Prophecy Coal to sell 22,100 tonnes of coal to local DRI manufacturing plant

Prophecy Coal Corp. (TSE:PCY) announced Thursday it will sell 22,100 tonnes of thermal coal from its Ulaan Ovoo mine in Mongolia to a local, direct reduced iron (DRI) manufacturing plant.
Prophecy said the undisclosed buyer has indicated that the initial purchase will meet shortfalls from other suppliers, and that it would eventually like to increase the supply from Prophecy to 300,000 tonnes on an annual basis.
Shares in the company rose 2.04 percent after the announcement, trading at 25 cents as of 11:00 am EDT.
The buyer currently purchases in excess of 850,000 tonnes of coal annually from various local suppliers, said Prophecy.
The pricing is competitive to offers received from Russia, the company noted, and sets a benchmark for the continuation of off-take discussions with other local industries in the growing Mongolian economy, for which the Mongolian government forecasts 19% GDP growth in 2013.
No other details of the agreement were disclosed.
"As we move past the mine establishment phase at Ulaan Ovoo, we anticipate steadily decreasing operating cost and increasing sales quantity and price,” said Prophecy chairman and CEO John Lee.
"Our goal is to make Ulaan Ovoo operations cash flow positive in the near term without relying on Russian or Chinese export markets."
Prophecy said its "high quality thermal coal" (NAR 5100 kcal/kg) is ideal for DRI, which is also known as sponge iron.
DRI is produced from the direct reduction of iron ore in the form of lumps, pellets or fines by a reducing gas produced from burning coal, said the company, adding that the coal must be lumpy and of high calorific value.
Temperature, however, does not have to reach blast furnace levels, and therefore coking coal is not required.
Reducing gas from the coal requires a mixture of hydrogen (H2) and carbon monoxide (CO), which acts as a reducing agent.
Prophecy noted that this process of directly reducing the iron ore in solid form has been developed to overcome some of the high costs and difficulties of conventional blast furnaces.
DRI product is one of the chief raw materials in steel-making as it has higher qualities and advantages compared to scrap irons and pig irons, the company said. The products have been quoted in China at over US$300 a tonne.
Looking ahead, the company said it continues to make progress on opening the Zeltura border crossing - 10 kilometres from its Ulaan Ovoo mine - to facilitate coal export to Russia, which would then increase the total demand for Ulaan Ovoo coal past 1 million tonnes a year.
Prophecy is a Canadian listed company focused on developing energy projects in Mongolia.
With its Ulaan Ovoo mine now in production, Prophecy has proposed a 600 MW mine-mouth power plant adjacent to the Chandgana coal deposit, 14 kilometres away from the Ulaan Ovoo mine.
The plant has been permitted by the Mongolian government and negotiations on financing, power purchase agreements and construction management are underway.
Earlier this month, the company issued a statement clarifying previous disclosures related to a feasibility study of its Chandgana coal deposit, and also said it commissioned a preliminary economic assessment for Chandgana.
In January, the company issued a statement describing the feasibility study for the proposed mine-mouth power plant, and said that the report did not include an economic assessment of the Chandgana coal deposit under NI 43-101 compliant standards.
Given the report is linked to a specific coal deposit, a coal mine economic assessment under NI 43-101 is required before any disclosure can be made regarding the feasibility of a power plant project, as "economics of each is integral to the other", the company said.
As such, until an NI 43-101 economic assessment is prepared for the Chandgana coal deposit, "no meaningful feasibility study can be prepared in connection with the power plant," Prophecy said in May.
To address this, the coal producer retained John T. Boyd Co. to prepare a NI 43-101 compliant preliminary economic assessment for the Chandgana deposit.
The Ulaan Ovoo deposit hosts a measured resource of 174 million tonnes and has an indicated resource of 34 million tonnes, of which 20.7 million tonnes are classified as a reserve.
Meanwhile, the Chandgana coal property consists of three licenses: Chandgana Tal, which has a measured resource of 141 million tonnes and includes two licenses, and Khavtgai Uul – which contains one license and is located in the southwestern end of the basin – has a measured resource of 509 million tonnes and a 539 million tonne indicated resource.
In the past, the company said it has grouped its estimated coal resources on many occasions for the two Mongolian properties, contrary to NI 43-101.
These resources are only some 14 kilometres apart, and are close to important infrastructure - such as towns, roads, and electric transmission lines. They are linked by paved highway to Mongolia's capital, Ulaanbaatar, and the Trans-Mongolian Railroad.