Continental Coal (ASX: CCC, LON: COOL), in a strategic move, will enter the higher margin coking coal market with an option to acquire a 50% interest in a producing Colombian mine.  

This means the potential for near to medium term cash flow from the already producing operation if Continental chooses to exercise the option.

Sales of hard coking coal are made at mine gate with current margins of around 75%. Sales directly to the export market are planned for 2013.

The potential cost of this acquisition is US$15 million. 

Taking the option would enable Continental to operate, develop and expand an existing business, which consists of five mining concessions/contracts covering over 1,500 hectares, including the existing underground mine that has been in operation for 24 years and adjacent exploration ground.

Based on historic reports and its current due diligence, Continental believes annual production of 500,000 tonnes can be achieved in the medium term.

An independent technical review in 2010 determined that mine production can be increased from its current levels through the introduction of mechanisation, improvements to the mine infrastructure, a modified mine layout and an additional production shift.

Current underground production and access for the mine is through a series of declines to mine two seams with a total economic thickness of 1.7 metres. 

Mining is by a modified room and pillar mining method and, given the high quality nature of the coal, no wash plant is currently required. 

The mine has a life in excess of 50 years, although currently it has no JORC Reserves or Resources.

Next steps

Continental has agreed to carry out an initial exploration program on the adjacent and near-mine exploration ground.

The company will fund and develop the existing operation. 


Funding

Continental has received an indicative proposal for a new debt and commodity linked facility to fund the US$15 million potential acquisition cost. 

The company has also finalised a convertible note facility with U.S.-based Bergen Global Opportunity Fund LP for up to A$5 million.

The facility will be made available to the company in three tranches, with the first tranche of $2.5 million already drawn and two subsequent tranches each of $1.25 million after 30 and 60 days. 

The facility will be used for general corporate purposes and working capital and to assist in the evaluation of advanced and producing opportunities both in and outside of South Africa.


South African operations 

Continental is set to increase cash flow in the short term with the advancement towards production at the Penumbra Mine in the second half of 2012.

Penumbra is set to become the company’s third thermal coal mining operation in South Africa. 

Sales of 500,000 tonnes per annum of a high quality export thermal coal product are forecast, generating annual free cash flow of around US$23 million based on prevailing prices.

Continental already has up to 500,000 tonnes of coal sold under existing offtake agreements.


Analysis 

The company recently increased its bank balance to further the development of the Penumbra, De Wittekrans and Vlakplaats Coal Projects with the financial settlement of its new partnership in South Africa.

Continental has now received the total ZAR140 million (A$16.9 million) payment from Broad Based Black Economic Empowerment Company, Sishen Iron Ore Company Community Development Trust.
 
Cash at the end of the March 2012 quarter was $6.6 million. This would imply cash backing of around $0.05 per share (or 38% of valuation) for a company whose share price is trading at $0.13. 

In addition, Continental earned revenue of $20 million for the March quarter and EBITDA of $1.5 million. 
 
All this indicates an under-valuation relative to cash generation and cash on hand.

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Continental Coal (ASX: CCC) is set to increase cash flow in the short term with the advancement towards production at the Penumbra Mine in the second half of 2012.

Penumbra is set to become the company’s third thermal coal mining operation in South Africa. 

Sales of 500,000 tonnes per annum of a high quality export thermal coal product are forecast, generating annual free cash flow of around US$23 million based on prevailing prices.

Continental already has up to 500,000 tonnes of coal sold under existing offtake agreements. 

The twin declines at Penumbra advanced 58 metres to a combined total length of 135 metres in April. The twin declines will have a final length of about 390 metres.

One decline will be equipped with a conveyor, while the second will serve as a travel route for trackless equipment.

The conveyor road has advanced down 79 metres and the travelling road down 56 metres.

Other advancements made last month include the placing of orders for the medium volt and low voltage containerised substations and switchgear, with the adjudication of the tender of the upcast ventilation fan switchgear also completed.
 

Increasing thermal coal production

Production from Continental’s Ferreira and Vlakvarkfontein coal mines increased during April. At Vlakvarkfontein, Continental achieved run of mine coal production of 112,281, a 6% increase on the monthly average achieved in the March quarter.

Domestic thermal coal sales of 93,180 tonnes were slightly higher than the average 92,761 tonnes of monthly sales achieved in March 2012.

Year to date run of mine coal production of just over 1 million tonnes has been achieved with an unaudited net profit after tax of ZAR33.6 million (A$4.1 million) reported against a budget of ZAR22.4 million.

At Ferreira, run of mine coal production reached 55,263 tonnes in April, 25% above budget and 4% higher than the monthly averag in the March 2012 quarter. 

In addition, total production of 37,830 tonnes of a high quality export thermal coal product was achieved at the Delta Processing Operations.

Sales of 40,864 tonnes of high quality export thermal coal were achieved for the month. 

Year to date run of mine coal production of 574,419 tonnes and export sales of 496,065 tonnes has been achieved at the Ferreira Coal Mine and the Delta Processing Operations with an unaudited net profit after tax of ZAR37.1 million reported against a budget of ZAR24.4 million.


Landmark coal supply agreement 

Under a coal supply agreement announced in March between Continental’s joint venture partner Ntshovelo Mining Resources and South Africa’s state utility company Eskom, domestic thermal coal sales from Vlakvarkfontein are now being made directly to state utility company Eskom.

The agreement is for the supply of 720,000 tonnes per annum of thermal coal over an initial three year period. 

Importantly, this is a landmark agreement that positions the Vlakvarkfontein Coal Mine as one of only 25 direct suppliers of coal to Eskom in South Africa.

Eskom is one of the top 20 utilities in the world by power generation capacity, generating around 95% of the electricity used in South Africa and about 45% of the electricity used in Africa.

Power demands in the region will grow significantly in the next 10 years, with substantial coal supplies set to be transported by rail to Eskom’s power stations.


Cash backing

Continental recently increased its bank balance to further the development of the Penumbra, De Wittekrans and Vlakplaats Coal Projects with the financial settlement of its new partnership in South Africa.

The company has now received the total ZAR140 million (A$16.9 million) payment from Broad Based Black Economic Empowerment Company, Sishen Iron Ore Company Community Development Trust (SIOC-cdt).

Cash at March 2012 Quarter was $6.6 million.  This would imply cash backing of around $0.05 per share (or 38% of valuation) for a company whose share price is trading at $0.13.  In addition, Continental earned revenue of $20 million for the March quarter and EBITDa of $1.5 million. 

All this indicates an under-valuation relative to cash generation and cash on hand.

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Continental Coal (ASX: CCC) has increased its bank balance to further the development of the Penumbra, De Wittekrans and Vlakplaats Coal Projects with the financial settlement of its new partnership in South Africa.

The company has now received the total ZAR140 million (A$17.2 million) payment from Broad Based Black Economic Empowerment Company, Sishen Iron Ore Company Community Development Trust (SIOC-cdt).

SIOC-cdt is Continental’s 26% partner in the company's South African subsidiary. 

Continental has laid the foundations and has funding in place for substantial growth and a forecast increase in earnings.

The company has a current run of mine production of 2 million tonnes per annum of thermal coal with sales to the international export and domestic markets.

Continental also has a third coal mine, Penumbra, currently under development that is forecast to double export thermal coal sales and group earnings in 2012. 

A fourth mine Bankable Feasibility Study has been completed confirming a technically and economically viable operation that is forecast to again double export thermal coal sales and group earnings in 2013.

When in operation the De Wittekrans Coal Project is expected to produce over 0.8 million tonnes of export sales, over 1.7 million tonnes of domestic sales, and annual earnings before interest, taxes, depreciation and amortisation in excess of US$50 million.

Continental’s goal is to achieve 7 million tonnes per annum of run of mine coal production in 2013.


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Continental Coal (ASX: CCC) has acquired the Prospecting Right adjoining its Ferreira Coal Mine in South Africa which will ultimately extend the operating life of the high quality thermal coal mine.

South African subsidiary Mashala Resources recently entered into a sale and purchase agreement with Misty Sea Trading to acquire and develop the Prospecting Right. 

Mining of between 350,000 and 400,000 run of mine tonnes is forecast to be completed in about eight months. 

Continental has already begun mine planning work on the Prospecting Right to incorporate the adjacent block into the Ferreira Coal Mine’s existing mine plan. 

A 15-hole exploration and resource confirmation drill program has been finalised and drilling has started. 

Continental plans to begin development of the Prospecting Right once relevant approvals have been obtained.


Further expansion

Continental is in negotiations with other parties to acquire further Prospecting Rights that are contiguous and near to the Ferreira Coal Mine.


Laying the foundations for strong growth

Highlighting the rapid progress being made by Continental at its South African operations, early last month the company's joint venture partner and operator of the Vlakvarkfontein Coal Mine, Ntshovelo Mining Resources, executed a coal supply agreement with South Africa’s state utility company Eskom.

The agreement is for the supply of 720,000 tonnes per annum of thermal coal over an initial three year period. 

Importantly, this is a landmark agreement that positions the Vlakvarkfontein Coal Mine as one of only 25 direct suppliers of coal to Eskom in South Africa.

Continental has laid the foundations and has funding in place for substantial growth and a forecast increase in earnings.

The company has a current run of mine production of 2 million tonnes per annum of thermal coal with sales to the international export and domestic markets.

Continental also has a third coal mine currently under development that is forecast to double export thermal coal sales and group earnings in 2012. 

A fourth mine Bankable Feasibility Study has been completed confirming a technically and economically viable operation that is forecast again to again double export thermal coal sales and group earnings in 2013.

When in operation the De Wittekrans Coal Project is expected to produce over 0.8 million tonnes of export sales, over 1.7 million tonnes of domestic sales, and annual earnings before interest, taxes, depreciation and amortisation in excess of US$50 million.

Continental’s goal is to achieve 7 million tonnes per annum of run of mine coal production in 2013.

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Under the terms of an agreement signed in November last year, Continental’s black empowerment partner Sishen Iron Ore Company Community Development Trust (SIOC-cdt) has taken a 26 per cent stake in its subsidiary Continental Coal Limited, which was previously held by Masawu.

In addition to the initial payment of ZAR140 million, SIOC-cdt will invest a further ZAR75 million (£6.1 million) to fully satisfy the ZAR215 million loan advances made by Continental Coal on behalf of its previous partner.

The funds will be used for the development of Continental’s thermal coal mining business in South Africa.

“The partnership with SIOC-cdt is considered to be a landmark agreement and we believe it will have a major impact on our business activities and opportunities in South Africa,” said chief executive of Continental Coal Don Turvey.

“In addition to the agreement and partnership itself, it will now provide CCL with further capital of ZAR140 million from the repayment that will now be applied to advance our South African coal projects.”

Continental Coal has been accelerating development of its Penumbra coal mine. The company is targeting first coal at Penumbra in the second half of 2012, and has up to 500,000 tonnes of coal sold under existing offtake agreements.

Continental Coal (ASX: CTP) has reached a milestone in the settlement of its new partnership in South Africa.

The transaction is with the Broad Based Black Economic Empowerment Company, Sishen Iron Ore Company Community Development Trust (SIOC-cdt).

Under the terms of Subscription and Shareholder Agreements executed in November 2011, SIOC-cdt agreed to acquire the 26% interest in the company’s subsidiary, Continental Coal (CCL) previously held by Masawu by way of a subscription for shares.

Importantly - SIOC-cdt has now commenced payment of ZAR140 million of the loan to be advanced by it to CCL as required under the agreements.

Don Turvey, chief executive officer of Continental Coal, said, "The partnership with SIOC-cdt is considered to be a landmark agreement and we believe it will have a major impact on our business activities and opportunities in South Africa.

“In addition to the agreement and partnership itself, it will now provide CCL with further capital of ZAR140m from the repayment, that will now be applied to advance our South African coal projects.”

Contintental Coal (LON:COOL) said today both its operating mines increased production in the first two months of 2012 while development work at Penumbra also sped up.

The South Africa-focused coal miner group said it has completed the majority of the civil engineering work at Penumbra, with emphasis now switching to the twin declines. These will have a final length of about 390 metres.

One of the declines will be equipped with a conveyor and the second will serve as a trackless equipment travelling route. Currently the conveyor road has advanced down 60m and the travelling road down 16m, the firm said.

Meanwhile, the Ferreira mine produced ROM 105,119 tonnes in January and February, a 14 per cent increase over budgeted levels.

Total production of 100,986 tonnes of a high quality export thermal coal product was achieved at the Delta Processing Operations, 16 per cent above budget while sales of 96,709 tonnes of high quality export thermal coal exceeded budget by 23 per cent.

The Vlakvarkfontein Coal Mine nachieved ROM coal production of 200,783 tonnes, a 1 per cent and 6.5 per cent increase on the average monthly ROM coal production in the December and September 2011 quarters respectively.

Continental has a 74 per cent stake in the two operating mines.

Emerging Mid-Tier Thermal Coal Producer in South Africa

We are initiating coverage of Continental Coal Limited (CCL), an ASX-listed South African coal producer/exporter, with a Buy rating. Our 12-month Price Target is A$0.35 (ADR = US$3.50).

Strategically Well Positioned to Benefit from Increasing Asia Pac Thermal Coal Demand

Richards Bay Coal Terminal (RBCT), South Africa exports are shifting towards India and China (at the expense of Europe). In 2008, Europe accounted for 63% of coal exports, which has since fallen to 25%.

On the other hand, India currently accounts for 32% of total exports (up from virtually zero in 2004), and China accounts for 11% (up from zero in 2008). We expect this trend to continue. Accordingly, we believe CCC is well placed.

Recent Initiatives Have Laid a Solid Foundation for Growth

The company now has an established infrastructure, an experienced management team, RBCT export allocations, and an impressive resource base (600 MMt in South Africa and a 6-7 Bt exploration target in Botswana).

With the start-up of new mines in 2012 and 2013, the target is to increase ROM production to 7 MMtpa up from the current level of 2 MMtpa.

Solid relationships with sizable global payers are clear long-term positives. CCC has strategic offtake and financing relationships with EDF Trading, supply arrangements with domestic utility Eskom, and a partnership with South Korea’s state-owned mining giant KORES.

We See Attractive Risk/Reward

Our rating is Buy, and our price target is A$0.35, based on our NAV analysis which indicates a potential upside of 35%. We see a downside M&A valuation support.

The share price has underperformed recently -- mainly reflecting macro headwinds (global coal macro, South Africa politics), some project slippages, and other factors. Our long-term opinion on CCC is based our positive view of the Asia Pac coal fundamentals. Near-term investors will continue to monitor domestic politics, as well as successful and timely project execution.

When in operation the project is expected to produce over 0.8 million tonnes of export sales, over 1.7 million tonnes of domestic sales, and annual EBITDA in excess of  US$50 million.

Don Turvey, Continental’s CEO, said “the De Wittekrans Coal Project is clearly a significant asset of the company and these preliminary results confirm that.

"The project is scheduled to be our fourth operating coal mine and will lead to a significant increase in both export and domestic sales and earnings for the group.”

The company has already commenced a detailed review and optimisation process that it anticipates will lead to a significant reduction in up-front capital costs, a much reduced risk profile and enhanced returns to shareholders.

Continental has also received expressions of interest from financiers looking to debt fund a large proportion of the capital costs of the project.


Penumbra Coal Mine

Site construction and civil works at the Penumbra Mine, the company's third coal mine in South Africa, is progressing well with the current focus being the installation of support in the box-cut and of the portal highwall entrance and finalisation of the pollution control dam civils construction.

The box-cut excavation is to a depth of 15 metres and is now focused on the installation of support of the portal highwall entrance with up to 9 metres soil nail, wire mesh and shotcrete.

About 50% of the Penumbra Coal Mine development capital has now received firmed quotes from the construction companies and suppliers that are in line with the company’s escalated budget of about US$40 million.

Importantly, all current development activities are proceeding in line with this budget and are slightly ahead of schedule.

Planned production of 750,000 tonnes per annum of ROM coal from the Penumbra Coal Mine will be beneficiated through the existing (and adjacent) Delta Processing Operations, which comprises a 300tph coal processing plant and the 1.2Mtpa Anthra Rail Siding.

The company forecasts sales of 500,000 tonnes per annum of a RB1 specification, high quality export thermal coal product. The export thermal coal product will be railed through to the Richards Bay Coal Terminal under existing rail contracts and sold to EDF Trading and under other export off-take agreements.

De Wittekrans Bankable Feasibility Study

The preliminary draft of the BFS on the De Wittekrans Coal Project was completed by study managers TWP Projects.

Significantly, the initial review has identified the opportunity to potentially enhance the project returns through utilisation of existing coal wash plants and rail sidings in the vicinity of the De Wittekrans Coal Project to both reduce up-front capital commitments and possibly accelerate the project development and the permitting process.

Under the draft Bankable Feasibility Report, the De Wittekrans Coal Project is proposed to be developed as a conventional opencast and underground mine.

Opencast mining is proposed initially at a rate of 100,000 tonnes per month over a five year period. Underground development is proposed to commence in the second production year with access from a highwall.

Underground mining is proposed to utilise six continuous miner sections with production forecast to continue for 31 years. Planned processing of the 3.6Mtpa ROM production will be through a new 600t/hour dense medium separation wash plant.

Production of about 1.7Mtpa of a 20MJ/kg thermal coal product to be sold to the domestic market is forecast. A further 0.8Mt of a 27.5MJ/kg “RB1” high quality export thermal coal product is forecast under the draft BFS to be railed from a new rail siding and sold FOB at the Richards Bay Coal Terminal.

The De Wittekrans Coal Project is forecast to have total operating costs (July 2011 terms) of ZAR449/t (about A$53/t) of export coal and total FOB costs of ZAR568/t (A$75/t) of export thermal coal including all sustaining underground capital expenditure.

Total up-front capital (July 2011 terms) to be spent over the initial three years for the De Wittekrans Coal Project will be ZAR1.7 billion (A$219 million).

This will comprise ZAR394 million (A$51 million) of surface infrastructure, ZAR308 million (A$40 million) for the coal wash plant, ZAR160 million (A$21 million) for offsite infrastructure and rail siding construction and ZAR838 million (A$107 million) of underground mine development.

The up-front capital is offset over this period by about ZAR254 million of (A$33 million) operating cashflow from the initial three years of open cast operations.

Continental Coal and its consultants are continuing its review of the draft BFS and have already identified ways to optimise the project in order to improve the already positive results and findings.

Discussions are ongoing with a number of parties in respect of utilising existing operating coal wash plants and rail sidings located close to De Wittekrans Coal Project. This may result in capital cost savings of about ZAR468 million (A$60 million).

In addition, discussions are continuing with specialist coal processing contractors to complete the construction of the coal wash plant under a BOOM (Build-Own- Operate-Manage) Contract that on a standalone basis will potentially reduce the up-front capital by about ZAR308 million (A$40 million).

Analysis

Continental has a targeted production of 7 Mtpa ROM coal by 2012, an off-take and funding agreement with EDF Trading for its export thermal coal production, and a recently signed joint development agreement with KORES, Korea’s state mining and exploration company, for one of its prospects.

Taking all this into consideration, and the company's strong growth profile, Continental's current share price appears light at A$0.21 per share.  Continental is trading at a significant discount to its peers.

Vlakvarkfontein Coal Mine

During October, the Vlakvarkfontein Coal Mine achieved run of mine coal production of 102,796 tonnes, a 9% increase on the average monthly tonnes of run of mine production in the September quarter.

Continental sold 117,122 tonnes of thermal coal from the Vlakvarkfontein Coal Mine to the South African domestic market during the month.

This was approximately 9% below the record average monthly sales of 128,148 tonnes of domestic sales achieved in the previous quarter.

Wolvenfontein Acquisition

South African subsidiary Continental Coal (South Africa) has completed the acquisition of the Wolvenfontein Coal Project from South Africa-based Universal Pulse Trading for A$1.3 million (ZAR10.4 million) in equity.

The Wolvenfontein Coal Project is located approximately 80 kilometres east of Johannesburg and 4 kilometres south of the town of Delmas in the Nkangala District Municipality, Mpumalanga Province.

Importantly, the project is located less than 5 kilometres to the east of Continental’s Vlakplaats Coal Project, which has a total JORC Resource of 187.7 million tonnes, and is bordered by four operating collieries and a number of advanced coal projects.

These include Exxaro Resources’ 3 million tonne per annum Leeuwpan Mine and Universal Coal’s (ASX:UNV) 124 million tonne Kangala Project.

Wolvenfontein has an Inferred JORC Resource of 36.7 million tonnes, of which the majority is contained within the No. 2 Seam. The average reported depth to the top of the No. 2 Seam is 28 metres and the average thickness is 9 metres.

The Wolvenfontein Coal Project lies at the western extent of the Witbank Coal Field and is well located near roads and rail infrastructure.

Commenting on the acquisition, Continental chief executive officer Don Turvey said, “The acquisition of the Wolvenfontein Coal Project is an opportunistic acquisition and strategically important to the company given its proximity to the Vlakplaats Coal Project that we have in joint venture with KORES.

“These two coal projects now have in excess of 220 million tonnes of resources that we will be looking to advance through feasibility studies and towards development in the coming 18 to 24 months.”

The joint venture agreement between Continental and Korea Resources Corporation (KORES) over the Vlakplaats Coal Project is KORES’ first investment in South Africa’s coal sector.

It follows substantial investment in excess of US$2 billion by KORES in coal projects worldwide, including interests in 10 coal mines in Australia producing in excess of 25 million tonnes per annum.

In June, Continental boosted its total Inferred Resource for the Vlakplaats Coal Project by 54% to 187.7 million tonnes, up from the previous 122 million tonnes.

Socius SG II boosts shareholding

In other news, Continental’s substantial shareholder U.S. investment group Socius CG II has again increased its stake in the company and now holds 13.05%.

Socius purchased a further 20,906,797 shares for a consideration of $4,285,893, providing an average entry price of $0.205 per share.

Vlakvarkfontein and Ferreira

Continental Coal currently has two operating mines, Vlakvarkfontein and Ferreira, producing approximately 2 million tonnes per annum of thermal coal for the export and domestic markets.

In 2011 and 2012 the company is set to commence development of two further thermal coal mines, putting it on target to achieve a run of mine production rate of 7 million tonnes per annum by the end of 2012-13.

Penumbra

Continental Coal continues to expand its coal interests in South Africa with the start of development of the Penumbra coal project.

The Penumbra Coal Mine will be the company’s third thermal coal mining operation in South Africa producing 500,000 tonnes per annum of a high quality export thermal coal product.

First production from the underground mining operation is forecast to begin in the June quarter of 2012 with full production targeted to be achieved in the third quarter of 2012.

Penumbra, which has an initial 10 year mine life with the possibility for extension, is located just 3 kilometres from Continental Coal’s producing Ferreira mine and the Delta Processing Operations.

De Wittekrans

The company’s De Wittekrans Coal Complex Project, which is set to be its largest new mine development in the coming years, comprises four projects De Wittekrans, Knapdaar, Vaalbank and Project X.

The project has a significant resource base and is located within a 10 kilometre radius and adjacent to major infrastructure.

A Bankable Feasibility Study was completed in September 2011 and peer review and initial optimisation studies have begun with preliminary results to be released to the market in the December quarter 2011.

Initial targeted production is 3.6 million tonnes per annum run of mine from conventional opencast and underground mining operations at De Wittekrans.