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Caledon Resources

Caledon Resources: What's the story?

Polo Resources, a company floated last year to invest in the coal and energy sector, own over 12% of Caledon’s shares as of 6th May, and there is no let up in the apparent demand for the stock. So what’s the story at Caledon Resources?

Simple answer is that nobody really knows….or if they do, they aren’t saying!

The only thing that appears set in stone – due to the obligatory official announcements - is that Polo Resources Ltd, a company floated last year to invest in the coal and energy sector, own over 12% of Caledon’s shares as of 6th May, and there is no let up in the apparent demand for the stock.

When Polo began their buying spree in February, Caledon’s share price stepped on to an escalator, which shows no sign of stopping. Not even a disappointing production update and a lack-lustre set of financial results have stood in the way of the steadily rising price for more than a day or two…

The Times have been suggesting for several weeks now that ex-Caledon chairman Stephen Dattels – who coincidentally is now Chairman of Polo Resources – has an axe to grind with Caledon’s current management, particularly Chairman Robert Alford, and is lining up a change of control and/or a takeover bid.

Assumed evidence for the takeover bid was the announcement by Polo that they were going to raise £125 million in a hurry. This statement on 7 March said: “The Board of Polo is focused on several attractive potential acquisition opportunities consistent with its previously stated vision of rapidly building a significant global coal company, and with its strategy of acquiring coking and thermal coal assets at all stages of development. These opportunities may include acquisitions which due to their size and/or nature will be treated as Reverse Takeovers under the AIM Rules resulting in further potential suspensions of the Company's shares from trading. Where appropriate, the Company may seek to move rapidly and aggressively in pursuit of such acquisitions/opportunities.”

Hmmmm, thought everyone. Caledon.

This financing plan – rather ambitious in the prevailing market climate - failed. When Polo eventually closed their placing on 13 March, they had managed to raise only £41.1 million net of expenses. Not enough to buy Caledon.

In the middle of this attempt to raise large amounts of money, Polo stated quite categorically at Caledon’s 10 March General Meeting that they had no confidence in the management of Caledon, and attempted to block all resolutions. As this General Meeting had been called, amongst other reasons, to approve the issue of new shares for a listing on the Australian Stock Exchange, Caledon might have been in trouble had Polo been able to muster enough support to overturn the resolutions. Unfortunately for Polo, they were the only successful nay-sayers, and all resolutions were passed.

Just as well, really.

There’s a lot needs to be done at the Cook Colliery, especially at the coal handling & preparation plant (CHPP), to bring it up to scratch so that it can cope with increasing output from 2011-12 onwards.  Due to the breakdown-riddled workup of the brand new Voest Alpine ABM25, a key element of the recently installed Magatar mining system, revenue has been slow to accumulate. This left Caledon short of the final instalment which needed to be paid by 31 May 2008 to safeguard their ownership of the Minyango licence area. It also has left them a bit tight on working capital.

The first has been dealt with by the placement, in advance of the ASX listing, of over 6 million shares on AIM to Australian investors. Caledon can now pay for Minyango, thus assuring some 240 million tonnes of coking and thermal coal at JORC-compliant inferred and indicated resource status, which is likely to form the backbone of the company’s expansion plans after 2012. The second will be secured by the placing of another 13.64 million shares as CDIs on the ASX, which are expected to commence trading on 10 June.

So having failed to stop the ASX listing, what might Polo do next? With over 12% of Caledon’s share capital in their hands already, and apparent continued buying pressure in the market, it’s anybody’s guess.  The “no confidence” statement made at the Caledon General Meeting would suggest that Dattels is indeed out to secure a change of control. However, unless he can muster a significantly larger number of votes in support of any action that Polo might take in the future, he will have his work cut out and may need to continue buying….

Meanwhile, back at the coal face, Caledon have persevered with the new Magatar system. Having been delivered way beyond the scheduled dates, in spite of early ordering, the components were finally assembled underground some 5-6 months late, in February 2008. The Magatar unit consists of the state-of-the-art Voest Alpine ABM25 bolter-miner coupled to a 16-car Prairie Mining Flexiveyor. Neither of these components are new. Both are proven technology. What WAS new was the “glue” that joined them together, and also joined the mining/conveying unit to the mine-to-surface conveyor. What’s also new is the mining configuration: instead of the “street & avenue” approach used by traditional bord and pillar mining, the Magatar uses the linear mining configuration, consisting of long angled drives into the seams which are mined forwards and then in reverse, leaving a long “strip” of pillar between drives to support the roof. The objective is to achieve seamless mining, conveying and haulage to surface, both forwards and in reverse, without the bolter-miner at the coal face having to stop cutting coal. In theory, the process is simple. In practice it has been anything but. Work-up has been complicated by a number of failures of the ABM25, including faulty roof-bolter assemblies which have brought production to a grinding halt whilst the problem was dealt with. Several vital components have required complete replacement – was Caledon’s ABM25 a “Friday afternoon” machine?

The company now say that the majority of faults have been remedied, and the Magatar unit will be working up to its intended capacity during Q2 of 2008. In the meantime, an ABM20 and a group of shuttle cars are also mining in another area of the underground pit. The overall coal production target for 2008 has been reduced to 900,000 – 1.1 million tonnes delivered FOB, due to the delay in the implementation of the Magatar unit. But the reduction is not really material, as it is unlikely that they could have railed or shipped any more than that during 2008 due to the current infrastructure restrictions in Queensland. Caledon, along with their marketing partner Xstrata, have been endeavouring to acquire greater transportation capacity in 2009, but it’s not yet clear whether they will succeed.

In fact, it is likely to be 2012, when the new Wiggins Island coal loading terminal at Gladstone will come on-stream, before Caledon can increase production significantly beyond a million or so tonnes per annum.

Had coal prices remained at 2007 contract levels, this could have been problematical for Caledon. However, surging demand for steel has propelled the price of coking coal up to the US$300 level at times on the spot market, and it is assumed, even by the most pessimistic of analysts, that contract prices for 2008-9 will reach somewhere between $250-300 per tonne. In fact only yesterday, Western Canadian Coal Corp announced that it has negotiated a majority of its 2008 coal year contracts for hard coking coal at an average above US$300 per tonne. Thermal coal, targeted in all company forecasts at just $42 per tonne, has also doubled in price.

All of which, going forward, paints a colourful and vibrant picture for Caledon.

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The author holds shares in Caledon Resources