ALTO CAPITALRESEARCHPhone: (08) 9223 9888Fax: (08) 9221...

ALTO CAPITAL
RESEARCH
Phone: (08) 9223 9888
Fax: (08) 9221 0488
Email: [email protected]
Website: www.altocapital.com.au
ACNS Capital Markets Pty Ltd T/A Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
BFS and Major Addition to Board
11th November 2010
Atomic Resources Limited (ATQ)
Speculative Buy
Price:
12-month Target:
Enterprise Value:
40.0?
60.0?
$48.7m
Summary Information:
Capital Structure:
Share Price
$0.40
Ord Shares
137.3m
Market Capitalisation
$54.9
Cash (Nov 2010)
$6.2m
Enterprise Value
$48.7m
Listed Options (25? exercise)
28.9m
Unlisted Options
8.0m
52 week Low/High
9.2?
/ 45.5?
Directors:
Non-Exec Chairman
Clive Hartz
Managing Director
Clinton Cain
Non-Exec Director
Alastair Walker
Proposed Non-Exec Chairman (subject to completion of placement)
Graeme Robertson
Ngaka Resource*
Measured
139mt
Indicated
66mt
Inferred
46mt
Total
251mt
*ATQ equity share 59.5%
Comparison to Peer Group
Summary:
Atomic Resources Limited (ATQ) is an Australian company, headquartered in Perth, Western Australia, focused on the exploration and development of major thermal coal assets in Tanzania, and uranium projects in Australia.
ATQ announced a placement of 22.3m shares at $0.22 to raise $5m (subject to shareholder approval) to Aspac Mining Limited, an entity owned and managed by Mr Graeme Robertson. Mr Graeme Robertson has been invited to become Chairman of ATQ upon completion of the proposed placement.
Mr. Robertson has previously been responsible for pioneering and managing world class mining, energy and transport infrastructure operations throughout Africa, Australia and the Asia-Pacific region. He was CEO and developer of the largest open cut coal mine in the Southern Hemisphere, PT Adaro Indonesia, and is a former Managing Director of New Hope Corporation Limited (1987 ? 2005). New Hope Corporation Limited?s current market capitalisation is in excess of $4bn. In 2010, Mr Robertson was awarded the Coaltrans Lifetime Achievement Award for his contribution to the coal industry.
We believe Mr. Robertson?s potential appointment to the position of non-executive chairman will greatly assist ATQ as it transitions from explorer to producer. His past experience in Africa and particularly his extensive knowledge of the global coal industry will prove invaluable.
ATQ holds its Tanzanian coal assets via its 85% owned subsidiary Pacific Corporation East Africa (PCEA), which in turn holds a 70% interest in Tancoal Energy Limited (Tancoal), the holder of the Tanzanian tenements. The remaining 30% stake in Tancoal is owned by the National Development Corporation (NDC) of Tanzania, the primary Government agency responsible for the development of Tanzania?s natural resources.
The Ngaka Coal Project (the groups most advanced project) currently has a JORC-compliant resource of 251 million tonnes of medium ash, low moisture, low sulphur sub bituminous coal. The company recently received a positive outcome from the Bankable Feasibility Study (BFS) into a 1.5mtpa open pit mine at Mbalawala to supply a 450MW power station.
ATQ plan to develop the Ngaka project via three stages: 1) Stage One mining, where Tanzanian and neighbouring countries will be supplied with coal, 2) Stage Two mining: supply to the 450MW power station, and 3) Stage Three: export sales.
ATQ intend to use their tenements located on Lake Nyasa for Stage One production, due to the convenience of the waterways and barges. This will allow their Ngaka Coalfields to be used exclusively for the Power Plant and potential export sales.
We have maintained our Speculative Buy recommendation on ATQ, and have increased our 12-month price target to $0.60 per share based on the positive outcome of the BFS and recent commentary on the imminent commencement of Stage One Mining as well as the potential appointment of a new non-executive chairman with extensive coal industry experience.
ATQ?s Australian based uranium assets are not commented on in this report.
Alto Capital
Atomic Resources Limited
November 2010
Page 2 of 11 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
Ngaka is ATQ?s most advanced project
251 million tonne JORC resource at Ngaka at present
Resource expected to increase to a least 400mt
Key Points:
? All coal assets in Tanzania are held through Tancoal Energy Limited, with the Tanzanian government holding a 30%. This effectively makes ATQ a partner of the Government.
? JORC compliant thermal coal resource at Ngaka of 251mt, expected to increase to at least 400mt during 2011
? Stage 1 development of Ngaka is expected to start in the first quarter of 2011 with the commencement of Stage One mining, with initial production of 150,000tpa to satisfy the Tanzanian domestic market and replace coal currently imported.
? The recent BFS into the viability of a 1.5mtpa open pit to supply a 450MW power station (Stage 2) confirmed the project was commercially viable and generated an Internal Rate of Return (IRR) of greater than 27%. First production from stage 2 is not expected before 2014.
? Stage 3 development of the Ngaka coal project involves the export of 3.0mtpa through the ports of either Mtwara or Nacala or a combination of the two.
Summary of the Ngaka Coal Project
The Ngaka Thermal Coal Project is ATQ?s most advanced project, located in the resource-rich Ruvumu District of South West Tanzania, 40km east of Lake Nyasa, approx. 650km from the deep water port of Mtwara and 1,100km from Dar Es Salaam, the capital of Tanzania.
Atomic, through its Tanzanian Operating arm; Tancoal are developing the Ngaka thermal coal project.
Mbalawala, located in the southern portion of the Ngaka Coalfield, has a JORC-compliant resource of 251 million tonnes of thermal coal (Measured 139mt, Indicated 66mt and Inferred 46mt), and a Proven Reserve of 40mt.
ATQ recently received the preliminary results of a Bankable Feasibility Study (BFS) into the financial viability of a 1.5mtpa mine at Mbalawala to supply a proposed 450MW power station. The BFS confirmed that the project was commercially viable.
Total coal resources at Ngaka are expected to increase to over 400 million tonnes in the coming months when a new infill drill program at Mbuyura/Mkapa, located in the northern portion of the Ngaka Coalfield, is expected to convert a large proportion of the 160mt ? 320mt exploration target into a JORC resource.
Tancoal plan to develop the Ngaka coalfield in three stages, with Stage One consisting of production, initially at 150,000tpa in 2011 and ramping up to 1.0 million tonnes pa by 2013 to satisfy local domestic demand, as well as neighbouring countries. Stage 1 production is expected to replace coal currently imported from South Africa and Malawi.
Stage Two consists of supplying 1.5mtpa of coal to a 450MW mine mouth power station. Stage 2 was the subject of the recent BFS which confirmed the project was commercially viable. Production from stage 2 is expected to commence in 2014. The Power Station may be increased to 1050MW in the future, depending on the success of the 450MW station.
Alto Capital
Atomic Resources Limited
November 2010
Page 3 of 11 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
Potential to be producing almost 5.0mtpa by 2018
Mbalawala Block subject of recent BFS
High calorific content at over 6,200 in raw coal
Maiden reserve of 40mt expected to significantly increase over time
Stage Three consists of exporting up to 5.0mtpa of thermal coal through the ports of either Mtwara or Nacala or a combination of the two. Stage 3 is at a very early stage with no studies completed to date. First export sales are not expected before 2016.
All numbers in this report are in US$ and on a 100% equity basis unless stated otherwise.
Potential Production Profile
2011
2012
2013
2014
2015
2016
2017
2018
Stage One Mining
0.15mt
0.3mt
1.0mt
1.0mt
1.0mt
1.0mt
1.0mt
1.0mt
Power Plant Supply
0.6mt
1.5mt
1.5mt
1.5mt
1.5mt
Export Market
0.6mt
1.6mt
3.0mt
Total
0.15mt
0.3mt
1.0mt
1.6mt
2.5mt
3.1mt
4.1mt
5.5mt
Resources/Reserves (Exploration Target)
The coal resources of the Mbalawala Block (the subject of the recent BFS) are located within the southern portion of the Ngaka Coalfield. This area was the focus of intense geological and resource studies by the Colonial Development Corporation (?CDC?) in the early 1950?s.
The resource estimate is based upon 27 boreholes completed by the CDC in 1955, and 29 diamond drillholes completed by Tancoal between 2008 and 2010. The initial Tancoal diamond drilling program was to verify and validate the CDC?s historical geological and analytical data.
Resource Category
Measured
Indicated
Inferred
Total Tonnes (mt) 139 66 46 251
Inherent Moisture (%)
2.9
2.8
2.6
2.8
Ash (%)
18.9
19.0
23.8
19.9
Volatile Matter (%)
52.0
51.4
46.3
50.8
Fixed Carbon (%)
26.3
26.9
27.3
26.6
Calorific Value (kcal/kg)
6,326
6,350
5,937
6,257
Total Sulphur
1.4
1.3
0.8
1.3
Specific Gravity
1.5
1.5
1.6
1.5
The coal quality components above are reported on an Air Dried Basis (ad). The major positives to be taken from the above resource breakdown is the very high calorific value and relatively low ash content in the raw coal, particularly as the calorific content in the raw coal at Mbalawala is comparable to that of many washed coals. The only slight negative is the sulphur content which is a bit on the high side.
Schematic of a typical Mbalawala cross section (vertical scale exaggerated 5x)
Reserves
As part of the Mbalawala BFS an initial 40 million tonne open pitable mining reserve was defined from a proportion of the 139mt measured resource. The BFS indicated that there is significant potential to increasing the current reserve component in both open pit and underground mining areas, by continuing mine development planning. A drilling program is planned to commence in December to further increase the current reserve.
Alto Capital
Atomic Resources Limited
November 2010
Page 4 of 11 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
Exploration target of 160mt- 320mt in the northern portion of the Ngaka Coalfield
Plan to commence Stage One mining early next year
Initial 1,000t bulk sample appears to have passed quality controls
Production to ramp up from 100kt to 400kt within 3 years.
Operating costs estimated at $37.25/t
Operating profit of $13m per annum at a sale price of $70/t
Exploration Target
The Mbuyura/Mkapa Blocks are located within the northern portion of the Ngaka Coalfield, and were subject to considerable historical exploration activities by the CDC during the late 1940?s and early 1950?s. The CDC drilled 13 holes, accompanied by detailed mapping, trenching, pitting and auger drilling. During 2009 Tancoal drilled 27 holes across the area.
Review and re-analysis of historical and recent Tancoal drilling data has resulted in an Exploration Target range of 160 to 320 million tonnes to a depth of 500 metres. Lower and upper ranges take cognisance of reasonable assumptions with regard to seam variability, continuity and thickness.
Exploration Target
0 ? 50m
50 ? 500m
Total
Seam 4 (mt)
8 ? 17
35 ? 70
43 ? 87
Seam 3 (mt)
12 ? 23
105 ? 210
117 ? 233
Total (mt)
20 ? 40
140 ? 280
160 ? 320
Stage 1 Development (Stage One Mining)
ATQ plans to commence mining operations early next year to supply coal to local Tanzanian coal consumers operating in the cement and gypsum industries. It is estimated that these coal consumers currently import around 250,000tpa of coal from South Africa (with up to 500,000tpa used in Tanzania).
The FOB (Free on Board) price for coal out of Richards Bay in South Africa is currently around US$90/t, with the purchaser required to fund the cost of shipping, freight, and insurance from the port to the final destination. This can increase the total cost of a tonne of coal to around US$150/t once it has reached its final destination in Tanzania.
ATQ has announced plans to sell locally mined coal to Tanzania?s coal consumers to replace the currently imported product.
The company delivered a 1,000 tonne bulk sample to Tanga Cement, one of Tanzania major cement producers, to enable the company to test the quality of the coal, the logistics required to get the coal from the mine gate to the cement facility, and enable costs to be estimated. ATQ reports that initial feedback indicates Tanga was very happy with the sample.
We believe ATQ plan on commencing Stage One production at an annualised rate of 150,000tpa during the first quarter of 2011, before ramping up to 1.0Milliontpa during 2013.
It is anticipated that the capital costs required to commence production at an annual rate of 400,000 tonnes per annum should not be significant (US$5 ? US10m), with the major capital item being a Coal Handling Plant (CHP) and initial earth moving equipment.
For Stage One mining we have estimated a strip ratio of 5.0: 1.0 for the first 5 years, meaning that 5.0 tonnes of waste is required to be removed for every 1.0 tonne of coal. Therefore in order to produce 400,000t coal per annum in Stage 1, it is necessary to mine 2.4 million tonnes of material (0.4 million tonnes of coal and 2.0 million tonnes of waste).
In house estimates of the various costs associated with this mining stage indicated production costs of around US$37.25/t of saleable coal at a loading facility on Lake Nyasa (40km from mine gate) is achievable using the following costs and assumptions:
In-situ
Saleable
US$4.00/t
Mining costs
US$24.00/t
US$3.75/t
CHP costs
US$3.75/t
US$0.75/t
Administration costs
US$4.50/t
Transportation cost
US$5.00/t
5.0
Strip Ratio
Based on the above assumptions, it is estimated that the Stage 1 development of the Ngaka Thermal Coal project should be able to produce an annual operating profit in the vicinity of US$13 million (see table below).
Revenue
400,000t @ $70.00/t
$28.0m
Mining
2.4mt @ $4.00/t
-$9.6m
CHP
0.4mt @ $3.75/t
-$1.5m
Administration
2.4mt @ $0.75/t
-$1.8m
Transportation
0.4mt @ $5.00/t
-$2.0m
Operating Profit
$13.1m
Alto Capital
Atomic Resources Limited
November 2010
Page 5 of 11 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
Positive outcome from BFS into 1.5mtpa open pit to feed 450MW power station
Stage 2 initial Capex forecast at $98m
Estimate operating costs of $33.80/t
Operating profit of $46m per annum at a sale price of $65/t
The table below shows how the annual operating profit changes based on breakdown of sale price and operating costs.
Sale Price / t
$60
$70
$80
$90
Operating
Cost / t
39.25
$7.1m
$11.1m
$15.1m
$19.1m
36.75
$8.1m
$12.1m
$16.1m
$20.1m
37.25
$9.1m $13.1m
$17.1m
$21.1m
31.75
$10.1m
$14.1m
$18.1m
$22.1m
29.25
$11.1m
$15.1m
$19.1m
$23.1m
It must be noted that the annual operating profit above does not include royalty, taxes, exploration, or head office expenditures.
Stage 2 Development (1.5mtpa feed for Power Station)
ATQ recently received the preliminary results of a Bankable Feasibility Study (BFS) into the financial viability of a 1.5mtpa mine to supply the proposed 450MW Mbalawala Power Station (to be located alongside the mine) for a period of 25 years.
The results of the BFS concluded that the project was commercially viable and generated an Internal Rate of Return (IRR) of greater than 27% based on the following findings: 1) Proven Reserves of 40mt, 2) Mine Development Schedule of 30 months, 3) Capital Expenditure requirement of US$98m over three years, 4) Life of Mine (LOM) operating cost of US$34.75/t coal, and 5) Average sale price of US$60-70/t of coal.
Only summary information of the BFS is available at present; however the breakdown of the initial US$98m in capital expenditure that has been released looks to contain a lot of padding. We predict that once construction of the mine commences some of the estimates may come down; an example is the US$48.8m that has been allocated to access roads, bridges, and site infrastructure.
We have used the limited data released from the BFS, and our own cost estimates to investigate the potential profitability of the Stage 2 development below.
For the Stage 2 development we have applied a LOM strip ratio of 8.2 : 1.0 (as announced to the market), meaning that 8.2 tonnes of waste is required to be remove for every 1.0 tonne of coal. Therefore in order to supply 1.5mtpa to the 450MW power station, it is necessary to mine 13.8 million tonnes of material (1.5 million tonnes of coal and 12.3 million tonnes of waste).
In house estimates and information gleamed from the BFS of the various costs associated with the 1.5mtpa mining operation indicated production costs of around US$33.80/t of saleable coal at the mine mouth power station is achievable based on the following costs and assumptions:
In-situ
Saleable
US$2.75/t
Mining costs
US$25.30/t
US$2.50/t
CHP costs
US$2.50/t
US$0.55/t
Administration costs
US$5.00/t
Handling cost
US$1.00/t
8.2
Strip Ratio
Based on the above assumptions, it is estimated that the Stage 2 development of the Ngaka Thermal Coal project should be able to produce an annual operating profit in the vicinity of US$46 million based on the development of the proposed 450MW Mbalawala Power Station (see table below).
Revenue
1.5mt @ $65.00/t
$97.5m
Mining
13.8mt @ $2.75/t
-$37.9m
CHP
1.5mt @ $2.50/t
-$3.7m
Administration
13.8mt @ $0.55/t
-$7.6m
Handling
1.5mt @ $1.00/t
-$1.5m
Operating Profit
$46.8m
Alto Capital
Atomic Resources Limited
November 2010
Page 6 of 11 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
Stage 2 dependent on successful construction of 450MW power plant
Management investigating potential of export sales
Potential exports through deep water ports at either Mtwara or Nacala
Estimate operating costs of $72.50/t, with transport and port costs making up over half of costs
Operating profit of $80m per annum at a FOB price of $100/t
The table below shows how the annual operating profit changes based on changes in sale price and operating costs.
Sale to Power Plant
$60
$65
$70
$75
Operating Cost /t
$38.80
$31.8m
$39.3m
$46.8m
$54.3m
$36.30
$35.6m
$43.1m
$50.6m
$58.1m
$33.80
$39.3m $46.8m
$54.3m
$61.8m
$31.30
$43.1m
$50.6m
$58.1m
$65.6m
$28.80
$46.8m
$54.3m
$61.8m
$69.3m
It must be noted that the annual operating profit figures stated above does not include royalty, taxes, exploration, or head office expenditures.
It must also be noted that all of the above scenarios are dependent on the successful construction of the proposed 450MW Mbalawala Power Station, which to our knowledge is not yet even at the detailed planning stage.
Stage 3 Development (5mtpa for export market)
Due to the large resource base at Ngaka of 250 million tonnes (with potential of +400mt), and the likelihood that the current proven reserves of 40 million tonnes will increase significantly, it is believed that ATQ are in the early stages of investigating the potential of producing coal for the exporting market.
Recent commentary from ATQ has indicated that they are investigating the potential of producing export quality thermal coal for export through the ports of either Mtwara in Tanzania or Nacala in Mozambique or a combination of both. Stage 3 is at a very early stage with no studies reported to the market, and first export sales not expected before 2016.
The major hurdle that ATQ will need to overcome to enter the export market is the lack of transport infrastructure around the Ngaka Coal Project. The preferred route to market would involve the construction of a new 700km railway from the Ngaka project to the port of Mtwara, with the second option involving barging coal several hundred kms into Mozambique and then loading it onto a railway to the port of Nacala.
The company would also have to invest significant capital into a Coal Handling Processing Plant (CHPP) to bring the coal up to export quality, generally this would involve reducing the ash content to around 10% - 15%, and lowering the sulphur content to less than 1%.
For the Stage 3 development we have applied a LOM strip ratio of 8.2 : 1.0 (same as Stage 2), meaning that 8.2 tonnes of waste is required to be remove for every 1.0 tonne of raw coal. However the raw coal is not suitable for export until it has been upgraded through the CHPP, which we estimate would result in a 20% loss or the raw coal (80% recovery). Therefore in order to produce 3.0mtpa of export quality coal, it would be necessary to mine 3.75mt of raw coal and 30.8mt of waste (34.5 million tonnes of material).
Rough cost estimates indicate the total costs to mine, transport and load the ore for export of around US$72.50/t of saleable product, based on the following costs and assumptions:
In-situ
Saleable
US$2.25/t
Mining costs
US$25.90/t
US$3.70/t
CHPP costs
US$4.60/t
US$0.30/t
Administration costs
US$3.50/t
Handling cost
US$1.00/t
8.2
Strip Ratio
80%
CHPP recovery
Transport to Port
US$30.00/t
Port Costs
US$7.50/t
Based on the above assumptions, it is estimated that the Stage 3 development of the Ngaka Thermal Coal project should be able to produce an annual operating profit in the vicinity of US$80 million based on the development of 3.0mtpa export project (see table below).
Revenue
3.0mt @ $100.00/t
$300.0m
Mining
34.5mt @ $2.25/t
-$77.6m
CHPP
3.8mt @ $3.70/t
-$14.0m
Administration
34.5mt @ $0.55/t
-$19.0m
Handling
3.0mt @ $1.00/t
-$3.0m
Transport
3.0mt @ $30.00/t
-$90.0m
Port Costs
3.0mt @ $7.50/t
-$22.5m
Operating Profit
$82.5m
Alto Capital
Atomic Resources Limited
November 2010
Page 7 of 11 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
NDC granted an addition two coal concessions to Tancoal
Mbamba has potential to contain 30 million tonnes of thermal coal
Liweta has potential to contain 30 million tonnes of thermal coal
The table below shows how the annual operating profit changes based on changes in Sale price and production level.
Export Price (FOB)
$80
$100
$120
$140
Operating Cost /t
$38.80
-$7.5m
$52.5m
$112.5m
$172.5m
$36.30
$7.5m
$67.5m
$127.5m
$187.5m
$33.80
$22.5m $82.5m
$142.5m
$202.5m
$31.30
$37.5m
$97.5m
$157.5m
$217.5m
$28.80
$52.5m
$112.5m
$172.5m
$232.5m
It must be noted that the annual operating profit above does not include royalty, taxes, exploration, or head office expenditures.
Other Coal Projects
The National Development Corporation (NDC) granted two additional coal leases to Tancoal during the March quarter 2010 (Mbamba & Liweta). These two leases offer the opportunity for further coal to be identified close to the margins of Lake Nyasa. Preliminary estimates put the coal potential of these two new leases at 40mt ? 60mt.
Mbamba
At Mbamba Bay, previous work in the region by Harkness (1953) and others identified coal at surface. Initial proximate analysis completed on surface samples collected during the field work in the 1950?s show:
Ash
Moisture
VM
Sulphur
CV Kcal/kg
13 ? 27%
0.8 ? 13%
21.3 ? 30.1%
0.3 ? 0.4%
6,040 ? 7,810
Based upon the main seam thickness of approximately 2 metres seen in outcrop and dip determined from the outcrop sampled combined with the aerial extent of the basin, ATQ anticipates that a target potential tonnage of between 20 -30 million tonnes of moderate ash, low sulphur thermal coal with a calorific value exceeding 6,000Kcal/Kg lies within the concessions.
Liweta
The primary coal bearing formation is estimated from work on the exposed coal field up dip from the optioned concessions, to be approximately 50m thick with up to 6 contained seams up to a maximum individual seam thickness seen in outcrop of 1.5m.
Ash
Moisture
VM
Sulphur
CV Kcal/kg
28%
unknown
31%
0.7%
8,080
Atomic estimates Liweta has a target potential tonnage of between 20 ? 30 million tonnes of moderate ash, low sulphur thermal coal with a high calorific value exceeding 8,000 Kcal/kg. Geologically the coal is within outliers of Karoo sediments within the main Mchuchuma Formation, the coal bearing formation at Ngaka and Mchuchuma coal fields.
Rukwa
ATQ has entered into a Memorandum of Understanding (MoU) for 80% of the Rukwa Coalfield with local Tanzanian company Upendo Group. The Rukwa coalfield comprises two areas of down faulted Lower Karoo coal measures, the Namwelle-Mkomolo coalfield and the Muze Coalfield.
Potentially workable coal seams within the upper part of the Namwelle-Mkomolo coal zone occur in seams up to 1m thick, commonly aggregating 2.0 ? 2.5m, separated by carbonaceous mudstone partings. The project contains an exploration target at Namwelle and Mkomolo of 5mt and 2.5mt respectively. The coal can be described as high volatile bituminous coal, with high ash, high sulphur and moderate to low specific energy.
Alto Capital
Atomic Resources Limited
November 2010
Page 8 of 11 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
Reporting formats vary dramatically between companies so necessary to standardise
ATQ?s calorific value is superior to its peers
More work required on sulphur content (a little high)
Comparison of Coal Quality for ASX listed Peers
Coal quality is reported in various formats that can affect the interpretation of the coal quality, for this reason it is necessary to make adjustments to the reported figures to make like for like comparisons meaningful. The most common basis for reporting coal analysis are:
Term
Symbol
Definition
As Received
(ar)
The analysis of coal as it is received which includes both free moisture and inherent moisture , i.e. Total Moisture (TM)
Air Dried
(ad)
As above but with the free moisture removed by exposure to air, but still containing Inherent Moisture (IM)
Dry Basis
(db)
Excludes all moisture by heating coal to around 110?C
Dry Ash Free
(daf)
Excludes all moisture and Ash
As the various coal components are removed the calorific value of the remaining material increases. For this reason it is important to standardise the results.
Below we have standardised the results to a Air Dried Basis (ar), the major points to be taken from the table is the high calorific value of ATQ?s coal compared to its peers, although the sulphur content of ATQ?s coal is a bit on the high side.
IM
Ash
VM
FC
S
CV
Company
Area
(%)
(%)
(%)
(%)
(%)
Kcal/Kg
Comments
East Energy (EER)
AUS
14.2
12.5
31.2
42.1
0.4
4,900
Washed F1.60
Coalworks (CWK)
AUS
16.5
18.2
24.0
41.3
0.3
4,600
In-Situ
NuCoal Resources (NCR)
AUS
Not broken down to components
Coalspur (CPL)
CAN
4.5
11.9
33.7
49.9
0.3
6,200
Washed Values
Hunnu Coal (HUN)
MNG
No reported resource yet
Kangaroo Resources (KRL)
IDN
18.6
5.0
0.2
5,200
Continental Coal (CCC)
ZAF
2.5
31.6
18.2
47.7
n/a
5,100
In-Situ
Firestone Energy (FSE)
ZAF
2.5
32.5
25.7
40.0
0.9
4,900
De-Shaled
Res Generation (RES)
ZAF
3.6
33.1
25.7
37.7
1.0
4,500
De-Shaled
Atomic (ATQ)
TZA
2.8
19.9
26.6
50.8
1.5
6,200
In-Situ
In the comments sections, Washed means the coal has undergone an upgrading stage to remove some of the ash, De-shaled means the coal has had waste material (shale) removed before analysis, and In-Situ means that the coal has not undergone any upgrading, i.e. raw as mined coal.
Resource are generally valued between 10? and 60? a tonne
ATQ?s resource is valued towards the lower end of the range
Comparison of Coal Resources for ASX listed Peers
Below is a table that compares the value of a tonne of coal in the resource category for various listed coal companies on the ASX. The comparison does not take into account the quality of the resource (measured/indicated/inferred), or the calorific value of the coal.
Company
Code
Mkt
Cap
Resource
Mkt Cap/ Resource
Coalspur
CPL
$652m
900mt
$0.72
Cockatoo Coal
COK
$478m
830mt
$0.58
NuCoal
NCR
$191m
420mt
$0.45
Continental
CCC
$189m
480mt
$0.39
Caledon
CCD
$309m
750mt
$0.41
Bandanna
BND
$462m
1,250mt
$0.37
Atomic
ATQ
$55m
150mt
$0.37
Kangaroo Res
KRL
$79m
365mt
$0.22
Res Generation
RES
$116m
1,500mt
$0.08
Firestone
FSE
$64m
730mt
$0.09
Coalworks
CWK
$54m
822mt
$0.07
East Energy
EER
$28m
1,000mt
$0.03
ATQ resource is valued towards the bottom of the valuation range compared to other ASX listed coal companies, which we consider rather strange when the superior calorific quality of Nkaga coal is considered, the fact that 50% of ATQ?s current resource base is in the measured category, and the likelihood of resource increase to 400mt (ATQ share 240mt) in the near future.
Alto Capital
Atomic Resources Limited
November 2010
Page 9 of 11 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
Valuation based on Sum of Parts method
Segments making up the valuation have had discount rates applied based on perceived risks/certainty
Discounted sum of the parts valuation for ATQ of US$76.6m
Valuation should increase as confidence/knowledge in the project increase
Valuation
As ATQ has yet to lock in sales agreements for its proposed Stage One mining commencing next year, has only released preliminary data from the BFS on a 1.5mtpa mine to supply the proposed Mbalawala Power Station, and is still investigating the potential of export sales, we have decided to value the company using a sum of its parts basis. We have divided the group up into eight segments for valuation purposes:
Stage 1 DCF:
Discounted cash flow using a 12% discount rate for Stage One, with production commencing at 100ktpa for 2011 and ramping up to 400ktpa by 2014, with sales into the domestic market at a price of US$70/t.
Stage 2 DCF:
Discounted cash flow using a 12% discount rate for the sale of 1.5mtpa to the 450MW power station commencing at 600kt in 2014 a price of US$65/t.
Stage 3 DCF:
Discounted cash flow using a 12% discount rate for the sale of 3.0mtpa into the export market at a price of US$100/t commencing in 2016 at 600kt, and ramping up to 3.0mtpa by 2018.
Resource Upgrade:
Based on a resource upgrade from 251mt to 400mt
Exploration Potential
Based on converting exploration potential into resources (additional 400mt)
Exploration:
Value of ATQ?s other exploration holdings
Cash:
Net cash holdings
Corporate:
Head Office expenditure (3 years)
As there are varying levels of uncertainty into the outcomes of the various stages, we have discounted our valuations to take into account this perceived risk. The higher the discount used the less likely the event is to occur (example a discount of 15% implies a fairly high level of certainty, while a discount of 95% implies there is a fairly low level of certainty.
Item
Value
Equity
Equity
Discount
(US$m)
Share A$
DCF Stage 1 ($70/t)
US$50m
59.5%
$29.8m
15%
25.3
18.4?
DCF Stage 2 ($65/t)
US$100m
59.5%
$59.5m
60%
23.8
17.3?
DCF Stage 3 ($100/t)
US$300m
59.5%
$178.5m
95%
8.9
6.5?
Resource Upgrade (400mt)
US$15m
59.5%
$8.9m
15%
7.6
5.5?
Exploration Potential (800mt)
US$20m
59.5%
$11.9m
60%
4.8
3.5?
Other Exploration
US$8.0m
mixed
$4.0m
4.0
2.9?
Cash
$1.2m
$1.2m
1.2
0.9?
Placement
$5.0m
$5.0m
5.0
3.6?
Corporate
($4.0m)
($4.0m)
(4.0)
(2.9?)
Total
US$495m
$294.8m
76.6
55.7?*
* based on 137.3m shares
It must be noted that the valuation above of US$76.6m is based on information known at the time of this report.
As the project becomes more advanced (Mbalawala Power Station go ahead, JORC resource increase, successful scoping study on stage 3, etc.) the discounts applied to various items will decrease. As an example, with all things being equal, once the Mbalawala Power Plant receives FID (Final Investment Decision) the current discount rate of 60% may decrease to 30%, adding US$18m to the valuation, or once a successful scoping study on the Stage 3 export potential has been completed the discount rate may decrease to 70% from the current 95%, adding an additional US$50m to the valuation.
The valuation method we have used above is designed to increase in value as confidence and knowledge of the project?s segments increase.
Alto Capital
Atomic Resources Limited
November 2010
Page 10 of 11 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
Speculative Buy with a 60? price target
Currently trading at a significant discount to our valuation
Recommendation and Price Target
We have maintained our Speculative Buy recommendation on ATQ, and have increased our 12-month price target to $0.60 from $0.40 per share based on the positive outcome of the BFS, the appointment of Mr. Robertson to the Board, and recent commentary regarding the potential of export sales
Our 12-month price target of $0.60 is slightly above our sum of the parts valuation of ATQ of $0.56, and is due to our believe that new board appointment of Mr. Graeme Robertson will provide renewed confidence in the management team of ATQ going forward.
We expect positive news flow over the coming months as initial production from Stage One mining approaches, results from further drill programs are released to the market, and the potential of a significant resource upgrade in the new year.
Based on our price target of 60? a share, and a valuation of 55? a share, ATQ is trading at a significant discount to fair value, and has the potential to produce substantial capital gains if the group?s future plans come to fruition.
Future value for ATQ?s equity share of Tanzanian assets could be as high as A$250m
Little downside risk at current share price levels.
Final Thoughts
If ATQ plays its cards right, and a bit of luck goes its way, its assets in Tanzania have the potential of being a company maker. It does not take much imagination to see the value of ATQ?s projects in Tanzania being worth in excess of $100m, potentially as much as $250m in the future.
We believe the easiest and most profitable way forward for ATQ would be for Tancoal to form a partnership with one of the larger resource companies to provide the necessary capital required to get this substantial resource project off the ground.
We see little downside in the current price of ATQ at around 40?, particularly as the $5m placement should provide the necessary funds to progress to Stage One production (and hopefully positive cashflows).
The fact that Mr. Graeme Robertson may accept the position of non-executive chairman (subject to shareholder approval) and has committed $5m (via placement) to fund the company going forward is we believe a positive development.
Directors
Mr. Clive Hartz
Non-Exec Chairman
Mr Hartz is Chairman and CEO of a private diverse investment group that he established in 1976. The groups interests span property, exploration, mining and construction and have include the development of retirement villages, offices, showrooms, industrial and residential building, subdivisions and shopping centres. Clive was a key participant in the resurrection of Skywest Airlines in Western Australia. He is currently the President and Chairman of IGC Resources Inc., a Canadian listed resources company.
Mr. Clinton Cain
Managing Director
Mr Cain holds a diploma in Mechanical and Electrical Engineering, a Graduate Diploma in Business Management and a Masters of Business Administration (MBA). He brings to Atomic over 25 years experience in the mining and heavy engineering industries including coal and has extensive business and corporate experience in Africa and Australia.
Mr. Alastair Walker
Non-Exec Director
Mr Walker has a Bachelor of Business and is a Fellow of CPA Australia. He has over 20 years experience in the accounting profession and commerce in area such as finance, mining and property development. He was Company Secretary and CFO of a WA based diverse private investment group involved in resources and property development. Alastair has served as Company Secretary of a number of ASX listed companies.
Alto Capital
Atomic Resources Limited
November 2010
Page 11 of 11 ACNS Capital Markets trading as Alto Capital ABN 93 088 503 208 AFSL 279099
This information must be read in conjunction with the disclaimer at the end of this document
The author of this report currently owns shares in ALG, ALGO, ATQ, CEU, SFZ, SFZO, TAH, and TBR.
Carey P. Smith
Research Analyst
Phone: 08 9223 9838
Mobile: 0400 216 502
E-mail: [email protected]
Investment Managers
Stockley Davis
Corporate Manager
Phone: +618 9223 9835
[email protected]
Adam Belton
Director
Phone: +618 9223 9818
[email protected]
Craig Brown
Director
Phone: +618 9223 9828
[email protected]
Shane Wee
Director
Phone: +618 9223 9868
[email protected]
Brendan Fogarty
Investment Manager
Phone: +618 9223 9810
[email protected]
Peter Hayes
Investment Manager
Phone: +618 9223 9836
[email protected]
Alan Lawson
Investment Manager
Phone: +618 9223 9878
[email protected]
Maciej Rosiewicz
Investment Manager
Phone: +618 9223 9830
[email protected]
Brett Schreuders
Investment Manager
Phone: +618 9223 9825
[email protected]
Cameron Bolton
Investment Manager
Phone: +618 9223 9832
[email protected]
Chris McGrath
Investment Manager
Phone: +618 9223 9822
[email protected]
Ian Leete
Authorised Representative
Phone: 0415 707 065
[email protected]
Mathew Walker
Director
Phone: +618 6460 4960
[email protected]
Russell Lynton-Brown
Authorised Representative
Phone: +618 6460 4960
[email protected]
Nathan Barbarich
Authorised Representative
Phone: +618 9223 9848
[email protected]
James Robinson
Authorised Representative
Phone: +618 6460 4960
[email protected]
Carey Smith
Research Analyst
Phone: +618 9223 9838
[email protected]
Carrie Burns
Office Manager
Phone: +618 9223 9888
[email protected]
Research Disclaimer/Disclosure
Important Information
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