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Ambitious Oracle Coalfields enters the crucial phase of development in Pakistan

Last updated: 11:26 12 Nov 2010 GMT, First published: 12:26 12 Nov 2010 GMT

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PLUS-listed Oracle Coalfields (PLUS:ORCP) is a small company with big ambitions.

It hopes to bring what will be Pakistan’s largest ever coal mine into production. And after four years of hard work it is on the precipice of doing just that. 

However there is a series of hurdles to negotiate in the next year to 18 months before the operation in the Thar Coalfield in the country’s Sindh Province is up and running.

None on its own is insurmountable, but each presents its own unique challenge – and chief executive Shahrukh Khan is well aware of this as he talks me through the company’s progress to date and the plans for the future.

First let’s take a step back and look at the project being developed by Oracle. 

As I said it is in the Thar Coalfield - Block VI to be precise, which is located approximately 380 kilometres east of Karachi in Sindh Province.  Oracle plans to excavate lignite coal, which is brown in colour and has lower calorific value than the thermal coal that goes for export from places such as Indonesia. 

It’s the sort of stuff that is found in abundance in Victoria, Australia and Germany. Oracle has a measured JORC resource 1.4 billion tonnes and proven reserves of 371 million tonnes.The idea is the project will be developed in two stages. The first will have over 100 million tonnes in the proven category and will “get the mine up and running”, while the second phase with another 200 million tonnes on top “provides the scalability over the life of the mine”, says Khan. 

Although a great deal of work had been done by American geologists, Germans from electricity giant RWE, Geological Survey of Pakistan and latterly the China North East Geological Bureau, it was important that Oracle went about things properly and got that JORC resource. 

That meant re-verifying some of the earlier data. “What hasn’t been understood is things have to be standardised to attract international money,” Khan told Proactive Investors. 

“You cannot compromise methodologies and disciplines. You have to stick to them and the international standards.

“When we acquired Block VI we re-verified work, did work of our own and took it to a JORC resource. 

“The Pakistan government didn’t understand why we had to do this. But if we wanted to raise international money we had to do these things to bring authenticity to the area and the project.”

Power generation in Pakistan has failed to keep pace with the massive population increase of this developing nation.

This means that in major conurbations such as Karachi, population 18 million, the utilities do something called load shedding, or deliberately shutting down power generators. 

This leads to outages of up six hours for some homes in the city. It is estimated there is an immediate shortfall of 2-3,000 megawatts on a daily basis. 

And the problem is only going to deteriorate as the population expands further. This is why Oracle is teaming up with the Karachi Electric Supply Company, or KESC for short, which is majority owned by Dubai-based private equity group Abraaj Capital. 

Output from the Thar Coalfield will be used by new plants developed by KESC. The pair have a memorandum of understanding, which it is hoped will metamorphose into a supply agreement once both sides have concluded feasibility studies. 

While coal production is expected to begin in 2012, it could be another three years before KESC has a power plant up and running. 

But Oracle has found a neat way use the time until then. It plans to supply coal to Lucky Cement, the nation’s biggest producer of the material, and also hopes to sign up some of its smaller rivals.  Output is expected to be initially up to 1 million tonnes per year to supply the cement works with additional 2.5-3 million tonnes a year production to supply KESC at the time of power plant commissioning. 

“We asked ourselves what should we do in that gestation period,” Khan says. “You can’t have a mine standing on its own. 

“It needs a customer and ways to generate some cashflow. So we looked at the cement industry in Pakistan.”

I suggested earlier that Oracle is on the final lap in the race to get Thar into production. However I also said there were a few hurdles to negotiate before it crosses the finish line. 

And the next year to 18 months will be the most crucial in the company’s short history. Luckily it has on board top notch consultants led by SRK, which will take the project through to a bankable feasibility study, and Dargo Associates have been appointed “to make sure things get done on the ground”, Khan says.

Wardell Armstrong have been appointed to produce the environmental and social impact assessment and Aquaterra will work on de-watering. It is a tight time-line but a bankable feasibility study is expected to be ready in 2011. 

It has been reported that Oracle will in the early part of next year move from PLUS to the AIM market. 

But this would make sense, particularly if the company plans an equity component to fund the mine’s development. The cost could be anywhere up to US$300 million, though again Khan won’t be drawn on the finances of the planned open pit operation at Thar. 

All of this will be contained in the BFS and he is at pains not to prejudice the work of SRK and the team he has assembled. 

We have come this far without mentioning the possible risks associated with investing in a company based as Oracle is in Pakistan. 

The country has a politically turbulent history marked by a period of martial law at the start of the last decade and characterised of late by unrest in the region of the country that borders Afghanistan. 

Khan says almost 900 miles separate his project in Sindh from the flashpoint area in the north, though the violence flared much closer to home with Thursday’s bomb in Karachi city centre.

However Khan says the political will exists to make Thar a success. Governments, ministers and officialdom have changed frequently in Pakistan, yet Oracle’s progress has been uninterrupted by the political turmoil.  There is support at federal and provincial government level for Thar Coalfield projects and the project has been received warmly by the provincial Sindh government as an important British investment in the country.   

“Pakistan is a progressive nation,” the Oracle chief executive tells me.  “The media, however generally shows Pakistan negatively, largely driven by events in the North of the country on the TV. 

“I would encourage entrepreneurial investors to go. It is not as projected. It has its shortcomings. But it is a progressive nation and we have not had any serious problems working in Sindh Province.

“We have found ways of mitigating the project risk by the way we have carried out our work programme. 

“What we are doing is not rocket science. What is crucial here is the methodology is no different to any other mining project elsewhere in the world. 

“We are no different than a company working in Africa, Latin America or Australia, we just happen to be in a country that is in the headlines for all the wrong reasons. That said our coal mine project is a very long way from the troubles in the north-west of the country.”

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