This small cap is turning around its fortunes, but not its share price.
There aren't many companies producing coal in the UK nowadays, and those that still are don't always find it easy going.
The third largest of these is AIM-listed ATH Resources (LSE: ATH) whose recent history has been a little chequered, as I explained in October.
Since then, the shares have put on a few pence and stand at 58.5p, valuing the mining group at £23.4m -- though this will be little consolation to investors holding from around £2 a couple of years ago.
The company was listed on AIM in 2004, and operates three surface coalmines in Scotland. It has coal reserves of 8.6 million tonnes and has planning permission to start production at Netherton in the West Midlands. It currently produces around 2 million tonnes a year.
Coal is still used to generate a third of the UK's electricity and ATH has supply contracts with four of the UK's main electricity generating companies.
The basic investing case is that if ATH can overcome its problems, which seem essentially temporary in nature, and return to anything like previous levels of earnings and dividends, then the shares are too cheap by half.
Admittedly, that's a big "if" but such is the nature of investing against the herd -- and there's refreshingly little interest in ATH. Of course, this may be with good reason. Last year's record freeze impacted profits badly, and the current Scottish winter isn't exactly mild so far.
The Glenmuckloch mine also suffered from geological problems, causing ATH to struggle for cash and cut the dividend at a time when it also needed £14m's worth of investment for development of its Netherton and Duncanziemere mines. The combination of these factors caused the share price reacted as you might expect, hitting a low of 53p in October.
On the upside, future production from Netherton and Duncanziemere and the sale of ATH Regeneration for £6.5m in cash, plus royalties over 7 years capped at £8m and a possible £2.5m from the eventual sale of land and buildings -- could eventually total around £17m.
Turnaround in progress
Wednesday's final results for the year ended 3 October seem to show that the company is on track to turn its fortunes around, but if it is, this isn't reflected in the share price so far.
ATH's expected drop in profit isn't really news, as it was already known and in the price. But looking forward, the company looks well positioned to deliver increasing returns as the impact of its legacy contracts reduces during 2012.
Operating profits from continuing operations of £7m on sales of £78m, net borrowings down by £4.9m to £34.5m, total coal reserves of 8.6 million tonnes (following planning consents at Netherton and Duncanziemere) and an average selling price of £43.70 per tonne, all combine to make the £23.4m market cap look rather stingy.
ATH also says that a new generator sales contract is being finalised which will further increase average prices. Next year will see production commencing at two new mines at Netherton. The company will now focus on replacing its below market legacy contracts with new sales contracts at current market prices, increasing reserves, reducing debt and the delivery of a "progressive dividend policy".
The brokers see earnings per share of over 11p next year and a restoration of the dividend to 5p (less than half its historic level). I think they'll be proved right and that the current price is, therefore, too low.
It would be the icing on the cake if the new executive team in place at ATH agreed with this view and bought a few shares of their own.
More on small caps from David Holding:
> David owns shares in ATH Resources.