Rey Resources (ASX: REY) has upgraded the Measured Resources in the upper seam (P1 seam) at Duchess Paradise to 60.2 million tonnes (Mt) of thermal coal, which is a major step toward calculation of a Reserve and moves the company closer to a mining operation in Western Australia.
The total P1 seam Resource increased to 305.8Mt, a 9% increase over the 2009 estimate. Included in the total is 60.2Mt of coal in the Measured Resource category, an increase of 229% over the previous estimate of 18.3 million tonnes.
Drilling information allows for the practical extension of Inferred Resource for a distance of up to 2,000 metres beyond the last exploration holes at both Paradise and Duchess.
Of the total Inferred Resource of 167.1Mt, 115.7 million tonnes (69%) are extrapolated beyond the last drillholes.
A Reserve statement based on the Measured and Indicated Resources will be reported in the second calendar quarter of 2011.
The Duchess Paradise coal deposit is contained within the Fitzroy Trough of the Canning Basin in Western Australia, about 175 km southeast of Derby. Importantly, only 25 kilometres of a greater than 300 kilometres of potential subcrop has been tested, providing significant scope to increase the resource base.
Overall, the P1 total seam thickness ranges from less than one to more than three metres, but it is very often in the range of 2.0 to 2.25 metres in both the Paradise and Duchess areas. The coal is characterised as low energy bituminous.
In-situ raw coal quality estimates for the Duchess Paradise P1 seam resource estimates were based on 68 cored samples.
The coal quality analyses provide indicative product specifications as follows: CV of 5,500 kcal/kg gar; ash of 12%; moisture of 17%; and sulphur of less than 1% at a yield of 66% wet basis (including mining dilution).
These estimates are made on a gross as received basis (comparable benchmark Newcastle 6,300 kcal/kg gar).
A Definitive Feasibility Study (DFS) is set for completion in June 2011. Rey Resources is continuing the DFS for a potential initial highwall mining operation on its Measured and Indicated Resources at Duchess Paradise.
From a positive feasibility study a simple highwall mining operation is proposed, with production mooted for 2013.
The initial operation would entail a 2 million tonnes per annum of saleable coal production over 20 years generating a pre tax net present value of $88 million, although this is likely to be boosted.
Most key transportation infrastructure for the proposed initial operation is in place.
Coal is expected to travel by road for 180 kilometres to the Derby export facility, where Rey holds a lease over port facilities and owns loading equipment, for shipment to nearby growing markets in China and India.
A 2011 drilling program will commence in the second quarter 2011.
Work in 2011 will bring milestones and strong newsflow for Rey including:
In addition, there will be ongoing newsflow from continuing exploration drilling, environmental and community consultation.
Rey has been achieving its milestones at Duchess Paradise. With projected growth in thermal coal expected to increase, Rey is in the "drivers seat" to tap Asian demand for coal with its initial mining operation in 2013.
At a current valuation of over $104 million, there is little project forward momentum and value of resource per tonne priced into Rey Resources current market value relative to coal developer peers. In addition, Rey has a defined path to production and substantial resource upside.
The completion of the DFS is likely drive valuation growth for Rey investors and could be expected to increase further at this point.
Having fended off two takeover offers, clearly corporate investors have calculated the value inherent in Rey's massive potential resource, that is closer to Indian and Chinese markets than east coast coal suppliers. It seems only time before other investors "twig" to the current versus future value of Rey.
REY Price at posting:
35.5¢ Sentiment: Buy Disclosure: Held
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