ENDOCOAL is a coal exploration company, focused on the Bowen...

ENDOCOAL is a coal exploration company, focused on the Bowen Basin in Queensland where it has one of the largest landholdings among the miners.


ENDOCOAL LTD (ASX:EOC) is an Australian coal exploration and development company, focused on the Bowen Basin in Queensland where it has one of the largest landholdings among the miners.

The company is preparing to announce its first feasibility study on a new coal mine in Queensland since the great flood.

Endocoal's main interest is on the exploration and development of hard-coking, thermal and PCI coal projects in the Bowen Basin.

It is Endocoal's current tenement package and includes over 5,000 square kilometres in the highly prized Bowen Basin, immediately adjacent to many existing coal-producing mines.

To date 10 of Endocoal's tenements have been granted by the Queensland Department of Mines and Energy.

With a combination of experienced Board and management plus a suite of highly prospective landholdings in the Bowen Basin, Endocoal's strategy is to develop at least two new high-quality coal mines over the next two years with mine planning and BFS at the Orion Downs, Inderi and Meteor Downs South projects.

With mining planned to commence in 2013 and further exploration and mine development scheduled, Endocoal is planned to develop into a pre-eminent explorer, producer and exporter of Australian coal.

SHARE PRICE MOVEMENTS

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Shares of Endocoal Ltd yesterday settled steady at 39c. Rolling high for the year is 80c and low 33c. The company has 738 million shares on issue with a market cap of $28.7 million.

Helmsec Global Securities, which has produced an extensive review of the company, has the stock as a speculative BUY.

The Endocoal share price has significantly underperformed the coal sector since listing in April 2010.

The firm believes that this is at least partly due to the relatively modest resource of 41.2 million tonnes established to date.

One of the measures used to value coal exploration companies is enterprise value (EV) per resource tonne.

With an EV of around $47 million, Endocoal's EV/resource tonne is around $1.11, well above Helmsec's 70c/tonne weighted average for a basket of ASX-listed coal exploration companies.

However, an increase of between 60Mt and 95Mt by August (based on possible increases of 10-15Mt at Orion Downs and a maiden resource of 50Mt-80Mt at Rockwood) would reduce the EV/t to between 34c and 46c, which could trigger a re-rating of the stock.

This could change if a maiden resource in excess of 50Mt (the lower end of the company's exploration target) at Rockwood and modest increases at Orion Downs are announced by mid-year.

Exploration drilling is expected to re-commence in March/April.

The program will set out to:

* Increase a resources at Orion Downs by a modest amount, as well as converting resources from the inferred to indicated category, improving the status of the resource base, establish an inferred resource at the Rockwood project, which currently has a 50-80Mt resource target for the northern area with potential for a similar target in the south scout drilling at Orion Downs, Essex, Expedition Creek and Talwood; and

* Assuming drilling commences in April, the company expects to announce a resource upgrade at both the Meteor Downs and Inderi projects at Orion Downs in June, as well as a maiden resource at Rockwood. The resource upgrade at Orion Downs is expected to be in the order of 10-15Mt; the company is targeting a combined total of around 50Mt of inferred resources at Orion Downs.

Cash balance of about $10 million means the exploration program is fully-funded for at least the next 12 months.

In parallel with the exploration program, the company is advancing the draft feasibility studies of the Orion Downs underground and Meteor Downs open pit operations.

Key risks:

The company's 2011 drilling program may fail to deliver a significant resource increase.

The company does not currently have a firm port allocation although there is a strong likelihood that other potential producers may not be able to meet their quotas.

Whilst the company is in discussions with banks, development remains subject to finance.

High short/medium term minimum exploration commitments at the majority of the company's Exploration Permits for Coal (EPCs) means there is some risk of cut-back in tenement size.

BACKGROUND

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The company listed on the ASX in April 2010, raising $17 million through an IPO, issuing 28.3 million shares at 60c per share.

The company has one of the largest land holdings in the Bowen Basin, including 10 tenements across 5,000 sq kms.

All projects are 100 per cent owned by Endocoal and all tenements are within close proximity to key infrastructure, including railways to coal terminals.

The company's initial exploration targets were the Orion Downs tenements (southwest Bowen Basin targeting thermal coal) and the Rockwood tenement (central Bowen Basin, targeting coking coal). The initial drilling program at Orion Downs commenced in August 2009.

Multiple coal intersections identified export-quality thermal coal and identified two areas of particular interest - the Meteor Downs South prospect in the south and the Inderi prospect in the southeast.

Drilling programs in 2010 resulted in the release of a maiden JORC resource for Inderi on July 28.

To date, the company's resource base is a modest 41.2Mt at two prospects, which appears to have disappointed the market.

Endocoal has, however, approached exploration and development on a slightly different 'pod' concept.

The company is targeting a 20-30Mt reserve per 'pod', each 'pod' producing 2-3Mt per annum with two or more producing 'pods' per tenement.

The advantage is that production could be achieved in shorter time frames, with lower start-up costs and infrastructure requirements than larger products.

It remains to be seen whether this concept will be embraced by the markets.

The recent flooding in the Bowen Basin will have little effect on Endocoal's 2011 exploration program as no drilling had been planned for the wet season (January to March).

The Orion Downs EPC, which covers an area of 1,027 sq kms, lies to the east of Yanzhou Coal Mining Company's Minerva and Athena operations (79Mt and 560Mt of thermal coal resources respectively), south of Bandanna Energy's Arturus and Springsure Creek projects (511Mt thermal coal resource) and west of Xstrata's Rolleston mine (600Mt resource and 9Mtpa thermal coal production).

The Rangal Coal Measures are being targeted.

The Dawson Highway transects the tenement which also lies within close proximity to the direct rail link to the port of Gladstone.

In 2010, Endocoal announced maiden JORC resources at two prospects - 26.8Mt at the Inderi project and 14.4Mt at the Meteor Downs South project.

Drilling in 2011 is expected to boost the status of the resource as well as increase the overall resources by 10-15Mt.

In addition, a 30-day program of scout drilling will target other potential areas of interest.

Inderi project:

More than 5,500m of drilling have been completed at Inderi since the company listed.

From a total of 29 boreholes drilled, 19 holes intersected coal, with seam thickness ranging from 3.9m to 5.4m.

Coal quality is similar to that being mined at Rolleston; the low ash/sulphur content indicates that coal is unlikely to be processed through a washing plant.

On July 28 the company announced a maiden JORC resource of 26.8Mt, comprising 15.5Mt indicated and 11.3Mt inferred resource.

The bulk (83 per cent) is Bandanna Formation "D" Seam.

The company is currently in the process of signing up contractors for the next drilling season, expected to begin in late March or early April, as well as liaising with landowners.

The purpose of the program is step-out drilling to the north and to more closely delineate coal quality in the area currently excluded from the resource base due to an intrusion in the seam.

A resource upgrade is expected by June, provided the drilling is able to start by the beginning of April.

Due to the presence of a dolerite capping and the depth of the coal seams, extraction would be by underground means.

Bord and pillar mining, with an estimated 70 per cent mining recovery, is currently being considered.

Other Projects

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In addition to Orion Downs and Rockwood, the company has a further eight exploration tenements in the Bowen Basin.

During 2011, scout drilling is expected to commence at:

* Essex, where 8-10 holes are expected to be drilled over a 45-day period. Coking and PCI coal is being targeted on the 204 sq kms EPC;

* Expedition Peak, where again the company is expecting to drill 8-10 holes over a 30-day period, targeting both thermal and coking coal on the 129 sq kms tenement; and

* Talwood, in the north, where drilling is expected to start in May and continue for a 180-day period.

The company also has two large EPCs in the southern Bowen Basin (Cedars, 1,020 sq kms and Barfield, 564 sq kms, both targeting thermal coal), another large EPC in the northern Bowen Basin (Sullivan Creek, 1,020 sq kms prospective for thermal and coking coal), a small tenement called Nebo (78 sq kms) in the northeast targeting PCI and coking coal and Springton Duaringa east of Blackwater, where coking and PCI coal is being targeted on the 761 sq kms tenement.

Furthermore, Endocoal has registered about 2,800 sq kms (more than 50 per cent of the total landholding) within six of its tenements under in-situ gasification projects for future underground coal gasification (UCG) applications.

This is a technical process involving the injection of oxidants into deep non-mined coal seams to convert coal into syngas, which is then brought to the surface for power generation and gas usage.

UCG strategy will be considered if coal seams are identified at depths below 200m.