Rey Resources reaches DFS milestone at Duchess Paradise

Rey Resources (ASX: REY) has 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.

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 (IRR) 27%, and a payback of 3.4 years.

Production costs at estimated at A$70 per tonne and capital expenditure reflect larger project and industry cost increases.

Rey Resources Managing Director, Kevin Wilson said, “We are excited by the long term potential of Duchess Paradise. The Duchess Paradise DFS provides a strong platform from which we will seek to maximise the value of our large landholding in the Canning Basin.”

“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.