CR: Placement to GEAR
Golden Energy and Resources (GEAR) is a Singapore listed company that owns Stanmore Coal (ASX:AMR) as a subsidiary. GEAR has taken a $15M stake in AHQ and will also fund the reconstruction of a rail link from AHQ's mine to the main rail loadout point (Jansen).

It's rare to feel enthusiasm about an equity placement  as they're almost always at a discount to market, so by default existing holders are being diluted, but as far as equity placements go this is about as positive as they come.

GEAR's placement at 9c is at a relatively small discount to SP, which was around 10c at the time, and follows a recent SPP where shareholders could buy extra units at 8c, so the feeling of dilution is minimal. 

Also GEAR's placement doesn't purely come with cash, but a plan to fund the reconstruction of a rail link that will a) ease  a bottleneck on Elk Mine's transportable production volume  and b) create a direct production cost reduction by removing the current need for AHQ's coal to be trucked ~40km to the nearest rail loading point.

The production cost saving is estimated at $6/t. We don't yet have a timeline for when the reconstruction would be done, but if it were in place for 2022 and AHQ's 2022 production estimate of 1.6Mt holds true, that would imply a saving of $9.6M, or about 2/3 the value of GEAR's placement saved in one year. So there is potential for this placement to have minimal or no dilution impact if it creates value while diluting.

The market seemed to agree this was positive news as the SP seems to have settled at 12c up from 10-10.5c prior to announcement.

Key upcoming announcements are the commencement of production (hopefully before the end of this month), and the first shipment (hopefully before end of financial year). Each of these announcements should see the SP rise if the milestones are met so while we've already seen 50% gains in 2020 I think there's potential for at least another 50% if the company delivers on its planned timeline (while any slippage would likely produce the opposite effect).

Disclosure: I hold shares in AHQ

Production Timetable Update

AHQ has released a progress update indicating that mining production is now scheduled to commence in mid-late April and first shipment is due in June.

This pulls the production timetable forward slightly and with more specific dates than had been previously announced, so is positive news.

The announcement also makes mention that demand for met. coal is strong with AHQ fielding growing interest from steel mills as we near production. Ironically ASX-listed AHQ looks likely to benefit from China's tariffs/volume limits applied to Australian coal as AHQ's mine is US-based.

SP is up a few % today but I would say deserves more as the growing certainty around the production schedule and confidence in product demand are positive statements addressing the two key business risks (1: When will we produce anything? 2: Can we profitably sell it?).

Capital Raisings & SPP
Last month AHQ announced a $15M private placement capital raising, which has since been extended by an additional $10M; and a $2M SPP is currently underway.

As a retail shareholder I'll be disappointed if the SPP is scaled back at all after the institutional placement was increased simply due to insto demand (place to existing holders and make new entrants buy on market, damnit!); but questionable treatment of retail shareholders aside, I think the CRs are positive signs for the company.

While the initial $15M placement was at a discount to the immediate past market price, the market had moved up significantly shortly before the CR so the placement was not at much of a discount to a truer sense of 'recent market price'.
Additionally, the $10M extension to the CR was made at the same price of 8c, despite that being at a premium to the market price at the time - i.e. institutions recognised that the SP was only temporarily depressed by the CR/SPP and would likely climb again once this was complete; indeed it has climbed while the SPP is still open meaning the SPP will likely be oversubscribed as it represents an immediate capital gain.
The CR was at a 60% premium to the last CR completed in November 2020 (3 months prior) so there is wholesale investor agreement that there is value at the current share price, indicating reasonable chance of a re-rate in the foreseeable future.

For the business, the CRs means the mine plan is now considered fully funded. This removes one significant risk pillar in that, in a high-level sense, I previously saw three risks: 1. Funding 2. Execution 3. Coal Price.
Funding is now fully resolved, and the execution risk I consider lower after researching more and learning AHQ will be using room and pillar mining, which is a technically simple form of mining. Any mining operation still faces potential mistakes and delays so execution risk is never removed, but I consider it lower than previously thought. Coal Price is a risk completely the control of the business, and probably is mostly dependant on the world continuing to recover from the pandemic. Recent slowdowns in vaccine rollout due to concerns re: AstraZeneca are not ideal news, but we aren't seeing worsening health conditions globally so I think recoveries are still broadly progressing well.

Given the SP was trading around 8.5-10c and peaked at 11c prior to the CR announcement, once the CR and SPP are completed and the project is now funding de-risked I expect the SP will likely return to that ~10c level relatively quickly, and could possibly even re-rate higher.  
If there isn't an immediate re-rate, then I think the next target milestone is the commencement of production. Funds from the CR mean AHQ expect production to commence within 3months ("June quarter 2021" according to the announcement), so  expect we will definitely see a re-rate if this target date is met.

This means we have the likelihood of significant capital gains being realised within a few months. As stated, execution risk always exists and a startup resource company is highly sensitive to market conditions for that resource; but I think the prospects are strong and the timeline to see gains is not too distant.

AHQ is a would-be coal miner who have acquired one mine in Colorado that they are in the process of getting started. The mine will produce metallurgical coal, not thermal, which is not currently easy to substitute with a renewable fuel source. This is a relevant distinction as it somewhat insulates the company against possible policy developments like a New Green Deal deal from Biden and/or insto divestments (though an ESG divestment may not recognise the distinction between thermal and met. coal).

Based on their latest mine plan, AHQ are targeting sales of 450kt (kilotonnes) in 2021 and 1600kt in 2022. AHQ estimate all-in production costs of ~$95/t and a predicted sale price of ~$130/t, for a margin of ~$35/t.

Accepting the forecast numbers at face value, we would see 2021 EBIT of $15.75M (0.45Mt * $35/t) and 2022 EBIT of $56M. Tax in these early years would be expected to be low due to startup costs, so EBIT will approximate NPAT. Shares on issue ~860M; or ~880M if fully diluted by options (though some of these options strike at $0.28, ~200% above current SP).

From those numbers, forecast EPS for 2021 ~$0.017 and 2022 $0.063. Similar small coal company Stanmore (ASX:SMR) trades on a PE of ~10; so if AHQ trades similarly we could see an approximate valuation range around $0.60c in ~18months.

To consider a more conservative valuation case allowing  leeway for cost increase and/or margin compression as well as production difficulties, assume both the mine output and the achieved margin might be 75% of what is forecast (so $26/t margin and 1200kt 2022 production). This would still generate 2022 EPS of $0.035 and implied valuation of about $0.35. 

Obviously for a startup enterprise the major concern is execution risk and as a company with a single mine it's somewhat all-or-nothing, but there is the potential for multi-bagger gains here.

CEO Mark Gray owns ~3% of the company, so has significant skin in the game, and tipped money into a cap raising as recently as September 2020.