AIM-listed Mozambique thermal and imminently hard coking coal producer and seaborne exporter Beacon Hill Resources Plc. (LON: BHR) (“Beacon Hill”) has never been one to waste time when it comes to hitting the steel markets with a new, significant and much-needed source of supply.
After taking the reins of the Minas Moatize coking and thermal coal project in May, 2010, Beacon Hill Resources got to ground on the now JORC compliant 42.65 million tonnes reserve operation in Mozambique’s highly coking coal prospective Tete province in December that same year. First shipment of thermal coal was trucked to the port of Beira and set sail in mid-December, 2011—the same month that the company took on majority ownership in its second project in Tete, the Changara coal project exploration-development joint venture. Minas Moatize’s maiden JORC reserve arrived in early February this year, closely followed by the recent release of its definitive feasibility study (DFS) And plans to imminently list Beacon Hill on the ASX.
Last year, Beacon Hill Chairman Justin Lewis told IRJ that the company has been “going hell for leather.” Breakneck-speed progress considered, it appears that this idiom is more fitting than ever before.
The Minas Moatize build-up
The newly released DFS demonstrates compelling economics for the Minas Moatize Coking Coal Project. Financial modelling based on a 4 million tonne run-of-mine (ROM) operation producing on average 2.2 million tonnes per annum of saleable coking and thermal coal demonstrates an NPV (pre-tax) of US$662 million (using a discount rate of 13 per cent), an Internal Rate of Return of 79.5 per cent and a mine life of 11.5 years.
The Minas Moatize maiden JORC mining reserve, released on February 2, has also provided encouragement. The reserve count comprising 42.65 million tonnes with potential upside of a further 7.9 million tonnes— a marketable reserve of 23.45 million tonnes which represents the saleable coal post-mining and processing of the resource, which houses at least 8.72 million coking coal—further demonstrates the technical and economic viability of the project.
The 2011 year-end culminated equally successfully with December’s first seaborne export from the project—the 10,650 tonnes of thermal coal transited by road to Beira. In turn, says Beacon Hill’s corporate development head David Premaj, plans to increase export tonnage have now been well accounted for in the DFS itself.
“Over the last 12 months we’ve demonstrated that there’s more coal in the ground than initially expected and a significant proportion of hard coking coal. Our commencement of the trucking operation and first export demonstrated that we really can get the product out viably to market,” he explains.
“In the next 12 months we’ll be building our production to have more frequent shipments.”
It won’t be long before these shipments incorporate hard coking coal. Beacon Hill is about to commence mining from the Upper Chipanga pit; the second of the company’s initial pits at Minas Moatize and one which contains hard coking coal within the Upper Chipanda coal seam. True to form, the company plans to begin production at the pit as early as in the first half of 2012. In line with its existing 600,000 tonnes per annum coking coal agreement with Indian metallurgical coal house Global Coke, this hard coking coal will be shipped FOB from Beira to markets such as India.
Incorporating this high margin product benefits Beacon Hill in more ways than one, not least when it comes to the trucking operation already established and company plans to utilise rail infrastructure as it becomes available, in line with aims to ramp up production to two million tonnes per annum output in the upcoming years.
“Using a trucking operation, we can mine, process and transport coal to the port for conservatively around $100 per tonne. Thermal coal using trucks is a marginal operation; however with conservative coking coal prices of around $200-plus per tonne, you can make a $100 margin on that kind of operation,” Premaj explains.
“That’s why we’re focused on coking coal in the near term given that we have already commenced trucking coal to the port for future shipments. As the rail comes on we’ll look to commence our life of mine operation involving the production and export of both coking and thermal coal.”
Unlike other project developers in Tete where, for some, rail development poses a pivotal project hurdle, it is by no means an absolute requirement for Beacon Hill. It may be the miner’s preferred logistics solution, but with a trucking operation capable of taking up to 500,000 tonnes coal to market per annum, by Premaj’s example calculations, the company is still sitting on coking coal at $200 per tonne against $100 operating cost, delivering a $100 margin that could generate up to $50 million per year.
“Given that our market cap is around US$150 million, when you compare that to the cashflow it’s an encouraging proposition,” Premaj says.
“As we start to ramp up production and move into a life-of-mine operation, that’s when we hope to see shareholder value appreciate.”
Adding the 7.9 million tonnes upside—ripe for future inclusion in the proven and probable reserves category—and it’s conceivable that Minas Moatize is a 50 million tonnes coking and thermal coal play. These tonnes, originally outlined by initial resource drilling, will see infill drilling this year. And, alongside Beacon Hill’s emerging coking and thermal coal production and export profile, they aren’t the only option the company has to delineate more resources to add to its global inventory.
The Minas Moatize springboard in action
Describing how Beacon Hill’s approach has always been to use Minas Moatize as an ideal platform from which to build near-term production assets in commodities relating to steel, predominantly coal, Premaj says that the company’s joint venture to explore and develop the 184 square kilometre Changara coal project was an opportunity the team had been looking out for.
This license, some 70 times bigger than that of Minas Moatize, provides the miner with a veritable option to take on a long-term development project capable of greatly adding to its overall resource base. Premaj says that it also represents the bigger picture for companies active in Tete and seeking to establish and expand long-lasting production-export profiles in the globally significant steel region.
“There are a lot of underexplored licenses held by private companies in the basin and what may happen in the coming years is that we’ll see opportunities for companies like us to earn-in, or develop the license areas, through the cash that we’re generating. This is our opportunity to grow into a larger coking coal producer in the region.”
It is a move well-timed with respect to Australian investor understanding about quite how much Tete has to offer post-Rio Tinto’s $4 billion buyout of Sydney’s Riversdale Resources’, which has its Benga project immediately next door to Minas Moatize. In part, this is why the ASX makes for a great place to dual list, Premaj says, explaining also that given the nation’s historic prevalence in global coking coal production, its fund managers know what makes a good coal play and many hold Mozambique in high regard.
“It’s another capital market in an area we can broaden our investor interest, and talking about Minas Moatize and Beacon Hill in Australia is good in that a large portion of the investment community understands what we’re doing and where we’re located,” he explains.
“We’re not actually raising any capital or issuing any shares. It’s just a compliance listing to get up and running on the ASX, and hopefully it may bring about some value upside.”
The company will present ASX investors with their multi-project coking and thermal coal production and export investment opportunity within the coming weeks.
The listing proposal has been lodged, Premaj says, and Beacon Hill hopes to commence trading in the first quarter of 2012.
“It also makes sense given our JORC 39 million tonne resource Tasmania magnesite project where we’ll finalise a scoping study in the coming months,” he adds.
“That scoping study will form the basis for securing a joint venture or offtake partner to fund the development of that project— someone who really understands the market, potentially an end-user. Otherwise, from a funding perspective we’re really focused on Minas Moatize and the Changara project.”
London’s institutional investors have been historically bullish on Beacon Hill. When ASX investors are offered the opportunity to gain exposure to the company’s rapidly established domestic and seaborne production and export coking and thermal coal scenario, it is likely global appetite for this stock will continue to prove hungry.
Global steel production is on track to hit 1.5 billion tonnes this year. Tete is slated to deliver to the markets approximately 20 per cent of coking coal by 2015. Beacon Hill, the company that previously ran Tete’s only operating mine, knows what it takes to move first and reap the benefits thereof, and if past exploits are anything to go by, the team is just getting started.