Coal Firm Eyes IPO

WITH the surge in interest in the Philippine Stock Exchange (PSE), the planned IPO or initial public offering of Coal Asia Holdings Inc. is being awaited with considerable anticipation by local investors. The company, with coal assets in Zamboanga Sibugay and Davao Oriental, has filed with the Securities and Exchange Commission (SEC) an application for its planned share offering with its PSE listing set in the last quarter of the year. The reason for the buzz about the share offering is its planned IPO pricing which is P1 per share, the company's par value and the fact that most of the proceeds from the IPO would be used for the development of Coal Asia's mine assets. The company, according to its prospectus, has over 120 million metric tons (MMT) of coal reserves and that further drilling exploration is seen to identify about 200 MMT more.

Coal Asia's prospects are anchored on the growing demand for more coal-fired power plants in Mindanao where its mine sites are located. Of late, there has been an increase in energy requirements in Mindanao as the area went through several brownouts and as hydro power plants, owing to less water, were delivering less energy megawatts. The entry of Coal Asia then provides the southern region an opportunity to take advantage of the growing energy equation that includes the higher need for coal.

Energy players are eyeing the establishment of coal-fired power plants in Mindanao that could benefit the company's coal sales. Prospects also for tapping the export market loom large as other Southeast Asian countries' demand for coal grows with their own power plants. Coal Asia, thus, is an enviable position as the rising demand for coal imports for local consumption has been documented from papers of the Department of Energy (DOE).

The DOE documents show that for the last three years, the Philippines has remained dependent on coal imports. Coal imports accounted for 76 percent of local coal needs as the imports were needed in a process called beneficiation or when coal imports with so-called higher energy output are mixed with the low BTU local coal. Coal imports went up to an all-time high of 11 MMT in 2011 owing to greater demand from coal-fired power plants.

With local energy players, such as conglomerate San Miguel Corp., putting up more coal-fired power plants that produce cheaper energy, Coal Asia's IPO provides a room for investors wanting to take advantage of the growing demand for coal. Even foreign investors, especially those burned in the bankruptcy of several euro-zone countries, are seen to crowd out local investors in the company's planned share offering due to the pricing terms.

Based on the company's presentation, there is a market for its local produce especially for other Southeast Asian countries that also rely on coal for their energy plants. There are export markets that Coal Asia is tapping given the cost considerations for its coal produce. In fact, the company has signed with a Chinese firm the delivery of 600,000 metric tons of its coal production for the next 10 years starting 2013. The company is Hangzhou Fuyang Gaoqiao Thermal Plant, which signed a memorandum of agreement with Coal Asia's subsidiary, Titan Mining and Energy Corp.

Coal Asia is also targeting other export markets for its coal production and these include Vietnam, Taiwan and Hong Kong. The export markets provide the company an extra advantage for the sale of its coal. This augurs well for its stakeholders given that the IPO buyers are entering the company at the same price as its par value. IPOs that were listed on the stock market were usually priced at a premium.

Out of the offering of 800 million shares at P1 per share, Coal Asia is allotting P726.87 million for the development of its Zamboanga Sibugay and Davao Oriental mine assets. The proceeds then from the IPO would ultimately benefit the company unlike when an IPO offering is priced at a premium, which means that existing shareholders would pocket their gains. The Davao Oriental mine is seen to be brought into production in 2014 with the Zamboanga Sibugay the year after.

Coal Asia, though, has other mine assets in the same places from where it would source its projected delivery of coal to the Chinese firm. But the fact remains that the company is well positioned to take advantage of the emerging energy equation that requires the putting up of coal-fired power plants to serve as an impetus for the economic growth of planned economic zones in Mindanao.

The DOE projections show that by 2014, projected domestic coal demand is 15.28 MMT, with the power sector accounting for 85 percent. Cement firms and other industries fill in the gap. That is what makes the Coal Asia share offering a cool investment for aspiring market participants.