Broker snap: Caledon still a prize worth having

Coking and thermal coal producer Caledon Resources may no longer be officially in play as a bid target but Westhouse Securities thinks another bidder could yet emerge for the company.

Last week the company announced it was no longer in an offer period as the indicative 68p per share offer it had received in mid-July had been withdrawn. The shares have recovered from the setback of failed merger talks with sector peer Polo Resources in June, but Westhouse thinks the shares still have further to go, and has set a target price of 77p.

"The withdrawal of the indicative offer is the latest instalment of a saga that has been going on for the past 18 months and coincided with the collapse of the coal market at the end of 2008. On 19 January 2009, the company announced that it was in discussions with a number of parties regarding a variety of deals, including a possible takeover of the company. In June 2009, The Times reported that four parties were interested, including Tata Steel and Denham Partners. Interest increased with the Essar Group of India, which had made a US$150m bid for Rocklands Richfield, visiting Caledon's operations. On 8 December 2009, Caledon announced that it was no longer actively seeking the sale of the company," writes Westhouse analyst Mark Heyhoe.

Since then there has been the abortive merger with Polo, which was kyboshed by the proposed introduction of a mining super tax by the Australian government, and then July's indicative offer, which also fell through.

As one of the few coking coal producers on the market, however, Westhouse thinks Caledon will still be of interest to somebody, with the current high coking coal price of more than $220 a tonne reflecting the tightness in supply.

"Caledon's management has failed to deliver over the past few years and we expect them to fall short of their 700kt [kilotonnes] production target this year. However, with a shortage of available coal export capacity and good quality coking coal projects, we expect interest in Caledon to continue, especially if the company secures an export allocation at the Wiggins Island Coal Terminal (WICT),"

Despite the prospect of a fund raising through the issue of new equity, plus the company's exposure to the US dollar/Aussie dollar exchange rate, Westhouse thinks the bull case outweighs that of the bear's and has initiated coverage of the stock with a "buy" recommendation.