few more tests to come, page-37

I’d to quote a report of Renaissance Capital about the trading of coal in Mongolia. It’s really useful for you to understand more about the potential value of NRU. In the latest report, it showed that “Recently received analytical results for batch 5 of samples lodged with SGS Mongolia for analysis continue to indicate a high ranking black coal with low moisture, low volatiles, low sulphur and relatively high ash at the Shanagan Project.”. However, Renaissance Capital gives us a clearly analysis about the trading of coal in some companies in Mongolia that may be less quality than coal of NRU, as follow:

“In 2009, Mongolia produced 13.2mnt of coal (up ~65% from a historic production level of ~8mn tpa) of which 7.6mnt (58%) was exported. In 2010, production almost doubled YoY to 22.5mnt and exports increased to 16.6mnt (74% of production) following the ramp-up in production from SouthGobi and MMC. To date all coal exports have been of unwashed/run-of-mine coal, but this is expected to change as the Mongolian government incentivises investment in downstream processing and as a number of companies invest in wash plants. By 2015 we believe the majority of coal exports will be of higher-value washed product. By 2015 the Mongolian National Mining Association (MNMA) forecasts coal production to reach 60mnt with up to 55mt of exports, although other industry participants have more aggressive estimates of up to 70mnt by 2015 and 120mnt by 2020. Production of 60mnt by 2015 implies a coal production CAGR of 22% requiring on average ~10mn tpa of new production capacity over the next four years. The MNMA expects at least 66% of the forecast 2015 production of 60mnt to be coking coal/semi-soft coking coal. We believe 60mnt by 2015 is a conservative estimate, but that it is unlikely to be so biased towards semi-soft coking coal and coking coal.

Prices for coal sold into Mongolia currently range from USD160/t for MMC’s washed coking coal sold at the Chinese border (Gants Mod) to USD40/t for SouthGobi’s high-ash, high-sulphur thermal coal sold at the mine gate. And prices can get lower if you have an undesirable out of spec product. Through 2010 SouthGobi received a price of
In particular we would highlight the negative price adjustments for moisture, sulphur and ash, which are particularly relevant for unwashed Mongolian coals. Tavan Tolgoi coals are also characterised by high phosphorous content; 0.1% vs 0.045% in premium low volatile coking coal. A high phosphorous content makes steel brittle in the steel making process. Chinese customers are typically unconcerned about phosphorous content, as they are better able to blend; it is however much more relevant for exports to Japanese and Korean customers. SouthGobi is battling with high sulphur content, >1.6% in part of its mine. Sulphur above 1.3% is problematic as it forms sulphur dioxide during combustion, and most coal products specify <1% sulphur content. Mongolian coals also tend to have low CSN with most CSNs between 3-6 vs the 7-9 found in hard coking coals. Ash in most unwashed Mongolian coal is around 20%, this requires wet washing to reduce to a more acceptable level of <10%.

Coke producers require a range of coals to produce coke including premium hard coking coal (~30%), standard hard coking coal (~20%), semi-hard coking coal (~20%), low vol PCI (~25%). And ultimately the price paid will depend on the value to the consumer and the other coals in the blend. Unfortunately not many Mongolian coals fit into the category of premium hard coking coals and the majority are lower ranking coals.

All Mongolian coal exports in 2010 were of unwashed coal. We however calculate that coal producers could realise up to a USD15/t cash benefit from washing coal. Assuming capex of USD25/t of capacity for a wash plant the payback period is just 1.7 years.

The price difference between unwashed and washed coal is significant. As of April 2011 MMC believes that it can increase its price received from ~USD95/t to USD150-160/t by washing their coal. The processing options available to Mongolian coal producers range from screening and rotary breaking to dry processing through to full wet washing, and most coal producers in Mongolia are developing some sort of washing facilities. Washing costs are relatively low at USD2-3.5/t and the capital cost is modest at ~USD25/t of installed capacity. While washing will result in better product specifications, through reduced ash, sulphur, an increased calorific value and improved coking properties, the economics are adversely affected by yields (and less saleable product) which are typically 60-70% but can be as low as 30%. We calculate that the price benefit of washing is minimal assuming no middlings and a 65% yield.

The key determinant of EBITDA margin in Mongolia is coal quality. Cash costs are generally low with strip ratios <5:1 and material movement costs are typically in the range of USD3-4/bcm. However, the variance in realised coal prices is huge. MMC will receive a price of USD150-160/t for its washed hard coking coal at the China border whilst SouthGobi receives a mine gate price of just USD40/t for its high ash thermal coal. Coal quality is king. MMC’s hard coking coal product realises significantly higher prices than other producers’ coal and vastly superior USD/t margins

MMC is currently selling its coal as an unwashed hard coking coal product at the Chinese border and is receiving a price of USD90/t. Management however believes that it would realise a price of between USD150-160/t for a washed product. Given MMC will mostly be selling a hard coking coal product; we expect it to have the highest realised sales price of all Mongolian coal producers. Coking coal pricing is typically “based on quarterly market prices” which are referenced to prices in Baotou, Tangshan, Shanxi, and Australia.

Long-term average selling prices are expected to be ~USD100/t for semi-soft coal and ~USD40/t for thermal coal at the mine gate.”

I’m very happy to keep holding NRU!