Investment bank Renaissance Capital highlighted the potential for significant growth for Beacon Hill Resources (LON:BHR) as its Moatize coal project in Mozambique nears completion.
Jim Taylor, analyst at the Moscow-based bank, released a research note on the mine developer this morning. The broker started coverage on Beacon Hill with a ‘buy’ recommendation, targeting 27 pence a share.
Renaissance is Beacon Hill's largest shareholder with an 18 percent equity stake, held via its Renaissance Partners unit. The investment bank is also the group’s joint broker.
Beacon Hill took control of the Minas Moatize mine back in 2010 when it was producing a small amount of ‘unwashed’ coal. The company quickly achieved a four-fold increase in production, albeit from a modest base, from 2,000 to 8,000 tonnes per month.
But the expansion programme is set to eclipse current output.
The open-pit expansion programme, which will be completed in early 2012, will take annual coal production to around 4 million tonnes - including 920,000 tonnes of coking coal, 850,000 tonnes of high quality export standard thermal coal and almost 600,000 tonnes of domestic quality thermal coal.
On top of this expansion Beacon Hill is also mulling the acquisition of a nearby licence (1165L), immediately east of Vale’s Moatize project, which will be producing 11 million tonnes a year by 2014.
Beacon Hill reckons its new licence, if acquired successfully, has the potential to significantly increase the group’s resources and could ultimately transform the group into one of the leading operators in Mozambique.
It signed an MOU with Indian firm Global Coke Ltd which set out the terms of the US$42 million licence acquisition. The due diligence for the deal is due to be completed very shortly.
In separate business, Global Coke has already paid Beacon Hill US$5 million upfront for a life-of-mine offtake deal for coking coke produced at the Minas Moatize mine.
Renaissance analyst Taylor values Beacon Hill at 37 pence a share (unrisked), from which it derives a risk adjusted 27 pence price target. But this valuation does credit the company with any value for the new licence.
Taylor points out three main catalysts to cause the stock to rise in the next year. Firstly the successful completion of the mine expansion in early 2012, followed by securing infrastructure capacity to allow large scale exports and thirdly the completed acquisition of the 1165L licence.
It is important to point out that Beacon Hill is not alone in the mining game in this part of Mozambique, especially when considering the development of transport infrastructure. The Moatize coal basin is in the middle of the Mozambique’s Tete province, an area that this rapidly becoming a significant mining region.
Indeed the emerging industrial mining hub - where several firms are developing major coal and iron mining projects – is particularly important because its position on Africa’s eastern seaboard, which gives it easier access to the world’s principal growth markets in Asia.
The region is expected to become a strategically important, premier mining location over the next decade.
Some of the companies developing new mines, and associated infrastructure, in the Tete province are Vale (NYSE:VALE), Riversdale (ASX:RIV) and Nippon Steel, as well as juniors Ncondezi Coal (LON:NCCL) and Baobab Resources (LON:BAO).
Looking at the options for rail infrastructure Taylor said: “Projects currently under consideration by companies in the Tete province of Mozambique have the potential to produce somewhere in the region of 85 million tonnes per year of export coking and thermal coal.
"In the medium term there are a number of infrastructure routes that we expect to be developed that have the potential to support production on this scale."
He added: “However, in the shorter term, the transport of coal from the region to the port is limited to the existing Sena rail line, or trucking.”
He highlights that Beacon Hill has secured its own facilities at the Mozambican port of Beira, and the company expects the facilities will have the capacity to load one million tonnes of coal each year and this could be expanded further as necessary.
Crucially the first ‘demonstration’ coal shipment will be made from the port later this year and regular shipments are being pencilled in to start in 2012, subject to the availability of rail capacity.
"We would expect the company to be able to export all of the planned coking coal production and a limited amount of export thermal coal production, with the remainder being stockpiled," Taylor added.
With such a busy schedule in the months ahead Beacon Hill certainly looks like one to watch in this exciting regional development story.