Continental Coal's De Wittekrans thermal coal set to boost earnings, Penumbra on track

Continental Coal (ASX: CCC, AIM: COOL) has received a preliminary draft of the Bankable Feasibility Study (BFS) on the De Wittekrans Coal Project, and development activities at its Penumbra Mine are proceeding on schedule and on budget.

The BFS on the De Wittekrans Coal Project in South Africa confirms a technically and economically viable project with the potential to generate significant returns for shareholders. A final review of the BFS will focus on optimisation of the coal wash plant and rail siding options.
When in operation the project is expected to produce over 0.8 million tonnes of export sales, over 1.7 million tonnes of domestic sales, and annual EBITDA in excess of  US$50 million.

Don Turvey, Continental’s CEO, said “the De Wittekrans Coal Project is clearly a significant asset of the company and these preliminary results confirm that.

"The project is scheduled to be our fourth operating coal mine and will lead to a significant increase in both export and domestic sales and earnings for the group.”

The company has already commenced a detailed review and optimisation process that it anticipates will lead to a significant reduction in up-front capital costs, a much reduced risk profile and enhanced returns to shareholders.

Continental has also received expressions of interest from financiers looking to debt fund a large proportion of the capital costs of the project.


Penumbra Coal Mine

Site construction and civil works at the Penumbra Mine, the company's third coal mine in South Africa, is progressing well with the current focus being the installation of support in the box-cut and of the portal highwall entrance and finalisation of the pollution control dam civils construction.

The box-cut excavation is to a depth of 15 metres and is now focused on the installation of support of the portal highwall entrance with up to 9 metres soil nail, wire mesh and shotcrete.

About 50% of the Penumbra Coal Mine development capital has now received firmed quotes from the construction companies and suppliers that are in line with the company’s escalated budget of about US$40 million.

Importantly, all current development activities are proceeding in line with this budget and are slightly ahead of schedule.

Planned production of 750,000 tonnes per annum of ROM coal from the Penumbra Coal Mine will be beneficiated through the existing (and adjacent) Delta Processing Operations, which comprises a 300tph coal processing plant and the 1.2Mtpa Anthra Rail Siding.

The company forecasts sales of 500,000 tonnes per annum of a RB1 specification, high quality export thermal coal product. The export thermal coal product will be railed through to the Richards Bay Coal Terminal under existing rail contracts and sold to EDF Trading and under other export off-take agreements.


De Wittekrans Bankable Feasibility Study

The preliminary draft of the BFS on the De Wittekrans Coal Project was completed by study managers TWP Projects.

Significantly, the initial review has identified the opportunity to potentially enhance the project returns through utilisation of existing coal wash plants and rail sidings in the vicinity of the De Wittekrans Coal Project to both reduce up-front capital commitments and possibly accelerate the project development and the permitting process.

Under the draft Bankable Feasibility Report, the De Wittekrans Coal Project is proposed to be developed as a conventional opencast and underground mine.

Opencast mining is proposed initially at a rate of 100,000 tonnes per month over a five year period. Underground development is proposed to commence in the second production year with access from a highwall.

Underground mining is proposed to utilise six continuous miner sections with production forecast to continue for 31 years. Planned processing of the 3.6Mtpa ROM production will be through a new 600t/hour dense medium separation wash plant.

Production of about 1.7Mtpa of a 20MJ/kg thermal coal product to be sold to the domestic market is forecast. A further 0.8Mt of a 27.5MJ/kg “RB1” high quality export thermal coal product is forecast under the draft BFS to be railed from a new rail siding and sold FOB at the Richards Bay Coal Terminal.

The De Wittekrans Coal Project is forecast to have total operating costs (July 2011 terms) of ZAR449/t (about A$53/t) of export coal and total FOB costs of ZAR568/t (A$75/t) of export thermal coal including all sustaining underground capital expenditure.

Total up-front capital (July 2011 terms) to be spent over the initial three years for the De Wittekrans Coal Project will be ZAR1.7 billion (A$219 million).

This will comprise ZAR394 million (A$51 million) of surface infrastructure, ZAR308 million (A$40 million) for the coal wash plant, ZAR160 million (A$21 million) for offsite infrastructure and rail siding construction and ZAR838 million (A$107 million) of underground mine development.

The up-front capital is offset over this period by about ZAR254 million of (A$33 million) operating cashflow from the initial three years of open cast operations.

Continental Coal and its consultants are continuing its review of the draft BFS and have already identified ways to optimise the project in order to improve the already positive results and findings.

Discussions are ongoing with a number of parties in respect of utilising existing operating coal wash plants and rail sidings located close to De Wittekrans Coal Project. This may result in capital cost savings of about ZAR468 million (A$60 million).

In addition, discussions are continuing with specialist coal processing contractors to complete the construction of the coal wash plant under a BOOM (Build-Own- Operate-Manage) Contract that on a standalone basis will potentially reduce the up-front capital by about ZAR308 million (A$40 million).
Analysis

Continental has a targeted production of 7 Mtpa ROM coal by 2012, an off-take and funding agreement with EDF Trading for its export thermal coal production, and a recently signed joint development agreement with KORES, Korea’s state mining and exploration company, for one of its prospects.

Taking all this into consideration, and the company's strong growth profile, Continental's current share price appears light at A$0.21 per share.  Continental is trading at a significant discount to its peers.

Originally published at: http://www.proactiveinvestors.com.au/companies/news/22625/continental-coals-de-wittekrans-thermal-coal-set-to-boost-earnings-penumbra-on-track-22625.html