Strategic Natural Resources in advanced financing talks for Elitheni coal mine, says CEO Nel

Strategic Natural Resources (LON:SNRP) is in advanced talks to secure debt financing for its Elitheni coal project in South Africa, chief executive David Nel told Proactive Investors.

The company is in dialogue with many potential funding partners, looking at a combination of debt, equity and forward sales of coal.

“Everything is going according to plan. We are on track,” the SNR boss said. 

“It is not so much a case of getting financing. It is a case of making sure we select carefully and conclude properly the right commercial arrangements with the correct commercial partners.

“We are working on a couple of very real deals and we are very happy with the progress. However at this time I can’t really announce anything. 

“In these tumultuous times we are very pleased we have such strong support and such strong interest.

“These are very positive conversations and they are progressing well, but we haven’t signed final contracts so there is nothing I can announce.”

To bridge the funding gap the company recently raised £1.9 million via a share placing with its biggest shareholder, a private investment company called Cooch 1095. 

The cash was used to pay for long-lead time items for the Elitheni project, which is expected to ship its first commercial coal next summer.

The fact the cash call was done at a premium to the prevailing price is important, Nel said.

“It shows a significant appreciation of the valuation (of the company) that is not reflected in the traded share,” he added. 

“And that’s one reason we did it (the placing) because we wanted to show there really is a great deal of support and appreciation of this higher value.” 

Elitheni has a 150 million tonne resource, although SNR has drilled only 3 percent of the project area, which measures 1,800 square kilometres. 

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

Eighteen months to three years down the line that figure could be as high as 2.5 million tonnes per annum. 

Initially the coal will be trucked out of Elitheni to the port of East London, though ultimately it is expected to travel via rail to the Port Elizabeth.

Nel said preparations to bring the pit into production are very much on schedule, which will re-assure investors. 

“We have the complete support from the ports authority - they are ready for us,” he added. “The transport is lined up and mining contracts are being finalised.

“So from an operational standpoint we are pleased with the progress. It is all very positive. 

“It is a question right now of giving the project an injection from a financial point of view.”

Exploration work on the Elitheni project area continues. The ideal would be to prove up a significant area of additional export-quality or coking coal.

There is evidence of its existence. However it is far too early to say definitively whether it is economical. 

“All we can say at this stage is we need to drill more,” Nel added. 

“We also need to do further analysis to understand the extent of any coking coal properties, how minable it is, how economical it is to extract and what the wash yield would be. 

So far the company has carried out some 8,500 metres of drilling, with coal found in 64 per cent of the holes.

It was originally envisaged the group would sink around 150 holes. However it probably has the funds to do closer to 250.

Somewhere towards the middle of the programme the SNR will have enough data to compile an updated competent persons report, which is likely to be published in the first quarter of next year. 

In early April the firm revealed that it had signed an off-take deal with Swiss-based commodity trader Trasteel International for the supply of its coal.

The first shipment is due to be loaded by June 2012 and the agreement is for an initial 2 million tonnes of coal, and Trasteel has also been granted the right of first refusal on the next 2 million tonnes.

If the planning and delivery thus far has been pitch-perfect, the response of the share price has not.

In the year to date SNRP is down almost 18 per cent and the stock is changing hands less than 16 pence.

However, this reflects investors’ extreme risk aversion, which has led to a sell-off in the small-cap sector, more than it does the company’s prospects.

After all here’s a business less than a year away from being a grown-up, cash producing and (hopefully in the not-too-distant future) a very profitable company.

SNR’s potential should not be underrated, according Charles Kernot, veteran analyst at Evolution Securities, the company’s broker.

The big prize for the group is the largest licence area which shows potential to supply up to 10 million tonnes a year through the Coega complex (near Port Elizabeth), he points out.

Kernot’s punchy price target of 49 pence is based not on this, but the value of the deals done in the sector.

“Even on the basis of a mine at Elitheni we believe that SNRP’s shares are markedly undervalued,” he added.