Friday, May 06, 2011

LLEN Has Potential In Chinese Coal

China's modernization miracle still has a full head of team.  A significant part of that steam is powered by coal, one of China's greatest natural resources.  Smaller companies like L&L Energy (LLEN) may have a chance to break out if their resources are recoverable at an attractive cost.

A quick review of the basics provides a starting point for further analysis.  The P/E of 4.42 (today) is unbelievably low for a resource producer in this age of Fed-induced commodity price explosions.  Operating cash flow has been negative for over a year (not good on its face).  Quarterly net income has been steady for about a year, which is especially nice given the company's very small long term debt load.  ROE is huge at almost 49%!  All of the numbers except the cash flow results make LLEN worth a deeper look. 

The salient figure for any resource producer is the place on the global cost curve occupied by its four mines in China (unknown at present for LLEN).  Its interest in the Bowie Mine in Colorado is harder to value; aside from its booked value as a loan, the equity option may have significant value if the mine can sustain its historical production of 4-5mm tons per year.  The TVA's fixed demand for about 3mm tons per year give the project reliable long term cash flow. 

The notable news here for potential suitors is that the company's market value and enterprise value are extremely close right now.  A market value much higher than enterprise value would suggest some hidden value to be unlocked in an acquisition.  This one bears watching to see if it can sustain its numbers and raise its market value. 

Full disclosure:  No position in LLEN.