Production is planned at a rate of 3 million tonnes per year to produce 1 million tonnes of domestic thermal coal, and 680,000 tonnes of export quality coal. Two additional coal projects are also under development within the same coal region.
The company is currently valued at very close to cash backing of $9.5 million, and the market assigns minimal value to its significant as well as advanced coal assets.
Share Price: $0.13
Issued Shares: 90.5m
Market Cap: $11.7m
Cash: $9.5m
Debt: Nil
On a fully diluted basis and after accounting for performance shares the number of issued shares becomes 140.5 million, and the adjusted market capitalisation would be $16.1 million.
Analysis
Catalysts such as receipt of mining permits, off-take agreement and funding could kick this valuation higher.
On an EV/tonne coal resource, Xceed is valued well below its coal sector peers.
Xceed could carry a similar valuation in 2012 as Moabsvelden develops into an operating mine and the portfolio produces a build up of resources for production, or acquires more low cost projects.
Background
The thermal coal market provides a very attractive entry point for a lightly capitalised company, and South African thermal coal assets can be acquired at very reasonable valuations. Long term demand for thermal coal in local and global markets is forecast to be robust.
South Africa is ranked amongst the top five countries as a coal producer and consumer of coal, and relies heavily on thermal coal for production of electricity. The country is also taking advantage of its proximity to Asian markets and is becoming an important player in the fastest growing seaborne thermal coal market in the world.
The country has good infrastructure, an established mining culture and has evolved its mining legislation to allow junior mining companies to form partnerships with local business entities.
The global consumption of thermal coal is projected to reach 7 billion tonnes by 2030, and is driven by the rapid industrialisation of countries such as China, India, and Brazil.
Thermal coal currently provides the feedstock to produce 39% of global electricity supply, and is expected to play a very significant role over the next twenty years. This is an extremely diverse global market that is not prone to extreme fluctuations in demand that typically affect markets for other commodities.
Management and Shareholding
The company maintains a three man board that is made of professionals who have all been involved with the development, construction and management of mines.
Patrick O’Conner serves as Non-executive Chairman, is Deputy Chairman of Perilya Ltd and until last month was Chairman of the West Australian Water Corp. He was previously Managing Director of Macraes Mining and CEO of Oceana Gold Ltd., and has had considerable experience in mining operations.
Ian Culbert serves as Managing Director, and was the former Managing Director of Tritton Resources Limited and Lafayette Mining Limited. He has 20 years experience in the resources industry and has managed the funding, planning, construction and operation of mines and exploration projects in Australia, Asia and Africa.
Stephen Belben is Finance Director, and was the national partner in charge of Ernst & Young’s Mineral & Energy Industry Group. He has 25 years of experience in the resources industry, and has served in senior executive positions and directorships for public companies with operating mines in Africa and Asia.
The top 20 shareholders hold 42.8 million shares, or 47.3% of the issued shares of the Company. The Directors and vendors of the 74% interest in the Moabsvelden Coal Project retain a significant equity interest.
The consideration for the acquisition of this interest included the issuance of 25 million ordinary shares. An additional 25 million Class A performance shares will now also convert into 25 million ordinary shares as a JORC compliant reserve has been delineated on the Moabsvelden Project prior to 5 April 2012.
A further 25 million Class B performance shares will convert to 25 million ordinary shares upon a New Order Mining Right being granted in relation to the Moabsvelden Project by 5 April 2014. If the milestone is not achieved by that date all Class B performance shares convert into 1 ordinary share.
Funding
Xceed Resources completed a 1:10 consolidation of its share capital, changed its name from Xceed Capital, and raised cash of $9 million from the issue of 45 million shares at $0.20 each. The Company re-listed on the ASX in mid April of 2011, after the funding was completed and management team was restructured.
Cash held at the end of the September quarter amounted to $10.04 million. Exploration expenses for the December quarter were projected at $1.2 million, and administration expenses were $350,000, for a total of $1.55 million.
Moabsvelden Coal Project
The company retains a 74% interest in the advanced stage Moabsvelden coal project which is located within South Africa’s key coal region of Witbank.
Xceed acquired the Moabsvelden thermal coal project because it is relatively easy to develop, and is within the Witbank/Ermelo/Highveld coalfield complex that supplies 80% of South Africa’s coal.
The coalfield has excellent road and rail infrastructure, and is surrounded by many thermal power stations that generate electricity, and is also 80 kilometres from the main Johannesburg industrial belt.
The project is surrounded by metallurgical and thermal coal mines at Leeuwpan, Stuart Coal, Vanggatfontein, and Rietkuil, where each project outputs an average of 3 million tonnes of coal per year. New mines are under construction at Vlakvarkfontein, Kangala and Brakfontein.
The market value of Xceed’s share in the project was valued by Venmyn and applied to the previously defined 55 million tonnes of Indicated thermal coal resources.
Venmyn who are leading specialists in the valuation of South African mining projects valued Moabsvelden at $18 million or $0.20 per share.
This valuation preceded the recent round of drilling that upgraded the in situ Indicated Resource to a JORC compliant Measured Resource and paves the road to funding, development, and production in 2013.
Since that assessment was completed the company undertook a drilling and development program that increased the size of the coal resource to a JORC compliant 66.14 million gross in situ tonnes, with 96% of that tonnage now classified as Measured Resources. No further exploration drilling will be required on the property.
Gemecs completed the independent resource estimate based on 39 diamond drill holes that were completed by Xceed in 2010 and 2011, and was further supported by an airborne magnetic survey that identified geological structures across the property. The survey also confirmed that the southwest corner of the property was barren of coal and was an ideal site for a wash plant and other facilities.
The resource is contained in two separate coal seams with the shallowest seam known as the 4 seam, and carries an average combined thickness of 1.46 metres, hosting an in situ Measured Resource of 3.08 million tonnes.
The deeper resource is known as the 2 seam, and carries an average combined thickness of 16.86 metres, hosting an in situ Measured Resource of 60.67 million tonnes, and an additional Inferred Resource carrying a thickness of 15.53 metres for 2.39 million tonnes.
The strip ratio for the shallower coal has been estimated at 1.5-1.6:1 for the first 5-6 years and at 2:1 for deeper coal, and will result in lower extraction costs.
Early washability tests confirmed that 100 tonnes of coal processed through a wash plant will produce 60.71 tonnes of 26.0Mj quality coal that provides 30.24 tonnes of export quality thermal coal and 30.47 tonnes of domestic quality coal suitable for local electricity production. More recent laboratory trials have refined this to produce a combined yield of 65.96 tonnes, and will add approximately 1 million tonnes of coal production over the life of the mine at no extra production cost.
The company has established a production target of 3 million tonnes per year that produces 1 million tonnes of 20MJ/kg thermal coal that can be produced at an operating cost of US$16 tonne, and sold to local power plants operated by Eskom at US$25 tonne.
Local thermal coal prices are extremely low and are under pressure from producers who are selling into export markets to obtain better pricing.
Xceed expects to produce 680,000 tonnes of high quality 26.5MJ/kg export coal at an operating cost of US$47 per tonne. This coal can be sold at US$77 per tonne at the mine gate to third parties with contracts at the nearby Richards Bay coal export facility.
The company is planning to develop Moabsvelden to produce 1.68 million tonnes of coal for sale into local and export markets on an annual basis. The project has potential to generate an annualized EBITDA of A$28 million, and provide an after tax profit of $18 million, based on current market pricing for thermal coal.
Xceed recently delivered a 43.8 million tonne initial Reserve for Moabsvelden which will support an increased mine life. Following the establishment of Measured Resources, as well as the recent completion of a mining work program by mining consultants Belton Mining Group, Xceed has released Proved and Probable reserves of 30.7 million tonnes and 13.1 million tonnes respectively.
Moabsvelden is expected to have a mine life of fifteen years (with potential to add to this), and will be a low cost open pit operation utilising modular and simple process plant.
Xceed is confident that it will be able to extend the mine life by potentially going underground. The company will undertake further studies to investigate potential underground mining in areas on the project site where easement and environmental considerations constrain open cast mining.
Targeted markets for coal production include Eskom power plants at Kendal and Kreil, local industrial power producers, steel mills for metallurgical coal, cement manufacturers, general industry, manufacturers, and export of higher quality thermal to Indian power companies.
Competitive advantages include closeness to markets, acceptable calorific values, excellent volatiles, low ash and acceptable sulphur. The project is located within 50 kilometres of South Africa’s major coal fired power stations and is adjacent to lucrative inland markets based around Johannesburg.
The project is located between several existing mining operations, and is not within a sensitive water catchment area, so directors do not anticipate any major obstacles to the granting of approvals to mine the resource.
The company has retained independent mining consultants who have lodged an application for a Mining Right, and are preparing a Social and Labour Plan, collecting data for an Environmental Impact Assessment and preparing an Environmental Management Plan along with an application for an Integrated Water Usage Licence.
A detailed Feasibility Study is expected to be completed in March of this year so that funding arrangements can be completed, and plant construction commenced in the March quarter of 2013, with commissioning of the plant scheduled for the September quarter of 2013.
Capital costs for mine development fall into the A$25 – A$35 million range for a 3 million tonne per annum 2 stage wash plant, along with all supporting infrastructure. Xceed may develop Moabsvelden via a 60/40 equity raise and secured debt funding package.
Various other options for funding Moabsvelden include 100% development funding by off-take partners, forming a BOOT or partnership with several funding partners who develop the project in return for a share of the financial returns, or possibly establish a lower cost mining operation that will sell Run of Mine coal to a local operator.
Roodeport Coal Project
Xceed has acquired a 70% interest in Roodeport on a Run of Mine per tonne basis. The project is adjacent to the Universal Coal (ASX: UNV) Roodekop thermal coal project hosting 84 million tonnes, and Exxaro Resources’ (JSE: EXX) New Clyesdale colliery located in the centre of Witbank coal field.
Roodeport covers 1,120 hectares and contains historic drilling that has identified near surface coal seams over half the property, and includes 5.6 metres on the #4 seam at a depth of 12.0 metres, and 6.65 metres on the #2 seam at a depth of 25 metres.
Drilling will commence shortly now that regulatory approval has been received.
Bankfontein and Vogelfontein coal projects
Bankfontein and Vogelfontein are two closely located properties in the Ermelo coal field, which is an eastern extension of Witbank and contains higher quality underground coal.
The two properties cover a total of 2,000 hectares and are surrounded by several operating and historical mines that are 35 kilometres from the main Richards Bay coal line hub.
Xceed has signed binding agreements to acquire a 70% interest in Bankfontein on a Run of Mine per tonne basis. The 22 historic drill holes on the property confirm the presence of all five of the Ermelo coal seams and of high quality coal in various holes. Like Roodepoort, all substantive conditions for the acquisition of Bankfontein have now been satisfied and Xceed will commence resource definition drilling of this project in the current quarter.
Some of this coal has start up potential for access via an open pit and includes 0.6 metres of the D seam from a depth of 10.9 metres, containing a raw coal CV of 28.78 and ash of 12.6%. The CL seam was intersected over 0.76 metres at a depth of 29.3 metres, containing a washed coal CV of 30.83, ash of 12.1% and a yield of 92.6%.
Xceed can acquire a 74% interest in Vogelfontein on a Run of Mine per tonne basis, subject to due diligence and regulatory approval. This is a large property that is connected by rail to the Richards Bay terminal and is located in the world class Highveld-Ermelo coalfield that is adjacent to Xstrata’s Spitzkop colliery.
Historic drilling confirms the presence of high value coal seams on the property.
Analysis
Based on recent coal sector M&A transactions and current valuations of South African listed coal explorers, Xceed’s current valuation looks light and that even an exit strategy for Xceed would value it between $0.20 - $0.25 per share.
Catalysts such as receipt of mining permits, off-take agreement and funding in planned timeframe could kick this valuation significantly higher.
On an EV/tonne coal resource, Xceed is valued well below its coal sector peers.
Xceed could carry a similar valuation in 2012 as Moabsvelden develops into an operating mine and the portfolio produces a build up of resources for production, or acquires more low cost projects.
Originally published at: http://www.proactiveinvestors.com.au/companies/news/24838/xceed-resources-cash-backed-and-developing-coal-production-and-cash-flows-from-moabsvelden-24838.html
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