Article in the Australian Business JournalAnother coal mine in...

Article in the Australian Business Journal

Another coal mine in 2012 & onwards to plus-10 Mtpa ROM coal in 2015

On track to commence 2012 production at its third operating coal mine to enter play in under two years in South Africa’s major coal fields surrounded by existing producing mines and vital infrastructure, can Continental Coal hit its 10 million tonnes per annum ROM coal production goal in 2015?

The answer is a resounding yes.

In May 2010, Continental Coal Limited (ASX: CCC) (“Continental”) began cementing itself as a coal producer for the export and domestic markets, and a regular face in South Africa’s major coal fields, by commencing production at its Vlakvarkfontein mine. Now less than two years on—targeting production from its portfolio of predominantly export thermal coal mines of 10 million tonnes per annum (and higher) run-of-mine (ROM) by 2015—“Contie,” as the company’s executive types affectionately put it, stands strong with two mines in production (Vlakvarkfontein and Ferreira), two development mines where production is imminent (Penumbra and Wittekrans) more to come from longer-term projects Vlakplaats, Mooifontein, Wesselton II, and Leiden.

Characterising Continental is simple: This is a group that pans the full gauntlet of exploration and development with multiple mines well-located to existing infrastructure in active coal producing regions.

Furthermore, once the Penumbra (in the third quarter of 2012) and Wittekrans (2013) mines commence output, Continental will surpass six million tonnes annual production; the next big step towards its impressive yet achievable 2015 vision.

2012 production at Penumbra

It goes without saying that Continental’s successes at Vlakvarkfontein and Ferreira are well known, as is the breakneck speed at which both coal projects saw development through to fruition. Aided in part by the company’s smart moves to secure projects in existing coal-producing provinces surrounded by the bulk commodity infrastructure necessary to make-or-break a mine, and in equal measure by the team’s steadfast motivation to bring its projects along, the past couple of years have delivered a litany of triumphs from both operations.

Vlakvarkfontein’s 17 million tonnes of resource and 10-plus year mine life is backed by three offtake agreements—confirming somewhat unsurprisingly that parties are keen to get their hands on the 100,000 tonnes of thermal coal that Continental targets per monthly output. And at just two kilometres from Continental’s 150,000tpm Delta Processing Operations, adjacent to the 1.2 million tonne per annum Anthra railway siding which provides swift and sizable passage direct to the Richards Bay coal terminal, Ferreira’s infrastructure setup is about as good as it gets.

Both operating mines suggest that Continental’s plans to take Penumbra to first coal in 2012, leading to 750,000 tonnes of run of mine production per year, are in the right hands. In fact, rumour has it that the team was a little ahead of schedule in January, having sent in the underground contractors and started work on the concrete ramp down into the boxcut.

Drawing similarities between up-and-running Ferreira and incoming Penumbra is easily done and with good reason. As production mounts from Penumbra’s underground operations it will gradually replace that of Ferreira, utilising both Continental’s Delta Processing Operations and the Anthra railway siding just like its predecessor, and also assuming the company’s existing offtake agreements in what looks to be a smooth transition, sustaining plans to grow the overall production profile of the company portfolio. In addition, the commencement of production at Wittekrans will, by all accounts, prove pivotal as Continental continues towards the 10 million-plus tonnes per annum ROM 2015 goal.

Stepping up with Wittekrans in 2013

Slated to deliver another 3.6 million tonnes of production and housing a current resource capable of sustaining a 30-plus year mine life, Wittekrans will be the next mine to come online after Penumbra. In line with company aims to hit full production from Wittekrans’ proposed initial open cast operation in 2013, optimisation works are underway ahead of plans for debt financing to fund project development. And given that the company aims to develop one new mine every twelve months, there’s every reason to suppose that, permits depending, construction at Wittekrans could be underway by the second half of 2012.

Penumbra’s debt financing agreement may offer some indication of the kind of arrangement Continental envisages for Wittekrans as well. Both Barclays and ABSA have agreed to stump up an aggregate debt facility of US$65 million for Penumbra’s development, and given that the project remains on track (if not a little ahead) it is quite possible that the reflection it has on Continental will prove attractive to would-be Wittekrans debt financing participants. Equally so, according to the September 2011 completed BFS, Wittekrans looks set for export coal operating costs of around US$55 per tonne; a comfortable operating margin for what remains on course to be a large, well-linked, well-mastered near-term coal play.

Time to wake up the markets

While today Continental’s cashflow, project and annual output all remain on the up-and-up, a glance back to five years ago delivers less favourable market memories of when coal was far from a standout investment option in terms of commodities. Continental’s efforts in scouting out advantageously priced opportunities in prime South African producing coal ground back in 2008—prior to export coal prices rising significantly—have and continue to pay off, and the company’s move to secure key assets ahead of the crowd is not one to forget now that its portfolio and production profile continues to grow.

The 2015 plus-10 million tonnes per annum ROM coal production target edges ever closer and it’s likely that by the time Penumbra and Wittekrans take current output over six million tonnes per year, the markets will have fully caught on. Production at Penumbra in 2012 is on track. Plans for Wittekrans are as well, backed by past operational and financing successes. For any coal investor keen to gain exposure to the full ambit of exploration-through-to-output, it goes without saying that Continental obviously a stock worth grabbing.