This coal miner may be a good recovery candidate.
Mining for coal in Scotland may not sound like the sexiest resource-based investment on the planet, in these days where rare earths in far-flung lands are all the rage -- but ATH Resources (LSE: ATH) may be worthy of recovery investors' excitement.
It really all depends whether you view ATH's glass as half full or half empty.
The company was listed on AIM in 2004 and operates three surface coalmines in Scotland; Skares Road, in East Ayrshire, Glenmuckloch in Dumfries and Galloway and Muir Dean in Fife -- though it is headquartered in Doncaster.
It is currently the third largest producer of coal in the UK producing around two million tonnes a year.
Coal is still used to generate a third of the UK's electricity and ATH holds coal supply contracts with four of the UK's main electricity generating companies.
Finding new coal
In October 2006, ATH started work on a new surface mine at Laigh Glenmuir in East Ayrshire and obtained further planning permission to extract 800,000 tonnes from an extension into Duncanziemere land in June 2010.
Planning permission was also granted to extract up to 4 million tonnes of coal from the company's Netherton site near Cumnock, East Ayrshire in June.
ATH has a number of other coal mining projects in Scotland and two through its French subsidiary, SRMMC including a series of six existing coal concessions in south-central France, with an estimated resource of approximately 4.5 million tonnes of coal.
Up a bit, down a lot…
In July 2010, ATH sold the assets of ATH Regeneration Ltd, the proceeds of which could total around £17m over a seven-year period comprising £6.5m in cash on completion plus royalties.
The news gave the shares a bit of a boost as they went north of 65p. But then on 7 October, the company told us things weren't going too well.
One of the coldest winters for many years didn't help matters -- and unexpected geological conditions at the Glenmuckloch mine during the second half reduced coal production causing the company to lower its estimate of remaining reserves by 50,000 tonnes.
As the mine is reaching the end of its life, this led to an accelerated write down in the value of work in progress of £0.75m, which will badly impact the year-end figures.
The bad news knocked around 10% off the value of ATH. At the time of writing, the shares stand at 54.5p valuing the mining group a shade under £22m.
The question now is whether the bad news is temporary or here to stay. As with all investments, there are two sides to the story.
The Bullish View
From a bullish viewpoint, the historic earnings and yield (the historic yield stands at around 20%, but then the shares were almost four times their current value just two year ago) and net tangible assets, which exceed the market capitalization, are reasons to be cheerful.
These factors, combined with the essentially short-term nature of the negative parts of the trading update and potential for future earnings have created a buying opportunity for optimists.
With the latest trading update, ATH also told us that its proved and probable reserves now stand at a higher level than at any time in the company's history at 8.5 million tonnes. The resources upgrade follows recent planning successes at Netherton and Duncanziemere, and an extension to the Laigh Glenmuir mine.
Average selling prices during the company's first half to 4 April were £44 per tonne, whilst new long-term sales contracts have been agreed with expected average prices of £36 per tonne.
The Bearish View
From a bear's perspective, the inevitable slashing of the dividend and requirement for the small matter of £14m of investment to open up both of the new Netherton and Duncanziemere sites are reason enough to watch from the sidelines.
Clearly the final results to the end of September aren't going to be too pretty. But that looks like it's already in the price. The valuation is all about future prospects, balance sheet strength and the £14m funding requirement.
The brokers see relatively paltry earnings for the full year, with a recovery next year to earnings of 11p, which, if correct, place the shares on a forward price-to-earnings ratio of 5 -- and which would be consistent with previous years' earnings when, of course, the share price was far higher.
The brokers also predict a dividend, next year, of 5p. I think they'll be proven right and the share price is too cheap.
More share ideas from David Holding:
> David owns shares in ATH Resources.