Universal Coal in ASX IPO, to deliver first thermal coal production in 2011

Universal Coal (ASX:UNV) is a freshly minted listing on the ASX, with a difference.

Universal Coal has advanced thermal coal projects in South Africa with near term coal production building in 2011, as well as an exploration target of over 1 billion tonnes of coking coal along the same strike as Rio Tinto's (LON:RIO, NYSE:RTP, ASX:RIO) and Coal of Africa's (ASX:CZA, LON:CZA) projects.

Executive chairman Tony Harwood and chief executive officer Tony Weber have a pedigree developing and operating large mining concerns in Africa.

For Universal Coal, a course has been set with advanced coal producing projects in established coal mining regions with infrastructure in place.

Harwood was VP of Placer Dome Inc (now Barrick Gold) and established Placer Dome in Africa.

Under his guidance, Placer acquired two mines and outlined over 17 million ounces of PGM resources through exploration before its take-over by Barrick Gold in 2006.

Weber was an executive director of Nkwe Platinum (ASX:NKW), an Australian listed platinum developer, and operations manager for Anglo Platinum at the 40-60 million tonne per annum Potgietersrus Platinum Mine.

Universal has over 726 million tonnes of JORC compliant coal resources across three thermal coal projects, which include:

- Kangala, a 104 million tonnes resource with a feasibility study due in the first half of 2011, with the company having a 70% ownership
- Roodekop, a 78 million tonnes resource, with an option to acquire a 74% interest
- Brakfontein, a 104 million tonnes resource, with an option to acquire a 74% interest

The thermal projects are located in the Witbank coalfield, which has been actively producing for over 100 years, with an excess of washing capacity available close to Universal's projects.

Significantly, the Kangala thermal coal project is located 65 kilometres east of Johannesburg, in the Witbank coalfield, which supplies more than 50% of South Africa's saleable export and domestic coal.

The company is targeting an initial 25 million tonne reserve at Kanagala, a shallow open pittable, ESKOM domestic and grade B coal.

Initial raw coal production at Kangala is planned from second half of 2011, targeting 3 million tonnes per annum run of mill (ROM) production.

This will generate cash flows from 1.5 million tonnes ROM initial raw production in 2011 and therefore self financing, scaling to 3 million tonnes per annum within 12 months and to 6 million tonnes per annum in three years from additional mines.

However, there is a real probablity Universal Coal can deliver 3 million tonnes per annum ROM open pit coal production within 12 months.

Also, the company is understood to be in advanced discussions with potential customers and an off take partner for output from Kangala.

For the Kangala Project, the resource is amendable to a low cost open pit operation averaging less than a 2:1 strip ratio.

With South Africa's second-largest South African coal producer Exxaro's Leeuwan colliery less than 10 kilometres away, there are potential operational synergies currently being explored with Exarro.

Hence, there is likely to be sales off take opportunities to neighbouring Leeuwpan colliery for sale to the domestic market.

Capital expenditure and operating expenditure are modest at ZAR90 million (A$13m) and ZAR85 million (A$12.4m), respectively at Kanagala.

At the Roodekop Project, Universal is targeting 1.5 million tonnes of export quality coal and ROM production in the second half of 2011.

There is toll treatment and joint venture potential at Exarro's nearby New Clydesdale colliery.  Potential product output from Universal's Roodekop project is likely to be a premium coal suitable for export with possible blending with coal from existing Richards Bay Coal Terminal allocation holders.

It is strategically located just 7 kilometres south of New Clydesdale’s Richard Bay Coal Terminal linked railway siding and just 20 kilometre north east of the Kriel and Matla Power Stations.

Coking Coal projects

Universal is also developing two substantial coking coal projects (+30,000 hectares), Berenice and Somerville, with a combined total exploration target of over 1 billion tonnes of coal.

The Berenice Coking Coal Project is located in the Soutpansberg coalfield, situated north of the Soutpansberg mountain range in South Africa's Limpopo province.

Rio Tinto and Coal of Africa have established coal operations in the Soutpansberg and Universal Coal’s Berenice project is located some 15 kilometres to the west of these operations, along the same strike.

At Berenice, the company is targeting a resource base in excess of 350 million tonnes with shallow, low-cost open pit potential leading into underground resource, contained within three seams.

Phase 1 drilling is due to commence in 2011.

Somerville is located in the Tuli coalfield, northwest of the Soutpansberg coalfield, with a gross in-situ inferred resource of 274Mt and inventory in excess of 550 million tonnes.

Development of the Somerfield coking coal project is at reconnaissance phase and inferred drilling will commence during 2011.

Taking a line through peer coal companies with similar size coal resources and with a near term producing thermal coal asset, there appears to be significant upside for Universal Coal given listing valuation and likely increases in resource base in 2011.  The potential of the coking coal projects to add value should also not be underestimated given M&A activity in the coking coal sector.

The company hits the ASX boards with significant momentum as one of the more advanced coal companies with  BFS results and production and significant newsflow in 2011.