Oracle Coalfields aiming high in Pakistan

Expectations are building of Oracle Coalfields (LON:ORCP) following its successful navigation from the Plus market to Aim and subsequent beefing up of its board, as it looks to bring its promising coal project in Pakistan to production.

The company certainly seems to be making good progress with its key Block VI lignite Thar coalfield in the Sindh Province of Pakistan, 380 kilometres from Karachi.

In an upbeat note looking at the company’s prospects, City research firm Edison notes that more than 6,000m of drilling was carried out at Block VI by the company between August 2010 and February 2011 as part of a field work programme to support a definitive feasibility study (DFS) of the area.

Further geological work still has to be done but the company looks on target to deliver the DFS in the third quarter of 2011, which can then be converted to the critical bankable feasibility study (BFS).

“To confirm the bankability of the project, it is essential to demonstrate that the coal is present in sufficient quantity, that it is of a satisfactory quality, and that it can be extracted economically,” says Edison.

Early indications are encouraging, suggesting Block VI holds a 1.4bn tonne resource with 371million tonnes of reserves. But, as Edison points out, it is the coal quality results that will underpin the economic basis for the project.

The economics will also need to take into account of factors such as capital costs, sustaining capital, operating expenditure, and, crucially, the price at which the coal can be sold. The DFS should enlighten considerably on these matters.

Assuming all goes well with the DFS, the bankable feasibility study will then follow, incorporating pricing and financing details to support an investment decision by Oracle. The BFS is not expected to be completed before the end of 2011.

Oracle’s share price has fallen back quite a bit recently but despite this contraction in the share price, Edison reckons Oracle’s current enterprise value per tonne remains low at 1.7pence/tonne, and that is without accounting for potential upside at Block VI.

At an assumed mine life for Thar of 3 million tonnes per annum for 20 years and a capital expenditure of US$300m, the capex cost per mineable tonne for Thar comes out at US$5/tonne, according to Edison’s calculations.

The broker points out, however, that as the total resource attributable to Block VI is 1.4 billion tonnes, the capex cost per resource tonne is US$0.21/t.  Therefore, for a capital investment of US$5/tonne, investors should potentially have access to a handsome profit margin between US$15/tonne and US$30/tonne.

The pace of progress being made at Thar means Edison is expecting Oracle to begin producing coal there by 2014, with the southern part of Block VI, known as Phase I, considered to be the most suitable for the initial phase of open pit mining.

Assuming a positive outcome to the BFS, and provided Oracle is able to raise the capital expenditure required for the project, Edison reckons first lignite coal production could commence in the second half of 2013 and full production in late 2014 or early 2015.

Alongside the importance of completing assessment of Thar and getting it into production, Oracle Coalfields is also very keen on supplying coal for local power generation so it is not directly affected by changes in the international spot market price for coal.

It has already signed a memorandum of understanding (MoU) with Karachi Electric Supply Company (KESC) in December 2009. Under the terms of the MoU, both parties have agreed to collaborate towards developing an initial 300MW mine-mouth power plant to be supplied with lignite coal from Block VI.

Edison expects development of the power plant to commence during 2012 for intended completion by 2015.

On another positive note for long term contracting for Thar output, in January 2010, Oracle Coalfields secured a potential off-take deal with Lucky Cement, Pakistan’s major producer and exporter of cement, whereby Oracle Coalfields will supply Lucky Cement’s kilns with coal as it develops the Block VI project into a mine.

These two MoUs still need to be hardened up and converted into solid development and supply agreements but they clearly hold considerable potential for providing visibility on earnings once Thar is producing.

Having abandoned an earlier attempt to move Aim in the midst of the global financial crisis, Oracle finally achieved this objective in April 2011, assisted by Regency Mines, which has a 10.05% stake in Oracle and an option to increase this further.

The Aim listing was accompanied by a £3 million fund-raising via the placement of 30,000,000 ordinary shares at 10p. The new funding added to the £2.3 million Oracle raised during 2010 on the PLUS market and will be used to complete the two key pieces of work on Block VI: the BFS and an environmental and social impact assessment.

The move to Aim and continuing good progress with fully assessing Thar has been accompanied, recently, with an encouraging beefing up of its board. In June, Oracle announced it had hired experienced power generation engineer Thomas Hawkins as a project co-ordinator.

And earlier this month it announced the appointment of Tony Philip as finance manager. Philip has previously had a variety of roles at Shell Group and its affiliates, and has managed company finance within Africa and the Middle East, working with US, EU and local investors.

As for the outlook for coal prices, Edison notes that although elevated coal prices recently have come under downward pressure, robust future spot prices look to be holding their ground well. Anglo American, for instance, took a deal with European steelmakers recently at a price of US$315/tonne from the third quarter of 2011, suggesting buoyant prices in the medium term.

Looking ahead, Pakistan coal importers remain exposed to higher coal prices, which in turn is likely to strengthen the Pakistan government’s support for the development of the Thar coalfield as part of its strategy to meet growing domestic demand for low-cost energy.  And that augurs well for Oracle Coalfield’s prospects.