Prophecy Resources: Building Asia’s Next Energy Company
Prophecy Resources (TSX-V:PCY), is a fast growing and internationally diversified entity that is currently ramping up coal production in Mongolia, but is also engaged in developing Mongolian electricity production, and, nickel and platinum group metals projects including the PGM Project in Yukon, and Lynn Lake Nickel Sulphide Project in Manitoba.
Prophecy has completed a NI 43-101 Compliant Pre-Feasibility Study for the first stage development of the Ulaan Ovoo thermal coal deposit located in northern Mongolia. The coal has a low ash content of 11.3%, calorific value of 5,040 kcal/kg, and moisture content of 21.7%. The Mineral Reserve Estimate is 20.7 million metric tonnes of coal for an open pit mine life of 10.7 years at 2 million tonnes per year. Production has already commenced with sales to local power plants, building to a rate of 1.1 million tonnes in 2011, and 2 million tonnes annually thereafter reaching a production capacity of 4 – 5 million tonnes per annum, with potential to add reserves and boost output.Operating costs per metric tonne of coal mined, are estimated at $US10.23 on a life of mine basis, which includes mining $9.40, on site handling $0.35, administration and overhead of $0.48. Capital costs, including contingencies, were estimated at US$69.7 million, and covered mobile equipment fleet, site infrastructure, indirect project cost, owners cost, road transport, reclamation, working capital, with sustaining capital adding $18.5 million.
The financial evaluation was based on US $40 per tonne of thermal coal sold at the Russia/Mongolia border port of Naushki, which produced a 25.5% Internal Rate of Return, Net Present Value of US$71.0 million, and a 4.5 year payback of US$85.9 million on capital costs. Prophecy has announced the execution of a Memorandum of Understanding with JUST Group of Mongolia, securing the sale of a minimum 1.2 million tonnes of coal per year on a 3% commission basis. This coal will be sold into Russia’s Buratya Province, located 10 kilometers from Ulaan Ovoo.
The minimum price of coal is set at US$35 per tonne at Naushki, rising to US$84 per tonne at Russia’s eastern seaports. Russian power plants and seaport clients have expressed interest in buying coal from the newly formed venture.
Having established the mine plan and secured rail transport, Prophecy finalized a truck leasing agreement to provide hauling of coal from mine site to Sukhbaatar, thus rounding up the entire transportation logistics to Russian markets.
Subsequent to this the company reached a major milestone by receiving its mine permit from the Mongolian Ministry of Mineral Resource and Energy, giving the company the green light to begin production. The company started its operation with the stockpiling of small amounts of ROM coal in 2010 and saleable coal production is slated to begin in 2011, with plans to produce 1.5 million tonnes in 2011, ramping up to for 4 – 5 million tonnes in the future.
In the last few months, the company has been actively negotiating off take agreements and signed on off take agreement with Mongolian JUST Group. The agreement will see Prophecy Resource sell at least 1.2 million tonnes of thermal coal per annum, and JUST Group will receive 3 percent commission fee for its intermediary services.
A feasibility study will explore coal marketing opportunities into Russia via Russian and Mongolian rail links located 120 kilometers from the deposit. New contracts will allow an increase in throughput rates and a reduction in unit production costs. The second development stage will extract thermal coal from a Measured and Indicated Resource of 209 million tonnes, and an Inferred Resource of 36 million tonnes of high quality, high volatile bituminous thermal coal with a 2:1 strip ratio. This coal seam has a thickness of 53 meters and requires no washing with an estimated production cost of $10-$15/ton.
A second thermal coal resource is held at Chandgana Tal and Chandgana Khavtgai, located in eastern Mongolia, approximately 300 kilometers east of Ulaanbaatar, and 160 kilometers from the nearest rail line. The Chandgana Khavtgai Deposit contains a NI43-101 Compliant Measured and Indicated Resource of 1,211 million tonnes, which is mostly contained within one seam averaging 37.7 meters to 45.4 meters in thickness, with an open pit strip ratio of 1.9: 1, low ash level of 12.49% and low sulfur of 0.68%. The much smaller Chandgana Tal deposit contains a JORC defined thermal coal resource measured “in situ” of 141.3 million tonnes.
The Mongolian Government recently approved a Detailed Environmental Impact Assessment submitted by Prophecy for construction of a 600 MW coal fired power plant. The approval allows the company to build and operate the plant within 20 months and to supply electricity into the Central and Eastern Electricity systems.
Mongolia has a population of 2.7 million and operates aging infrastructure producing a total of 650 MW, leaving an energy deficit of over 120 MW that is made up from expensive Russian electricity imports. The deficit is expected to balloon to 500MW by 2013 fueled by Mongolia’s GDP growth and new mission-critical mill and smelter openings.
Chandgana is ideally situated to meet this demand, located 150 kilometers from existing power infrastructure, and capable of expanding to a 4,200 MW – 10,000 MW installed base that can export surplus electricity into China via dedicated 800kv DC lines.
The power plant will consist of 2 x 300MW generators, running on 2.4 million tonnes of coal per year supplied by Chandgana Tal, with a low strip ratio of 0.5: 1. Chandgana Khavtgai can supply future demand, with permitting available in 90 days. Discussions are currently underway for construction of plant, transmission lines, off take agreements and investment.
Prophecy management may spin off of Canadian assets that include the Wellgreen Nickel, Copper, Platinum, Palladium and Rhodium Project, located in the Yukon Territory. The potential at Wellgreen falls into a range of 77 – 254 million tonnes at 0.26% – 0.38% nickel, 0.26% – 0.36% copper, 0.55 g/t – 0.85 g/t platinum and palladium, based on a strike length range of 4000 – 7000 meters, depth of 200 – 250 meters and a width of 30 – 35 meters. Drilling will continue on this project until the middle of 2011, when scoping and pre-feasibility studies will commence.
The Lynn Lake Nickel Mine is the fourth largest known nickel sulphide deposit in Canada, and contains a NI43-101 Compliant Measured and Indicated Resource of 22.9 million tons at 0.57% nickel and 0.30% copper, for 262 million pounds of nickel and 138 million pounds of copper. In 2008 a new near-surface discovery was made at the Disco Zone located 1.5 kilometers from the Lynn Lake Mine. This new zone measures 80 x 20 x 270 meters, with drill highlights of 18 meters of 1.5% nickel, 0.7% copper, 0.04% cobalt and 47.1 meters of 0.7% nickel, 0.5% copper and 0.02% cobalt. Feasibility studies and permitting are underway, with mine construction scheduled for 2012. Production is scheduled to commence in 2013 at a rate of 10 million pounds of nickel per year.
Prophecy is developing the Titan Vanadium, Titanium, Iron Ore Project, located in Ontario with an Inferred Resource of 49.0 million tonnes of 0.24% vanadium/ 0.43% vanadium pentoxide, 14.82% titanium dioxide, and 48.09% iron oxide. Drilling is expected to continue into mid 2011, followed by scoping and pre-feasibility studies. The last project under review is the Okeover Property, located in British Columbia, containing a NI 43-101 Compliant Inferred Mineral Resource of 86.8 million tonnes grading of 0.31% copper for approximately 593 million pounds, and 0.014% MoS2 for approximately 15.9 million lbs of molybdenum disulfide, for the North Lake Zone, which is one of 8 mineralized zones known on the property.
Prophecy is managed by John Lee and Arnold Armstrong, who own approximately one quarter of the issued shares, and are focused on building Asia’s next energy company. The company retains Rob McEwen, founder of Goldcorp and Harald Batista, a member of the family that founded Vale Inco, as advisors and attests to the financial firepower being assembled to develop the company.
Prophecy has fully diluted 236 million shares, options and warrants for a fully diluted market capitalization of $248 million. This includes a recent offering of $49.475 million shares, issued at 85 cents that raised $42 million to develop the company’s Mongolian coal assets.
Mongolia is certainly a good address to have for coal players in particular, thanks to its proximity to China and its veracious appetite for coal. Prophecy Resources entry into the country appears to be very well timed, and with energy assets in Asia combined with base and precious metals projects in Canada, the company has quickly built a balanced portfolio of interests to help diversify risk. Recent strength in all raw materials linked to steel bodes well for the company, underlined by the recent placing which significantly strengthened the company`s balance sheet.