April 04, 2011 - 11:04pm EST by
2011 2012
Price: 2.90 EPS $0.00 $0.00
Shares Out. (in M): 54 P/E 0.0x 0.0x
Market Cap (in $M): 157 P/FCF 0.0x 0.0x
Net Debt (in $M): 74 EBIT 11 28
TEV ($): 231 TEV/EBIT 21.0x 8.0x

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Fundamentals on the rebound plus a hidden asset make this Canadian microcap a "buy."  Maxim Power is a Canadian merchant power business with a coal-fired plant in Alberta, Canada plus natural gas-fired plants in the U.S. and France.  Maxim's share price was roughly cut in half at the onset of the recession due to low power prices in Alberta.  But while prices rebounded in 2H10, the shares have not.  Meanwhile, Maxim owns a coal property which can satisfy its plant's needs with plenty of metallurgical coal left over for export.  Met coal prices have soared as of late and Maxim is seeking to monetize this asset - likely within the year.

 Alberta is the key market to understanding this story, so let's start there.  The coal-fired H.R. Milner plant used to be Maxim's largest source of EBITDA, doing over $30M/year before the recession.  Power prices in Alberta are largely a function of natural gas prices (the fuel for marginal supply) and reserve margins (i.e. spare generation capacity).  Reserve margins expanded once the recession slowed the growth of power demand, meaning there would be fewer lucrative spikes in power prices due to unplanned outages, etc.  Also, the price of natural gas cratered, making gas-fired plants competitive at lower prices.  Finally, Maxim's coal costs went up in 2010 when its supplier (CVRI) sought and won a price increase.  Milner's EBITDA has thus sunk to roughly zero for 2010.

But power demand in Alberta has since resumed its strong growth.  Moreover, two large, aging coal-fired plants (TransAlta's Sundance 1 and 2) recently shut down will not reopen until 2012, if ever (my guess is they're finished).  Power prices have thus jumped from the $40s to the $70s per MWh.  (Historically, prices had previously sunk as low as the $40s back in 2002, but otherwise the $70s are roughly the average of recent history).  Regardless of the outcome at the Sundance plants, prices are unlikely to spend much time at 2009/2010 levels as they're just too low to support construction of new generating capacity.  Long-run power demand in Alberta is expected to grow strongly (think oil-sands development) and reserve margins are back to the lowest level in a decade.

Meanwhile, Maxim's 2008 gas-fired acquisitions the Northeast U.S. have added quite a bit EBITDA, particularly with the recent low natgas pricing.  U.S. ops are now doing around $20M per year.  Putting it all together, I estimate roughly $18M in 2011 EBITDA from Canada, $23M from the U.S., and $8.5M from France, for a combined $43.5M. 

At $2.90/share, Maxim's market cap is $156.6M.  Adding in debt, capitalized leases and working capital deficit gets you to an EV of $231M.  (Note the low leverage: 74.2/43.5 is roughly 1.5X debt/EBITDA)  Maintenance capex is around $8M, so that's an EV/(EBITDA - capex) of 5.6.  2010 EBITDA is likely to be ~$31M, so on trough levels that metric is 10X - i.e. not that high.  Note also that Maxim recently acquired $117M in tax assets that can be used to shield Canadian earnings.  All in all, I think $4/share would be closer to fair value before even considering the mine.

Basically, I think these shares are neglected ... not that surprising considering that the company hasn't yet put out any guidance reflecting the improved fundamentals.  Also, this is a micro-cap Canadian power producer - not exactly sexy.  For what it's worth, the yahoo message board for this company has exactly one posting.  The board has two.  Not even the spam bots have found this company.

So, about that mine:  Maxim acquired these coal leases (collectively known as "Mine 14") when it bought the Milner plant back in 2005.  The mine is located very close to Milner and Milner was designed to burn residual coal from a deposit like this.  For reference, both are located in central Alberta right by Grande Cache Coal (the subject of past write-ups on the VIC).  Mine 14 is fully-permitted but has yet to be constructed, and contains 13.4M recoverable metric tons of metallurgical coal - the kind used to make steel.  With China growing strongly and much of the world's met coal supply stalled due to record flooding in Australia, prices have soared to roughly $300/ton, meaning that many producers are getting about $200/ton back after production costs.

Maxim wants to bring in a partner with met coal expertise, and either set up a JV (which could later be IPO'd) or sell it outright (in which case the aforementioned tax assets could be applied toward any taxable gain).  Either way, Maxim would seek an off-take agreement, paying about $25M for the 500K tons burned annually by Milner.  At a production rate of, say, 1.3M tons/year, this would leave 800K tons free to be sold overseas. 

Now $300/ton met coal isn't likely to last forever, but even still one can imagine this asset having a lot of value, and Maxim has seen a lot of interest from various parties.  Let's say we cut that $200/ton netback down to just $50/ton.  $50/ton for 800K tons is $40M in pre-tax cash flow.  With upfront costs of ~$85M and a 10 year mine life, one gets a $125M NPV at a 12% discount rate, or ~$2.30/share to Maxim.  (Note that the 500K tons/year to Milner would be sold at cost.)

Last November, Walter Energy bought a Canadian met coal producer called Western Coal at a valuation of $3.3B for assets that could produce 6.6M tons/year.  Assuming similar valuation metrics on 800K/year of production, Mine 14 would be worth nearly $6/share.  Now that's some very crude math and I don't expect anywhere near that sort of windfall, but it's the closest comp and sheds at least some light on the situation.

It turns out that the off-take agreement has been a bit of a sticking point.  Ordinarily, met coal producers prefer to have the option of completely idling a mine should met coal pricing go too low.  Maxim would require them to always be mining just enough for Milner.  That said, Maxim is optimistic on reaching some sort of deal by year end.  In the meantime, the company will begin construction this summer.




Rebound in power prices shows up in guidance and/or results for the first time.
Announcement of a deal regarding metallurgical coal asset
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