Keep You Coal

The name "Coal Asia Holdings," to many of us for now, may very well read as "supercalifragilisticexpialidocious," but it is a name worth remembering a few months from now—particularly to those watching the stock market.

It is the name of the parent company of Titan Mining and Energy Corp. (TMEC), holder of mining rights covering 13,000 hectares in Davao Oriental and Zamboanga, which reportedly sit on the second-largest coal reserves in this country.

According to reports, its coal reserves are the high-grade bituminous coal, commonly known as "black" coal, as opposed to, for instance, "brown" coal. In the coal mining business, everybody knows black coal is the higher grade.

From what I gathered, Titan hired an outside company (Multinational Investment Bancorp., from what I heard) to valuate the mines. Its report said the mines were worth more than P12 billion—at current world coal prices.

Here is the deal: To help fund the coal mining project of its subsidiary, Coal Asia Holdings is issuing more than P700 million worth of shares in an IPO, most likely in the last quarter of the year.

My info is that the company has already filed its application with the Securities and Exchange Commission, or the SEC, since it also plans to list its shares on the Philippine Stock Exchange's "first board." Wait a minute—it even gets better, because from what I heard, Coal Asia is planning to price its IPO at par value of P1 per share. I dare say this: What an opportunity for investors!

It means that every Tom, Dick and Benigno Simeon (aka BS) can have the unusual chance to buy shares in the company at the same price as what its original incorporators paid.

That never happened before in the Philippine financial markets. Most companies doing IPOs price their issues like "designer shares," with too much value put on the intangible name brand.

Currently, the country's largest coal producer is listed Semirara, which also has a par value of P1 per share. The issue is now doing at P22 per share, for a price-earning (PE) ratio of about 10 times.

Based on talk in financial circles, the income projection for the coal of Titan in Davao province alone is about P400 million once the mine starts operation by 2014, initially at 600,000 metric tons of high-grade coal a year.

Let me spell it out to my neighbor's mother-in-law: This should give Asia Coal a PE ratio of just about 4 times at an IPO-purchased price of P1 per share.

At present, Semirara owns the biggest coal reserves in the country, although it has been producing at 7 million metric tons (MMT) a year.

As for Coal Asia—or its subsidiary, Titan—reports said it had more than 120 MMT of proven coal reserves. Word has it that the company is still doing exploration work in its mine site, to prove what it suspects that the site can contain more than 200 MMT of black coal.

I thought it was good news to the people of Mindanao, particularly the hundreds of thousands of workers in businesses that located there, enticed by the government's promise of "cheap" electricity.

And, yes, by the way, it has to be "available." Everybody knows there is still a power shortage in Mindanao.

The power crisis in Mindanao prompted the government to push for investments in more power plants in the area, wanting to diversify the power sources there from the dominant "hydro."

In a recent economic forum organized by Security Banking Corp., Energy Secretary Jose Rene Almendras noted that the Philippines must set up more coal power plants for "base load," simply because they can provide the cheapest electricity.

More importantly, it can be available any time all the time.

Now keep your cool, because luckily for us, the mines of Coal Asia are located at Mindanao, where certain groups are already rushing to build the cheap power source called "clean coal," giving Coal Asia instant access to long-term supply agreements with those groups.

As a policy, the Aquino (Part II) administration also wants Mindanao to develop fast—or even ignite an economic boom—by setting up economic zones all over the island, thus inspiring some groups to invest in cement plants, which are energy-intensive ventures.

It so happens that Coal Asia is one of only a few major coal-mining companies in the area. From what I gathered, Coal Asia is already deep in talks with the Department of Energy, including those power-generation companies. They are talking about supply agreements—and they are long-term, too.

Thus, aside from raising funds through the IPO, the company also draws interest from other investors, including power-generation companies, not to mention the cement industry.

The strategy is clear: Those coal users want to lock their fuel supply from the mines of Coal Asia, even trying to hedge against runaway coal prices in the future.

From what I gathered, even without such contracts with local power-generating companies, Coal Asia had already signed contracts to export its output to India, Japan, Taiwan, Hong Kong and Vietnam.

The problem is that the Philippines will need the high-grade coal extracted from the Coal Asia mines. Official records showed that our coal production reached 7.6 MMT in 2011—with Semirara contributing 96 percent of the total. Actually, for the longest time, we have been producing coal at only a little over 2 MMT a year. The output only tripled to an average of 6.7 MMT in the last three years.

The DoE estimates the demand at 14.23 MMT, mostly from power-generating firms. And so even while the domestic production has gone up, we continue to import coal—make it "expensive" coal—in the last three years. Our coal importation peaked last year at 11 MMT.

That is a lot of foreign exchange that our OFWs must break their backs to earn for us. I just thought we must keep the production of Coal Asia here.