Kinetic Mines and Energy Limited (‘Company’) is a leading integrated coal producer with production facilities in inner Mongolia. It’s involved in the entire coal production chain – mining, washing, loading, transportation, and trading.
It has an annual processing capacity of 5m tons/year and has access to coal resources of 413m tons plus reserves of 165m tons – which is over a century of production at the current rate.
The industry suffered a decline in demand for electricity as factories reeled from the effects of the Covid-19 pandemic and US-China trade tensions. The supply of coal was fairly well maintained, however, resulting in lower average coal prices during 2020.
The company performed well during this period by controlling costs. It reported TTM sales of $3b (2019: $3.1b), ebitda of $1.2b (2019: $1.2b) and net profits of $890m (2019: $945m).
Coal prices were about 7.5% lower over the year but the company sold 7.5% higher volumes. We think the company can continue to achieve sales of $3.1b and net profits of at least $800m over the future. Capital expenditures have been substantially lower than depreciation – and prospective free cash flows can be higher than $800m/year.
The balance sheet was strong with net cash of $400m and a strong liquid asset position. Net tangible assets were $2.6b. The company’s capital efficiency is indicated by superlative returns on tangible assets of over 30%/year.
The stock is selling for $3b ($0.355/share), which is less than 4x earnings. Though coal isn’t part of the ‘green’ future, the existing producers have made great strides in the quality and efficiency of their operations with respect to the environment, which is consistent with the Chinese government’s current coal policy.
Furthermore, it’s increasingly likely that the stronger players will keep getting stronger through industry consolidation – and the company appears to be in a good position to acquire smaller competitors (and have indicated they will).
Management have paid out 40% of recent profits as dividends, which yields over 12%.
The common stock of this well-run company appears to offer excellent value for the conservative investor.