Fending off takeovers

Rey's Kevin Wilson has fended off a number of takeover offers for the company, indicating the promise, scale and value perceived by suitors at Rey's Canning Basin coal project.  The current valuation would appear to offer considerable upside potential.

Plans for 2012

Significantly, the company is now looking to extend the mine life of Duchess Paradise beyond 10 years through further exploration of its land holding.

This year Rey will also advance corporate partnership discussions, which are well underway, as well as aim to reduce its funding requirement.

Analysis

It is little surprise that Rey has received approaches from parties wanting to partner with Rey on the Duchess Paradise Project, given the results of the DFS and potential to unlock further value from Rey's Canning Basin project as well as demand from Asian markets, particularly from India and China.  The Duchess project is well placed in terms of freight advantages to those markets.

In addition, India is facing a widening gap between coal demand and supply.

This year India will produce 554 million tonnes of coal but demand is likely to hit 696 million tonnes of coal. By 2016, it is estimated that India will require over 1 billion tones of coal - a shortfall of 300 million tonnes it cannot produce.

Rey Resources with its potentially large Canning Basin coal production could be a part of the long term solution for India (and China) with its Canning Basin coal production assets.  

The Canning Basin is a fast emerging coal region.  The region's importance is likely to become even more significant, as is an advanced project such as Duchess Paradise.

Kevin Wilson , managing director, said “these results suggest further support for our positive Feasibility Study by indicating that the proposed slot mining mine life may be extended as well as identifying further coal at depth. A resource re-calculation will be made in 2012 once all coal quality results have been received.”

The intercepts were confirmed with downhole geophysical and geological logging for each drillhole. P1 Seam thicknesses in this expanded region range from 1.23-1.82 metres. The intersections confirm the geological modelling and coal structure mapping.
 
In addition, a further five diamond drill holes and infill mud-rotary holes have been completed within the existing reserves for quality purposes.

On June 27 Rey completed the Definitive Feasibility Study (DFS) on the development Duchess Paradise, confirming it as economically robust and technically viable. Today's results add to the project's economics.

Cashflows are estimated at EBITDA $504 million over the first 5 years of sales against a market valuation of under $75 million. The project is likely to see Rey maximise the value of its large landholding in the Canning Basin.

Graefe has previously held the role of CFO/Company Secretary for Sphere Resources (ASX: SPH) and has also held senior leadership roles with Shield Mining (ASX: SHX), Resolute Mining (ASX: RSG) (Tanzania), Rio Tinto Indonesia and Rio Tinto India.

Charlie Lenegan, Rey Resources' chairman, said “we are delighted to have secured Mr Clark and Mr Graefe who will bring significant project strategy, project development, commercial and industry knowledge to the Rey Board."

'This is important following the completion of the Definitive Feasibility Study in June 2011 as the Company moves forward with key approvals processes and with the planning for project development and further growth of its resource base”.

Alan Humphris, who has been a non-executive director since July 2004 and James McClements, who has been a non-executive director since August 2007 will resign from the board on 1 October 2011.

On June 27 Rey completed the Definitive Feasibility Study (DFS) on the development of its wholly owned Duchess Paradise thermal coal export project, confirming it as economically robust and technically viable.

Cashflows are estimated at EBITDA $504 million over the first 5 years of sales against a market valuation of under $75 million. The project is likely to see Rey maximise the value of its large landholding in the Canning Basin.

The voluntary suspension allows Rey time for, '... clarification of some uncertainties in relation to the capital raising approved by shareholders on 5 August 2011.'

Rey said all of the resolutions put to shareholders at the Extraordinary General Meeting at the end of last week were unanimously carried on a show of hands.

The company expects the voluntary suspension to be lifted during the week beginning Monday 15 August.

Rey said all of the resolutions put to shareholders at the Extraordinary General Meeting at the end of last week were unanimously carried on a show of hands.

The company will remain in pre-open until the earlier of trade commencing on Friday 12 August - or when the announcement is released through the ASX.

The placement will be in two tranches, with the first to raise $1.34 million under the company's 15% capacity, with the second $6.66 million subject to shareholder approval.

The capital injection will be used for continued exploration targeting an increase in resources and extension of mine life, along with optimisation studies and permitting.

Kevin Wilson, managing director, said the placement would allow the company to accelerate its growth ambitions.

“We are delighted with the strong level of support for the placement and believe it is a strong endorsement of the Duchess Paradise Project and our strategy to maximise value through further exploration and development.

"As a result of this capital raising, our company is in a healthy financial position to prove the potential of our large land holding, negotiate with potential strategic partners and ultimately demonstrate the substantial upside of the Duchess Paradise Project.”

Rey Resources completed the Definitive Feasibility Study on the development of the Duchess Paradise thermal coal export project last month, confirming the project as economically robust and technically viable.

The study proposed a highwall mining operation producing 2.0 to 2.5 million tonnes of 5,500 kcal/kg thermal coal per year to be exported from the company’s existing port infrastructure at Derby in Western Australia.

Undertaken by Marshall Miller & Associates Inc. the study confirms the prospect of a longer life project and increased economic and employment opportunities for the area.

The study proposes an initial operation with a mine life of at least 10 years, an ungeared NPV (10% discount rate) of A$176 million (after taxes and MRRT), an internal rate of return of 27%, and a payback of 3.4 years.

Production costs are estimated at A$70 per tonne.

Rey Resources is now looking to extend the mine life beyond 10 years through further exploration.

Rey has not yet indicated where the new capital injection will be allocated, but the company earlier this week reached a Definitive Feasibility Study milestone at Duchess Paradise.

The study, which commenced in early 2010, proposes a highwall mining operation producing 2.0 to 2.5 million tonnes of 5,500 kcal/kg thermal coal per year to be exported via the company’s existing port infrastructure at Derby in Western Australia.

The study was undertaken by consultants Marshall Miller & Associates Inc. and confirms the prospect of a longer life project and increased economic and employment opportunities for the area.

It proposes an initial operation with a longer mine life of at least 10 years, an ungeared NPV (10% discount rate) of A$176 million (after taxes and MRRT), an internal rate of return of 27%, and a payback of 3.4 years.

Significantly, Rey is now looking to extend the mine life beyond 10 years through further exploration of the company's land holding.

Production costs are estimated at A$70 per tonne.

“We are working closely with all stakeholders to confirm development as soon as possible. Our ongoing discussions with native title holders and traditional owners are focussed on delivering employment and business opportunities and ensuring that benefits are captured in the region."

The Mining lease application has been submitted, and the timing of the operation is dependent on Government approvals. Production is targeted for 2013.

The company is continuing drilling for expansion of reserves to support extended life highwall operation and drilling is planned to define potential underground reserves for large underground operation.

The Duchess Paradise project has a freight advantage compared to non-Indonesian suppliers to south Asia, in particular India.

The project offers security of supply advantages against Indonesian suppliers and is believed to be cost competitive against non-Indonesian suppliers into the region.

There is an established JORC Reserve of 26.3 million tonnes thermal coal is based on detailed mining plans. An additional 4.0 million ROM tonnes derived from inferred resource are included in the mine plan, which provides 20.5 million marketable cleaned tonnes (gar). This represents only a small proportion of the upper (P1) seam coal JORC Resource of 305 million tonnes.

The mine plan envisages exports of 2.0 to 2.5 million tonnes of thermal coal per year for a 10 year life from the initial highwall operation. This is a larger annual tonnage and longer life operation than originally planned and does not reflect the substantial potential to significantly extend the mine life.

The use of highwall mining will minimise the impact on the land surface and ground water. It will also facilitate return of the coal plant rejects into the highwall slots.

Coal will be washed in a preparation plant, with yields of about 68 per cent. The product is transported by 100 tonne road trains on the highway to Derby and is exported through Rey’s existing Derby port facilities. Barges will transfer coal to 55,000 tonne self- loading ships. The system proposed to tranship the coal is widely used by other coal companies and was used previously at Derby to tranship metal concentrates.

Export product is a bituminous coal with an energy content of 5,500 kcal/kg gross as received (gar). It is expected that by 2020, lower energy bituminous coals similar to Rey’s are expected to account for more than 50 per cent of total seaborne thermal trade.

The DFS used a marketing consultant’s prediction that all thermal coal prices will fall in 2012 with real price increases from 2013. The financial model assumes a real terms price for Duchess Paradise coals of US$99 per tonne in 2014 rising to US$103 per tonne in 2023.

This compares with a mid-2011 market price estimate for Duchess Paradise coal of US$104 per tonne, and a 2014 estimate for the Newcastle benchmark price of US$121 per tonne reflecting Rey’s coals lower energy and higher sulphur content when compared to the Newcastle benchmark of 6,322 kcal/kg gar coal.

India is identified as a key market, with new power stations designed for coals of similar energy content. India is a country keen to geographically diversify supply sources and lock in a medium cost supplier. Marketing discussions have commenced with potential customers.

Cash operating costs are A$70 per tonne including royalties. A recent broker study indicates that operating costs for the Australian coal industry have risen substantially in recent years, with weighted average operating costs in the range A$80-100 per tonne.

Strong cashflows are estimated with EBITDA  at $504 million over the first 5 years of sales.

Capital costs to production, including wholly owned equipment fleet are $199 million (2011 dollars). This reflects conservative assumptions with a larger than planned operation and the assumption of owning all major equipment apart from road haulage (previous studies assumed all earthmoving activities to be contracted).

No critical environmental impediments to development were identified. The operation will use existing port and highway facilities.

Comment

Cashflows are estimated at EBITDA $504 million over the first 5 years of sales against a market valuation of under $75 million.  The project is likely to see Rey maximise the value of its large landholding in the Canning Basin.

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.

McIntosh brings to Rey expertise in the coal industry and project development.

This experience will be a perfect fit for Rey, as the company progresses the thermal coal Duchess Paradise project in the Canning Basin.

A Definitive Feasibility Study at Duchess is forecast to be completed mid-2011.

Rey has lodged a mining lease application to convert parts of two exploration permits into a mining lease.

The application includes sections of the previously reported Duchess Paradise thermal coal resource and its possible extensions.

Rey said the Definitive Feasibility Study on Duchess Paradise is on schedule for completion at the end of the second quarter, 2011.

Rey said funds will be primarily used to conduct further exploration drilling in the Canning Basin, continue environmental surveys and assessments in the area and complete the definitive feasibility study, which is due to be released at the end of June 2011.

The Canning Basin in Western Australia is ideally placed for export to coal strapped markets of India (and China), with a pre feasibility study identifying project viability on a 511 million tonne thermal coal JORC resource, with an initial highwall mining operation of 2 million tonnes per annum with a 20 year minelife.

Export to these markets was estimated to have a pre tax net present value of $88 million at A$/US$ 90c and US$80/t (Newcastle 6,300gar).

Kevin Wilson, managing director commented on the capital raising by saying, “We have a number of important milestones to complete over the next six to twelve months as we progress the potential Duchess Paradise project (within the Canning Basin) with the objective of commencing production at the end of 2013.

"I would like to take this opportunity to thank the existing investors for their continued support and welcome our new international and domestic institutions onto the register."

Rey has not yet announced which project the potential new funds will be allocated to, but earlier in the week the company announced a massive potential thermal coal resource at its Duchess Paradise project.

The project is ideally located in the Canning Basin of Western Australia for export to coal strapped markets of India (and China), with Rey able to fend off two takeover offers from Asian suitors attempting to acquire Rey at pre-definitive study and project development prices.

The 2010 drill program saw Rey progress Duchess Paradise Project in a number of areas.

A pre-feasibility study demonstrated project viability on a 511 million tonne thermal coal JORC resource, with an initial highwall mining operation of 2 million tonnes per annum with a 20 year minelife for export was estimated to have a pre tax net present value of; $88 million at A$/US$ 90c and US$80/t (Newcastle 6,300gar).

The company said it is not aware of any material information that has not been announced to the market.

Of interest, Rey did suggest two reasons for the sudden investor interest in the stock, including; the recent price increases in thermal coal traded internationally.

Secondly, Rey stated, 'that Buru Petroleum (ASX: BRU) has reported gas in a well in the Canning Basin and the significant increase in the price of BRU's securities since 5 November.

'The Company is the holder of Petroleum Exploration Permits EP 457 and EP 458 in the Canning Basin.

'In January 2008 Gujarat NRE Mineral Resources Ltd entered into an agreement with Rey by which it paid Rey $275,000 and acquired a 90 per cent interest in EP 457 and EP 458 which partially overlay Rey's mineral exploration licences (Agreement).

'By the Agreement, Gujarat has exploration commitments of $4.85 million over six years.

'Rey is free carried until the grant of a petroleum production licence.'

Rey shares continue to be well supported in afternoon intra-day trade, last changing hands at $0.24 on volume of 2.7 million.

The stock was purchased between early January and Wednesday 8 September 2010, with Mathews holding 16,969,553 fully paid shares as at Wednesday 8 September.

Rey’s major asset is the 100% owned Canning Basin Coal Project which has a total JORC resource of 510 million tonnes, as per categories below, of thermal coal within a very large coal deposit.

A positive pre-feasibility study for the project has demonstrated the large scale potential of the basin.

Rey has commenced a definitive feasibility study for an initial highwall mining operation. Projections are for two million tonnes per annum of saleable coal production with an expected mine life of eight years. Drilling during 2010 is designed to provide the data necessary to complete the study.

Most key transportation infrastructure for the proposed initial operation is in place. Coal is planned to travel by road for 180 km to the Port of Derby where Rey holds a lease over port facilities, and then be shipped to the nearby growing markets in China and India.

Rey shares closed $0.025 up on the day, or 20% at $0.15.

Gujarat’s current shareholding of 12.38% is less than its shareholding at the commencement of the offer of around 16.6%.

With the rebuff to Gujarat, Rey's shareholders and investors have voted solidly to support Rey managing director Kevin Wilson's strategy to develop the Duchess Paradise thermal coal project in the Canning Basin in Western Australia.

Wilson said today, the definitive feasibility study on the Duchess Paradise Project is progressing rapidly, with key project consultants appointed and mine planning advancing.

Gujarat has received acceptances for only 12 per cent interest from Rey Resources shareholders as at 4 June 2010.

Rey had successfully fended off an earlier offer from Crosby Capital (Holdings) Limited.

In January 2010, Rey announced that a Pre-Feasibility Study on Rey’s 100 per cent owned Duchess Paradise Project demonstrated a strong economic case for development. It is based on the 511 million tonne JORC resource that was reported in 2009.

Kevin Wilson, managing director of Rey, is aiming to develop its thermal coal resource to support an export mining operation through Derby port, via an initial two million tonnes per annum production of saleable thermal coal from highwall mining at Duchess Paradise.

The basin is well situated to feed the strong Asian demand for Australian export coal for power generation. At the Duchess Paradise project, Rey is concentrating on the near surface coals, which can be extracted by a technique known as highwall mining.

The project has a NPV of $161 million based on an 80c exchange rate and $88 million based on a 90c exchange rate. The expected payback is less than 2.5 years.

Rey has committed to a Definitive Feasibility Study for the Duchess Paradise surface operations for a potential larger underground mining operation. 

- Favourable outcome of Pre Feasibility Study on Duchess Paradise initial project
- Definitive Feasibility Study commenced
- Project Director appointed
- Preparation for drilling at end of wet season advanced

In January 2010, Rey announced that the Pre-Feasibility Study on Rey’s 100per cent owned Duchess Paradise Project demonstrated a strong economic case for development. It is based on the 511 million tonne JORC resource that was reported in 2009.

Proposed Initial Mining Operations

The PFS concluded that an initial operation comprising two million tonnes per year of saleable thermal coal from highwall mining is the optimum and most financially robust approach to begin commercialisation of the resource at Duchess Paradise.

The PFS proposed that mining operations will comprise Highwall Miners operating from a series of slots cut into the coal seam from the outcrop.

Under this scenario, the ROM production will be washed and trucked along the Great Northern Highway to Rey’s existing wharf at Derby, which then will be transported by barge to ships for export to Asian power generation markets.

The PFS proposes that mining operations will comprise Highwall Miners operating from a series of slots cut into the coal seam from the outcrop. It is proposed that the ROM production will be washed and trucked along the Great Northern Highway to Rey’s existing wharf at Derby, which then will be transported by barge to ships for export to Asian power generation markets.

This will form the basis for a definitive feasibility study on the underground operations, assuming a positive result from these studies.

To drive development, Rey has appointed Ron Hite as project director for its Canning Basin coal developments. Mr Hite will complete the recruitment of a team to undertake the DFS and the project development. The DFS will include reserve definition, engineering and hydrological drilling as well as combustion testing and environmental and marketing studies.

Hite was responsible for developing the first US – China coal mining joint venture in China. This included the design, construction and commissioning of a US$250 million, four million tonne per year best practice coal mining operation, state-of-the-art process facility and safety systems along with a 15 kilometre rail spur.

Kevin Wilson, managing director of Rey said that planning is underway for drilling at the end of the wet season in May 2010.

This includes aboriginal liaison as well as government and heritage clearances. The drilling program will have several aims including:

- Reserve drilling as part of DFS at Duchess Paradise
- Exploration drilling to add more tonnes in the north and west of the leases, which are closer to infrastructure. These have the potential to improve the returns and life of the Highwall Mining Project.
- Firm up resources for the large scale longwall studies

Rey saw off two takeover offers in 2009.  One from Gujarat NRE Minerals (ASX:GNM), Rey has recommended shareholders reject the offer.  The offer is due to expire on 14 May 2010. Gujarat holds a 12per cent interest in Rey Resources.

A conditional takeover offer for Rey from Crosby Capital (Holdings) Limited expired on 15 January 2010.

Divestment of non-core assets

Humito Project

During the quarter Rey agreed to sell 100per cent of the Humito Project in the Copiapo District, Chile to China Yunnan Copper Australia Limited (ASX: CYU). The purchase price is $200,000 cash and a 1.5per cent Net Smelter Royalty on any future production from the project leases. The divestment is subject to a 30 day due diligence period by CYU and to normal Chilean regulatory approval. The transaction was completed during the quarter.

Uranium Joint Venture

Rey signed an agreement with Uranium Exploration Australia Limited (ASX: UXA), allowing them to explore for uranium at Myroodah in the Canning Basin. UXA can earn up to 80per cent by spending $1.75 million on the two granted exploration licences, while Rey retains all the rights to the coal on the leases.

Cash at end of the March quarter was $12.5 million.

Outlook for 2010

In his review of the quarter's activities for Rey, Wilson said the PFS "demonstrated a robust, low capital entry method for unlocking the potential of the large coal deposits in the Canning Basin."

"The Duchess Paradise DFS will be undertaken during 2010 and 2011. Drilling is expected to start in May following conclusion of the wet season and subject to Heritage and Government approvals. This will focus on those shallow coal targets that are closest to export infrastructure as well as resource and reserve definition drilling at Duchess Paradise," he said.

Ongoing discussions with potential partners to develop the Canning Basin Coal Project will be continued.

Over 90% of long-term coal demand is from Asia, with electricity demand driving coal use.  China and India alone are estimated to account for a large portion of this coal demand.

Nowhere is the demand/supply situation more acute than India, where forecasts from Peabody and Coal of India indicate that India will need to find 120mtpa to 200mtpa of thermal coal by 2013.  In 2008, India imported just 20mtpa of thermal coal.  This implies growth of 100mt in three years.  Current Asia suppliers China and Indonesia face significant constraints to meet this growth.

China’s imports have already surged, a turnaround in under one year, characterised by closure of small unsafe domestic mines, although some re-opening expected, increased domestic demand and infrastructure bottlenecks.

Current estimates have China requiring net additional imports of 15-40 Mt by 2015.

With spot prices for thermal coal on the rise, Rey's Canning Basin project has ticked alot of boxes given its location to supply these new growing markets. It is sited in close proximity to both Indian and Asian markets. Additionally, it is not constrained in terms of infrastructural requirements.

Why has Rey captured interest?

- 511 Mt thermal coal JORC resource
- 9-11 billion tonnes of exploration target coal (<350m depth)
- Thermal coal prices again on the rise
- Derby Port facility -180 km by road
- Positive PFS
- Premium location in to supply export markets
- DFS underway
- Off-take discussions underway
- Massive land-holding of 8,000km2 in Western Australia

Nowhere is one of Rey's Canning Basin's key attributes better viewed than the shipping time to key markets versus Dalrymple Bay, Queensland and Newcastle, NSW.

Canning Basin (Rey) to India: 10 days
Dalrymple Bay to India: 18 days
Newcastle to India: 19 days

Canning Basin (Rey) to China: 12 days
Dalrymple Bay to China: 18 days

The Canning project has returned a positive Pre-Feasibility Study, indicating simple highwall mining operation (HWM) proposed with low capital costs of A$103M.  Production is due to commence in 2013, at an initial operation of 2 Mtpa from HWM to generate an Internal Rate of Return of 34% at current prices and exchange rates.

Providing a Net Present Value of $88M at A$/US$ 90c and $161M at A$/US$ = 80c.  Early conceptual work supports a much larger operation.

An initial or starter operation based on eight year mine life at Canning Basin would see Rey using only 20Mt of current resource from the upper seam (P1); washed product; 5,500-5,800 kcal/kg; 11-15% ash and trucked along the Great Northern Highway to the wharf at Derby for barge to bulk carriers and export to Asian power generation markets.

New appointee to drive development of Canning project

Rey has appointed Ron Hite as Project Director, with significant experience in the sector, having designed, constructed and commissioned a US$250M, 4Mtpa coal mine in China; managed and built large longwall mines and with extensive HWM experience.

Hite's mandate is to complete definitive feasibility study, drive project development & recruit an experienced project team.  The appointment by Kevin Wilson is indicative of the commitment to ensuring project success.

In terms of 2010, Rey has a Definitive Feasibility Study Underway; a DFS for HWM operations has commenced; a Specialist project director has been appointed and a team is being developed.  The company has applied for a Mining Licence as well as continuing environmental studies & community discussions.

Marketing discussions have begun, providing leverage to any long term partnership agreement or offtake agreement announcements made by Rey.  The company has begun resource definition drilling at Duchess / Paradise, with a 18,000m drilling program to add to resources in the north. The cost is estimated at $10M, which funds are available.

With only 20km of >300km of potential subcrop tested and multi-operation potential in the basin and time to first production estimated at 3 years, development CAPEX relatively low (with existing infrastructure) and the outlook for thermal coal price - very strong, Rey ticks alot of boxes in the coal space.

Having fended off takeover offers from Gujarat NRE Minerals Limited and Crosby Capital (Holdings) Limited, operators who know a thing or two about coal valuations, investors could do worse than follow the money.  The future looks bright for Rey and on its current valuation (Enterprise Value / Resource Tonne), Rey appears overly cheap versus its peers - a low valuation that would not seem capable of being sustained given the current cycle.

The purchase price is $200,000 cash and a 1.5% Net Smelter Royalty on any future production from the leases.

During the afternoon trade, shares in the company increased slightly to 16c.

The divestment is subject to a 30 day due diligence period by CYU and to normal Chilean regulatory approval. There is no accounting impact on Rey Resources.

The disposal is part of the Rey Resources’ strategy to rationalise the Company’s non-core assets to allow management focus on the Canning Basin Coal Projects.

Rey Resources is evaluating thermal coal export operations based on the Duchess Paradise Project which is part of the Company’s Canning Basin Coal Leases.

These leases encompass over 8,000 square kilometres in the Fitzroy Trough of the Canning Basin in Western Australia.

The disposal is part of Rey Resources’ strategy to rationalise the Company’s non-core assets to allow management focus on the company's Canning Basin Coal Projects.

Sale consideration for Humitos is $200,000 cash and 1.5% Net Smelter Return royalty on any future production, subject to completion of transfer documentation. The divestment is subject to a 30 day due diligence period by CYU and to normal Chilean regulatory approval.