www.reyresources.com
Rey Resources (ASX: REY) is thermal coal development company with a large resource and major land position of 8,000km2 in the emerging Canning Basin of Western Australia. A Pre Feasibility Study on the firm’s maiden 511Mt JORC resource at Duchess Paradise was completed in January 2010 and revealed a 2Mtpa highwall mining export thermal coal operation, commencing production in 2013, to be financially robust. Capital costs are estimated at A$113 million and operating costs at A$60/t FOBT Derby, where Rey has its own port and loading facility. A major exploration program in 2010 over 100kms of subcrop will seek to extend the 8 year life of the proposed operation and add new resources.
Rey Resources under the coal radar, for how long?
Coal developer Rey Resources (ASX: REY) looks to have timed development of its Canning Basin coal project in Western Australia, adroitly given growth in demand for coal from Asia within the next five years.
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.
