Does SinoCoking’s (SCOK) Syngas Project Add Up?

September 10, 2014 • Top News • Tags:

SinoCoking (SCOK), a coal and coke processor that produces basic and value-added coal products, has seen shares more triple in the last two days due to a press release. The company said in the statement that it will aim to convert 21 million tons of coal into the clean burning synthetic gas (“syngas”).

Under this new process, carbon dioxide will be left underground thereby reducing environmental concerns. Additionally, this is also consistent with China’s increased policy on clean energy. The news seems to be a home run. SinoCoking is focusing on popular alternative energy and expecting to generate gross profit of $30-$45M in 2015, more than triple its expected 2014 figure. Sounds too good to be true.

Costs of the Project

sinocoking syncan project

 

SinoCoking will fund the first stage of the project primarily with their cash reserve. However, in their latest filing (back from March), the company only reported a cash balance of 200k. Investors will have to wait for the fiscal Q4 (June 2014) numbers, which should be reported by the end of September to see an updated cash balance.

Subsequent phases of the project, expected to be completed by the end of 2016, will cost $280 million and will be funded primarily from bank loans and company-issued debt. The issue with this is that SinoCoking already has about $50M in debt expiring in 2015, so adding on an additional $280M will burden the company with $330M in loans. This is over double the company’s current market cap.

loan to bairui trust

 

Weighted average interest rate on debt for the nine months ended March 31, 2014 was 7.23%. Assuming this interest rate stays the same, SinoCoking will be paying roughly $20M in interest annually on the project debt. This would take a huge chunk out of the ~40M gross profit number that the company is projecting.

Liquidity and Going Concern

In the financial statements, SinoCoking discloses that the company’s continuation as a going concern is uncertain. The company was slow in collecting loans receivable (in the amount of $8M) while also missing a quarterly payment to Bairui Trust (which was extended). Even if SinoCoking is able to raise an additional $280M for the syngas project, it will pay a hefty interest rate given its financial standing. This could mean that it may be better suited to issue equity through dilution to raise funds.

Conclusion

At a first glance, SinoCoking’s announcement sounds very promising. However, once the company’s financial standing is taken into consideration, concerns are raised. SinoCoking Chairman and CEO Jianhua Lv said that the company would announce additional details on the construction and financing of the underground facility “in the near future.” Until further details are disclosed, SinoCoking should be considered a low float Chinese coal producer with a fluff press release.

 

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