million of NOLs that will shield all cash taxes for years to come.
If I use the same assumptions as above ($11 per ton of costs, $2mm corporate and $1mm capex) and assume they sell their thermal coal for $50 per ton, we get a cash flow profile of $94.5 million.
Now this is just a little insane. Cost per ton is probably closer to $35 and corporate will probably increase to something like $5 million and capex will probably be closer to $4 million.
But even if we plug in these assumptions, we still get a company generating $28.5 million of free cash flow per year.
$28.5 million of free cash flow per year with an enterprise value of just $36.8 million.
Plug in any assumption you want. But with thermal coal selling at $50 per ton and the company producing 2.5 million tons of coal per year, things get really interesting.
Let’s dig into this some more.