SGZH - I am surprised by Q4 guidance, it seems very high. But as the company released this 2 months into the quarter it is unlikely that they won't at least come close. Xing An is selling relatively low grade steam coal for power generation. Demand seems to be high in the area as the company brokered a LOT of coal in Q3 and will have to in Q4 to reach their guidance. The numbers suggest that SGZH is selling their coal to long-term customers about 10% below market, maybe that's the reason. Or it could just be short supply, their mines are in no man's land at the very tip of former Manchuria, just a few miles from the Russian border.
I can not possibly guess the supply/demand situation into Q3/2011. As you can see from the numbers of the past three years, sales numbers vary a lot between quarters, there is no steady development. SGZH's sales depend on a few large customers, the largest being a power plant company responsible for almost 50% of annual sales. I don't know anything about this company and I hope SGZH will communicate sales contracts for the next mining season a bit better.
SGZH doesn't keep a large inventory of mined coal, they will have to buy/broker coal from neighboring mines to fulfill sales contracts if they can't produce all the coal from their own mines. I believe a higher Xing An production will give them more flexibility, but as the last two quarters have proven - there seems to be plenty of coal available to them that they can broker to customers.
There are also risks with Xing An. While their other mine is directly connected to a railroad, Xing An is not. They have to use trucks and ship it about 60km to a stockyard before they can sell it. There are weather-related risks.
SGZH has enough cash and good cash flow to acquire 1-2 more mines, if we believe PUDA's price projections then the only way is up, heh.
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