metro coal site visit - roma / surat basin

The following is an account of my brokers very recent visit.
Apart from sharing this brilliant account with H.C. members, I have also posted this story to demonstrate why some brokers are worth their salt.
In the case of my broker, he has earned all the financial reward that he has got out of me and MTE is only one of a number of excellent stocks from the ground floor.

You don't get a summary like this one off e-trade or Comsec.etc.

Anyway, for you MTE holders, have a feast on the following.
Some names have been left out purposely.
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MetroCoal Site Visit 22-23 Nov 2011

Theo Psaros, Chief Operating Officer at MetroCoal, hosted my Adviser and a couple of others on a tour of MetroCoal’s tenements and the Cameby Downs coal mine in the Surat Basin. The following is a report my Adviser sent his clients today.



Over the two days, we had the opportunity to meet with 4 MetroCoal staff:

· Neil Forbes, General Manager, SinoCoal Joint Venture (Columboola project)

· Nicholas Villa, Project Manager, Bundi Project

· Ryan Wagner, Environmental and Safety Manager

· Alistair Robertson, Community Relations Manager

In addition, we had a tour of Cameby Downs Coal Mine, hosted by Stuart Green, General Manager, and Leita Johnson, Coal Quality Superintendent. The mine was recently purchased from privately owned Syntech by Chinese owned YanCoal Australia.



Surat Basin Overview

Driving into the town of Roma, the “capital city” of the Surat Basin, from its airport, where a new $11 million terminal is in the final stages of construction, and with the tarmac scheduled for an upgrade to accommodate larger jets, we were struck by the multitude of “No Vacancy” signs outside Roma’s accommodation houses, the number of rentals on the road and heavy yellow and orange work shirts everywhere promoting Xstrata, Santos, Epic, Origin, Macmahon, MetroCoal, drilling companies, environmental companies and more.



It is a thriving town, with the stated population of 6,500, maybe doubled by fly-in fly-out workers.



A combination of gas pipelines being laid throughout the Surat to the port of Gladstone, coal seam gas exploration and production, and coal exploration and production has helped rejuvenate this decade-long drought ridden region from what could be considered marginal pastoral and cropping land.

Sure, there are issues – the landowner who was poorly treated by an exploration company employee demanding access to the property rather than seeking permission; the landowner worried about water quality; the coal mine’s neighbours complaining (possibly rightly so at times) about noise and dust.



However, it was obvious to any visitor that the current prosperity of the town has been greatly enhanced due to massive spending and social investment being undertaken by mining interests.



Surat Basin Coal Resources and Infrastructure

Unquestionably, the Surat Basin contains good export quality thermal coal in quantities that pale existing coal resources in Australia almost into insignificance.



The most advanced prospective project is Xstrata’s Wandoan mine, a proposed 30 mill tonne per annum open cut mine. The company is in the process of securing a Mining Lease, which is expected by the end of 2012, following which final approvals for a 3 year construction period can commence (http://www.wandoancoal.com.au/).



MetroCoal’s Bundi project shares a boundary down-dip of the Xstrata Wandoan asset, where Metro Coal proposes to develop a 6 to 7 mill tonnes per annum ROM long wall underground mine.



Proving up sufficient coal reserves is not an issue in the Surat. Rather, the key to the timely development of the Surat Basin’s coal assets is rail and port infrastructure.



One option involves building the Surat Basin Missing Link rail line to the port of Gladstone (http://suratbasinrail.com.au), where there are two port possibilities, Wiggins Island, Stage 1 (27 mtpa), which has already had financial close, and has already accepted EOI’s for Stage 2 (additional 23 mtpa), (http://www.wicet.com.au/index.php?id=8) and another adjacent and privately owned venture, 3TL Pty Ltd (Tenement to Terminal), which is in the very early planning stages. Metro Coal has secured a 20% equity interest in 3TL and an approximate 11.5 mtpa export capacity.



Surat Basin Rail, the entity established to build the 214km rail line, is a joint venture between ATEC, Xstrata and QR National. Financial close on this project is expected by June 2012. The development of this infrastructure appears assured for a multitude of economic reasons and the only issue now is the timing. The Queensland Government has just gazetted the Surat Basin Infrastructure Corridor as a State Development Area. In other words, all government approvals are in place and compulsory land acquisitions for the rail corridor are beginning.



An emerging although limited alternative is an expanded Port of Brisbane handling possibly 30 to 50mtpa with an upgraded rail link that overcomes the capacity issues of the present rail infrastructure through Toowoomba. Timewise, this is a more distant solution.



One can assume the Surat Basin Rail to Wiggins Island terminal is the immediate solution to exporting coal from the Surat Basin, and therefore the short term driver for its development is Xstrata’s commitment to its Wandoan mine.



We took away from our visit a strong feeling that the Surat development is a definite goer within the immediate future

The obvious shorter term key piece of the jigsaw is a commitment by Xstrata to mine Wandoan. We believe this is their intention. Xstrata has been reported in the press to have bought 40,000 hectares of farming land (http://www.couriermail.com.au/business/xstrata-buys-up-40000ha-farmland-at-wandoan-for-coal-mine/story-e6freqmx-1226119826096) and anecdotally from the visit we heard they continue to buy. Would they invest money in purchasing the land if it wasn’t their intention to mine?



An Xstrata commitment to mine at Wandoan derisks the smaller players to a large extent.



MetroCoal’s Position

MetroCoal has 9 tenements in the Surat, covering some 4,000 sqkm. Two of these, Columboola and Bundi, have been actively explored since listing, to the point where they now have approximately 2.4 billion tonnes gross of resource (mainly inferred). A further upgrade to beyond 3 billion tonnes is possible before year’s end.



MetroCoal’s aim medium term is to establish 2 x 5 million tonne per annum underground coal mines, with mine development commencing in 2014 and the first coal to be on the rail by late 2015.



Funds of the order of $1.3 billion over the next 3 years will be needed to achieve their aim to develop both mines. Having China Coal as a Joint Venture partner in Columboola thus offers significant strategic advantages.



MetroCoal has a current market capitalisation of approximately $131 mill (212 mill shares at 62c), and cash of approximately $26 mill after the recent DADI Engineering placement is taking into account.



So what does a small company do to enhance its profile in preparation for moving from an Explorer to a Producer?

At an operational level, MetroCoal must get on with its game plan – doing everything it can, within its means, to become a coal miner – while at a strategic level, it must build relationships with parties at government and corporate level that will help it expand as and when it is appropriate.



How is MetroCoal performing in these areas?

Operations

At an operational level, Metro Coal has substantially strengthened the quality of its Board and Senior Management over the past 12 months. We were impressed by the knowledge, background and enthusiasm of the 4 field staff we met on our recent site visit.



The company has moved from primarily engaging consultants to employing in-house staff as the needs of the company have grown.



Neil Forbes (General Manager) at Columboola and Nick Villa (Project Manager) at Bundi have led the exploration teams through what have been difficult times (notably 5 months drilling time lost due to floods) to achieve their IPO stated target of 2.5-3.5 billion tonnes of resource by end of 2012.



“I love working for MetroCoal because I’ve been given the chance to be involved in everything from exploration through to production in an environment where I can have an influence.”, said Nick, whose previous experience in coal mines has been with much bigger companies. He has an obvious wealth of knowledge and a real enthusiasm for his work.



Remembering that a 6 to 7 million tonne per annum ROM coal mine that has a 20 year life requires an area of approximately 12 sqkm, these two managers are each responsible for finding the best 12 sqkm of contiguous high quality coal in tenements that are each 800-900 sqkm in size - meaning the issue is where best to position the mines for the long term future and growth of the company.



The first year of drilling has been wide-spaced, looking for consistency of seams of reasonable thickness (2.5m and above).



Nick and the contractors at Bundi have recently completed some closer spaced drilling, allowing the resource to be upgraded to an “indicated” level.

Neil is a few months behind at Columboola, mainly because his SinoCoal joint venture has decided to drill to 500m (Bundi has remained under 300m) to test the extent of deeper seams (e.g. the Condamine at approximately 300 metres which appears quite interesting).



In line with the development strategy, Alistair Robertson has been appointed to build rapport within the community. His role includes getting to know and understand landowners and assisting community development (eg this week he opened a community facility sponsored by MetroCoal). The Board is fully committed to this process of community engagement, as indicated by Alistair’s appointment and by holding Board meetings in the region.



Ryan Wagner’s role in the environmental and safety areas allows the critical environmental impact assessments to progress alongside resource definition. Stage 1, the Desk Top Study has already been completed with Stage 2 (Field data collection) scheduled to commence at the beginning of CY12. Again, Ryan’s role has been created to internalise the company’s development, as the demands in this area have increased.



Strategy

At the strategic level, MetroCoal successfully brought in SinoCoal as a joint venture partner in Columboola, which was finalised in September 2010 after a long period of negotiation, providing $30 million worth of working capital to this project. SinoCoal is a subsidiary of ChinaCoal, China’s second biggest coal miner with extensive underground coal mining experience. At the time of that deal, there was no identified resource in Columboola.



Currently, MetroCoal is in the final stages of selecting a joint venture partner for Bundi. Now with a resource of over 600 million tonnes, one might expect a (very) significant premium for a 49% interest in Bundi vis-à-vis the price achieved for Columboola some 1–2 years ago.



At an infrastructure level, MetroCoal has bid for 12 mtpa capacity in Wiggins Island Stage 2, and it has bought a strategic 20% stake in the privately owned 3TL port project adjacent Wiggins Island in Gladstone, which includes guaranteed capacity of approximately 11.5 million tonnes per annum. MetroCoal is also involved in the Southern Surat User Group that are looking at an additional 70km extension of the rail from Wandoan to Columboola.



DADI Engineering has recently purchased a 15% stake in MetroCoal at 75c per share. DADI is a Chinese mining engineering firm that specialises in underground coal mining, including mine design, coal process plant design and engineering, procurement and construction.



With a coal miner and a coal engineering company as business partners, MetroCoal has strategically positioned itself for access to the knowledge and experience needed to meets its stated aim of becoming a coal miner.



At the Board level, two recent additions have added much valued independence and wider experience.



What are the drivers of the share price?

Key drivers of the share price fall into two categories, those within MetroCoal’s control and those beyond it.

Internal

Resource quality upgrade on Bundi – December 2011

Announcement of Joint-Venture partner on Bundi – end 1Q 2012

Mine concept study on Bundi – mid 2012

Resource upgrade on Columboola – late 2011

External

Xstrata commitment to Wandoan – early 2012

Financial close on Surat Basin Rail – June 2012

3TL expressions of interest (EOI) – end 1Q 2012