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Northland sees current Forbes & Manhattan Coal stock price at "compelling entry point"

Published: 11:17 01 Nov 2012 EDT

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Northland Capital Partners Thursday issued a note on Forbes & Manhattan Coal (TSE:FMC), which recently suspended operations at both of its South African coal mines.

The thermal and metallurgical coal producer suspended operations at its Magdalena and Aviemore mines following the death of an employee and the serious injury of a second, associated with ongoing strikes since mid-October.

"We believe the fundamentals underlying FMC are strong but not attributed full value in the stock price. We believe this is a compelling entry point for investors," Northland Capital Partners analyst Tania Maciver said.

Northland has a "Sector Outperform" rating and $2.65 target price on the stock, which last traded at 58 cents in Toronto.

"We are currently assessing the potential magnitude of the financial impact to FMC and will provide additional updates once we attain further clarity on timing."

In the note, Northland said it was difficult to determine the potential length of the suspension of operations, which could last anywhere from weeks to months. Negotiations with employees over annual wage increases have already been ongoing for several weeks and workers have been on strike for over 2 weeks so far.

"We anticipate that the suspension of operations by FMC could easily run through the end of the quarter, which could translate to a negative revenue impact of approximately $8 million to $10 million (roughly one-third of expected quarterly revenue)," Northland's Maciver wrote.

"The question is how motivated FMC’s employees will be to get back to work, which translates to how difficult subsequent wage negotiations are likely to be." 

Northland believes the unions representing FMC’s employees are seeking wage increases of 30 per cent or more - similar to demands being made at other mines across South Aafrica - which is simply not economically feasible.

Those companies who have agreed to higher than normal wage increases in recent weeks have had to lay off workers, reducing the number employed in order to afford the wage increases. 

"In our view, this would only seem to exacerbate problems even more, with unemployment in SA already at approximately 25 per cent," the Northland analyst wrote.

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