Churchill Mining Expects Strong Interest in East Kutai After Positive Feasibility Study

The eagerly anticipated feasibility study on Churchill Mining’s (LON:CHL) East Kutai Project in Indonesia has confirmed it is a world class coal deposit. The news propelled shares in the group 15 per cent higher in early deals on the London Sock Exchange, to trade at 142 pence.

The proposed open pit operation is capable of producing 30 million tonnes of high grade thermal coal a year over an initial 25-year period and generating US$500 million of cashflow per annum.

At a discount rate of 10 per cent, the net present value of the project is US1.8 billion, while the payback period is estimated to be seven years, the study concluded.

The cash costs of East Kutai are among the best in the area at US$25.10 a tonne.

However Churchill is looking for a partner with very deep pockets as the feasibility study puts the direct capital costs at US$1.2 billion, which includes building a 160km coal conveyor and eventually a 100 MegaWatt power station.

Even so there has been no end of interest in East Kutai, according to Paul Mazak, managing director of Churchill.

“The development of any large asset is going to need big money,” he told Proactive Investors.

“But there’s a lot of money out there looking for good assets and in particular looking to invest in resource assets. 

“Top of that (resource) list has got to be coal. Certainly, the Indians and Chinese have their own funds to invest in these projects.”

Churchill has appointed Credit Suisse to run the process of finding a partner that will help develop and fund the East Kutai project.

Churchill might even countenance the outright sale of the project – which makes up two of four blocks in the area.

“We are looking to pick up a big brother with a big balance sheet who has sources of funds to develop the project,” Mazak said.

“We really see no problems with that at all.”

In October the company and its advisers will set out on a road-show that will give potential strategic investors a better understanding of East Kutai.

“We will then draw up a short-list of final bidders by November and that short-list will be invited to look at our data room and look in more detail at the project,” Mazak said. 

“From the short-list we intend to negotiate and come up with the best formula. That could range from outright sale all the way to joint venture.

“One thing I would like to make clear is that we have four plots and the current process we are talking about only concerns two of the blocks. 

“We still have another two blocks to investigate and develop.”

East Kutai has a JORC resource of 2.73 billion tonnes, of which 961 million tonnes have been classified proven and probable reserves.

The project is 75 per cent owned by Churchill, with the remaining stake held by mining, oil and construction conglomerate Ridlatama Group.

Located in East Kalimantan, Indonesia, approximately 160km from the coast, the project is ideally positioned as a strategic asset for independent power producers across Asia, particularly in India and China.

As these economic powerhouses continue expand their generating capacity, so they will need to secure long-term supplies of thermal coal.  

“We are one of the few projects in the world today that has a large asset where the asset has not been committed to other buyers. So that makes it very, very attractive,” Mazak said.

Although the current plan involves building a conveyor belt to get the coal to the port to be shipped overseas, the group is still applying for licenses to build a railway line to the shipping facilities.

This wasn’t included in the earlier plan as the Indonesians were very reluctant to allow foreign investment in infrastructure projects of this kind.

However the mood has altered markedly, which has encouraged Churchill to make sure the rail route remains an option.

“We are going to make sure the licenses are in place so that a if a joint venture partner is particularly keen on rail then we can go ahead with rail,” Mazak said.