UPDATE - Atlantic Coal's anthracite deal could double production says broker

Atlantic Coal’s (LON:ATC) proposed deal to lease a 410 acre anthracite site in Pennsylvania will be a very good move for the miner, according to broker Fox-Davies.

It says assuming both that the lease option is ratified by the board of the site's owner Reading Anthracite Company (RAC) and that due diligence is completed successfully, Atlantic has the potential to double its current rate of anthracite production and at a favourable strip ratio.

Atlantic announced this morning it had signed an option on the permitted site, which is 25 miles from its existing open pit coal mine at Stockton and also contains the same Mammoth Seam.

Atlantic estimates the new site, known as the Pott & Bannon anthracite mining property in Schuylkill County, contains 12 million tons of Run of Mine coal at a 3.9 ratio with 4.1 million tons of clean coal.

Subject to due diligence, Atlantic will pay US$6 million in cash and shares to RAC and grant it US$3 million worth of warrants at 0.75 pence per share.

Atlantic said that as well as developing its strategy of increasing its current reserves and production profile in the Pennsylvania Anthracitic Belt, it will allow it to build a commercial relationship with RAC, a firm that has been operating in the Pennsylvania area for 135 years.

The site is also in close proximity to major east-coast transportation hubs, it added.

Steve Best, Atlantic Coal's managing director, said: "We are extremely pleased to have been able to secure an option on this major site.  This agreement is in line with our growth strategy of expanding our regional footprint in this prime anthracite region, which has excellent infrastructure and established demand, and building Atlantic Coal into a major anthracite producer in the US.

Under the terms of the lease, RAC can buy all of the raw coal produced at the prospect until Atlantic builds a processing plant and up to 50% thereafter.

The $2.7 million cash component of the consideration will be sourced from Atlantic’s existing cash resources.

The lease will run for an initial period of 10 years and Atlantic will have the opportunity of extending the lease on the new site once it expires for two additional periods of 5 years each. 

Atlantic added it will try to achieve a minimum rate of production of 400,000t of run of mine coal in the second year of the lease. 

Its current operation at Stockton is an open pit colliery that sells mainly into the local central heating market and has reserves of 3.1 million tonnes of run-of-mine anthracitic coal, equating approximately to 1.5 million tonnes of washed anthracite after processing. 

The firm’s current target is to produce 300,000t of run-of-mine coal in 2011 after it reported a 65 per cent increase in the production of run-of-mine coal to 121,000t the first half of the year.

Shares were up 6% at 0.472p. Fox-Davies is Atlantic’s house broker.