Market Rider: Price manipulation target

A likely prey for price manipulation by “tsupiteros,” the local version of the day and swing traders of the market, owing to its relatively small size and modest par value price offer in its initial public offering (IPO), Coal Asia Holdings Inc. (COAL) has done well, so far, since it made its listing debut last October 23.

On the first day of trading, COAL opened at P1.36, hit a low of P1.34 and closed for the day at the session’s high of P1.50 a share, effectively garnering an average price of P1.4644, or a 46.4-percent gain from its offer price of P1. Total volume amounted to 301.55 million shares on a total value turnover of Php427.3 million.

The following day, COAL opened at P1.67, hit a high of P1.68, dropped to a low of P1.42 and close at P1.50 to maintain a 50-percent premium over its offer price. Total volume reached 249.02 million shares valued at P390.67 million. On October 25, the price of COAL opened higher as it did the first two days at P1.53, hit a high of P1.57, dropped precariously at P1.38 before recovering to close again at P1.50. Total volume fell to 95.02 million shares worth P135.14 million. There was no trading last Friday, a public non-working holiday.

Even if COAL’s market performance was limited to the three days last week, these were illustrative enough of what it is to contend with in the coming days.

Public offering

COAL is a holding investment company. Its “primary purpose is to engage in the acquisition of companies specializing in the exploration, development and mining of coal and other energy-related businesses in the Philippines and around Asia.”

Titan Mining and Exploration Co. (TMEC), a wholly owned subsidiary, is COAL’s vehicle in the coal business. TMEC owns three coal operating contracts (COCs) in Mindanao—in Davao Oriental and in Zamboanga-Sibugay.

Based on documents submitted relative to the public offering, COAL (through TMEC) “holds the country’s second-largest proven coal deposits at a combined quantity of 123 million metric tons (MT), composed of 71.1 MT in Davao Oriental and 51.1 MT in Zamboanga-Sibugay.”

The purpose of the IPO is for COAL to “raise P726.87 million in net proceeds” from the issuance and offer of 800 million common shares equivalent to 20 percent of total issued and outstanding capital stock. It will allocate about P450 million to prioritize the development of the Davao Oriental project in order to put it in production as early as the second half of 2013. It is also setting aside P60 million to complete exploration activities in the Zamboanga-Sibugay project, which will allow COAL to have a combined commercial output of about 600,000 metric tons a year in 2014. The balance of P126.89 million will be used for working capital requirements.

With this work program, COAL stands to become “the second-largest local coal producer with the potential to become the biggest producer of high-grade bituminous coal.”

As claimed in its submitted documents, its Davao Oriental mine “is rated to have a higher heating capacity of 8,500 to 10,000 BTU (unwashed) compared to that produced by Semirara Mining Corp., which is rated at around 8,000 to 10,000 BTU (washed).

With about P6 billion in market capitalization based on its last traded price, COAL proceeded over the weekend to hold talks with a local power company in setting up a “mine-mouth power plant” in the Davao Oriental mine with an initial power capacity ranging from 100 to 200 MW. According to plans, the capacity of the power plant will be expanded “to at least 600 MW once the Davao mine hits its full production capacity of 1 to 2 million tons a year.”

This will make the company a “serious player in the local energy sector, particularly in alleviating the power shortage in Mindanao” and, more importantly, provide the needed supply of coal to other local energy producers. This will also make COAL a strategic supplier of “steam-grade coal to the country’s cement plants, canneries and manufacturing plants that have converted their diesel-powered plants into coal-powered plants to mitigate costs.”

In a surprise move, COAL is also in active talks with VenturOil Philippines Inc. “to venture into the oil and gas business.” It is in the process of negotiating oil exploration plans in Service Contract (SC) 6 in Palawan, particularly in the Cadlao and Bonita blocks that are expected to produce up to 11,440 barrels of oil a day.

COAL is the fourth company to go public this year following GT Capital Holdings Inc. (GTCAP), which was listed on April 20 in the bourse’s first board at the offer price of P455 a share, First Gen Corp. (FGEN) also in the first board at the offer price of P100, and Yehey! Corp. (YEHEY) at the second board through listing by way of introduction.

Bottom-line spin

Looking at the way the shares of COAL traded last week, it was quite clear that it had been subjected to deliberate “short selling attempts and/or profit-taking effort” by “tsupiteros” and perennial market bears. Yet, it continued to stand 50 percent higher from the original offer price of P1 a share.

Such force against the onslaught of short sellers and profit-takers or market bears can only be attributed not only to the market-making effort of the company’s principal supporters but by the makings of market bulls that could see the potentials of the company. In any market play, the stock’s price performance can only be sustained by the fundamentals behind it.

As a result of the successful initial fund-raising exercise, COAL is expected to realize a conservative net income of P500 million in 2014 from coal business, based on the conservative price estimate of $80/MT of coal (the current price today is $98/MT). Earnings will go up higher as production output increases in the succeeding years.

Based on related documents in the public offering, initial studied coal reserves are valued at P12.5 billion. This supports an asset value for COAL of P3.125 a share. COAL appears to be the cheapest entry point to an energy and oil and gas investment, too. Its potential stake in VenturOil Philippines may lead it, accordingly, to partake in the latter’s production output that could “translate to a gross cash flow of over $315 million” in 2013.

Lastly, even in its coal business alone, COAL has a projected lower price earnings ratio (PE multiple) as compared to listed Semirara Mining in its estimated earnings for the current year and next year.

(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com.)