Unearthing the true potential of Strategic Natural Resources

The last six months have seen shares in Strategic Resources (LON:SNRP) more than double in value.

Today the South African coal miner unveiled plans that should help reveal its true potential: a US2.5 million drilling campaign designed to significantly increase the coal resource base. 

The company’s focus is on one project – Elitheni, in the Eastern Cape Province. It currently has a 150 million tonne measured, indicated and inferred resource. 

However it has drilled only 3 percent of the project area, which measures approximately 1,800 square kilometres.

By extrapolation the company estimates there could be as much as 3 billion tonnes of coal at Elitheni, of which around 1 billion could be recovered.

Chief executive David Nel said this morning: "We are confident that we have a great deal more coal resource available for exploration and, to aid our export strategy, I am pleased that we have allocated this initial budget to progress this drilling and exploration programme. 

“We hope to update our shareholders with an increase in resource, improved resource categorisation and some special coal qualities."

The new campaign is planned to increase the mineable resources available in the Phase 1 and 2 areas, which make up the central parts of SNR’s acreage. It will also explore two other targets to verify an earlier report of possible coking coal deposits.

Analysts welcomed the development. Andrew McGeary of Northland Capital said: “Recent action has been centred on proving up potential in relation to export markets. 

“The upcoming drilling programme should help build scale which will be of benefit to the company in that respect. 

“We can see significant upside from the low valuation if this company continues to progresses along the value cycle and the infrastructure issues are addressed.”

The operation is on schedule to begin production towards the end of the year, or early 2012 at a capital cost of £20-£40 million.

Initially the mine will produce 500,000 tonnes a year, most of which has already been earmarked for the export market. 

However, as output ramps up so the domestic industrial market will play a bigger part in its plans.

“Taking the likely yield into account, at planned initial production of 1.5-2 million tonnes a year this resource would be sufficient for 15-20 years,” said Charles Kernot of City broker Evolution in a recent note to clients.

“The big prize for the group is the largest licence area which shows potential to supply up to 10 million tonnes per year.”

Earlier this month the company appointed London Commodity Brokers as its coal broker to advise on the negotiations to agree the company’s first off-take agreements.

It formalises a relationship that has existed for several months already as the pair teamed up to find potential customers for the output from the Elitheni mine.  

SNRP said at the time of the announcement it is in discussions with potential customers on the terms of an off-take deal, adding that further announcements will be made in due course.

LCB’s experience is extensive as it has brokered global trades of almost 200 million tonnes of coal since its inception in 2005.

Last November Strategic Natural Resources revealed it was in talks with several “large, independent power companies” as part of a concerted push to bring on board major customers for coal from Elitheni. 

The shares, initially down, were up 0.23 pence to 21.85 pence by 11.40 am on the back of today’s news. However Evolution’s Kernot reckons the stock has much further to go and values it at 49 pence a share.

“We believe that SNRP represents an unknown gem given that its position in the small and micro-capitalisation end of the market means that it sits beneath most investor’s radars,” he added. 

“With scope for a near term trigger in terms of off-take progress, we believe the group will attract a growing following.”