Churchill Mining
Full Churchill Mining profile here
Churchill Mining PLC is an AIM listed (CHL) mining company with a significant thermal coal development project located in the East Kutai Regency of Kalimantan, Indonesia, where to date more than 2.73 billion tonnes of coal resource has been defined to JORC standard. The project feasibility study has been completed, indicating an economic and desirable project and the study forms the platform for the next stage in the development of the Project. In addition to the East Kutai Coal Project, Churchill has interests in the Sendawar Coal Bed Methane Project in East Kalimantan, Indonesia and a strategic holding in Spitfire Resources, who are developing the South Woodie Woodie Manganese Project in Western Australia.
Churchill Mining - 1.4 billion tonnes of coal: the countdown to production begins
Proactive Investor readers might care to run a careful ruler over Churchill Mining. We are sure to be hearing a lot more of this company in the future.
East Kutai Coal Project
East Kutai Coal Project
Churchill’s prize asset is its 75% stake in the huge East Kutai Coal Project (EKCP) in Kalimantan, Indonesia, which now boasts a resource of 1.412 billion tonnes (BT). Of this, 118 million tonnes (MT) is presently measured, 322 MT is indicated and the rest inferred.
The figures are unimaginably large, but other coal companies provide helpful context. For example, the well-known undeveloped Phulbari coal resource in Bangladesh totalled 572MT; Vele, the largest of Coal of Africa’s four deposits, stands at 721MT; Western Canadian Coal’s resource inventory with three producing mines totals just 158MT. Even so, EKCP is still currently less than half of the known size of the 3.3BT Pakar deposit, just 55km to the southwest and recently brought to production by a private Indonesian company. However, reserve, rather than resource, is what really counts.
Churchill’s East Kutai 775km2 tenement is huge. Within this, only a fifth of the current 350km2 target area has been drilled. Unofficial Indonesian estimates put Churchill’s likely resource at 4BT, but proving up more resource at EKCP is now pointless. Drilling continues, but is entirely directed towards defining a reserve by year end with all drill rigs in the pit area. A combination of aerial laser survey and infill drilling of the northern section will upgrade much of the inferred resource to measured and indicated, but all eyes are of the reserve figure, due by the end of this year. The original baseline target reserve was 150MT, but at that time the resource target was 500MT. Since Churchill surpassed this by a country mile, no-one will be shocked if the reserve figure turns out better by a factor of two or three. The company’s latest RNS drops a heavy hint that this is the case, and it may well turn out to be larger than Pakar’s reserve of 277Mt.
The importance of a reserve is twofold. Firstly, funders love the enhanced security. Secondly, it will trigger the conversion of last year’s Heads of Agreement with Indonesian power utility company PT Ridlatama Bangun Mandiri (PTM RBM) to a final purchase agreement. PTM RBM is currently erecting two local power stations. The terms call for 840,000tpa at a 5% discount to the prevailing price for 30 years.
The same HoA evidences the ready saleability of the coal, which is defined as medium calorific with low sulphur and ash content and moderate moisture, i.e. good quality thermal coal that needs no washing. According to www.coalindoenergy.com, this grade of Indonesian coal was fetching $84 per ton back in July, although Churchill’s conservative calculations assume a coal price of $50/tonne. Today’s RNS suggest that this can be upgraded from low to medium calorific coal, which attracts a 34% premium.
Coal prices have pulled back lately, as China appears to have temporarily built up stockpiles, notably at the port of Qinhuangdao. It won’t be causing Churchill Directors fitful nights. The Chinese are said to be building two power stations per week, all coal-fired, and the existing oil-fired ones are being converted to accept coal. Lest people worry about recession, demand in the east, not the west, will govern Churchill’s success.
The Scoping Study completed in June makes interesting if slightly frustrating reading. The frustration arises from the lack of black and white costings, but in fairness to Churchill, they have been constrained by ongoing negotiations with a range of funders. This includes a smorgasbord of investment banks, joint venture partners and parties interested in off-take agreements. The bright side of this opacity is that there is an element of competition amongst parties to bag a seat at Churchill’s table and finance is not in serious doubt.
In summary, Churchill now anticipates fast-tracking a modest 2 to 4MT per annum (pa) start a year ahead of schedule in late 2009. This is just a start, and the medium term goal involves upgrading to 15-20 Mtpa over time. For comparison, Pakar’s initial planned production is 5MTpa.
Overall, the results of the EKCP Scoping Study were deemed ‘very positive’ and identified a combination of haulage road and conveyor as the most economic option. This contrasts with Pakar, which uses the Mahakam River as its route to port and incurs double-handling costs.
This is where life gets interesting. CEO Paul Mazak reckons that initial development – call it Phase 1 – will simply employ a contractor for road haulage. Based on similar mines in Kalimantan, opex costs should be in the neighbourhood of $32/t, providing useful near-term cash. Under this scenario, Phase 2 could involve construction of a conveyor system, with ballpark opex costs of just $14/t. However, all sorts of permutations exist, since Churchill is now considering building regional infrastructure in concert with other parties in the area. This might even involve construction of a multi-user port.
Three months on, negotiations are well down the road between Churchill and several international engineering companies for final infrastructure design and construction, project management etc. News should be forthcoming before year end. Mazak is quite clear that the engineering firm appointed will be out of the top drawer and have robust Indonesian experience.
The next stage is the completion of the Phase 1 Feasibility Study. Half of this was already covered by Trans Tek Engineering in its independent Scoping Study. Environmental Impact Assessment comes to mind as a potential lurking banana skin, but it is not a particularly sensitive issue. In fact Churchill has been working for some time with the local community, government agencies and an Indonesian university. Regrettably the jungle has already been subject either to slash-and-burn agriculture or logging by local companies, so habitat destruction will be negligible. Once the mine is exhausted, the area will be returned to cash crop agriculture as required by locals.
Sendawar Coal Bed Methane Project
The figures are unimaginably large, but other coal companies provide helpful context. For example, the well-known undeveloped Phulbari coal resource in Bangladesh totalled 572MT; Vele, the largest of Coal of Africa’s four deposits, stands at 721MT; Western Canadian Coal’s resource inventory with three producing mines totals just 158MT. Even so, EKCP is still currently less than half of the known size of the 3.3BT Pakar deposit, just 55km to the southwest and recently brought to production by a private Indonesian company. However, reserve, rather than resource, is what really counts.
Churchill’s East Kutai 775km2 tenement is huge. Within this, only a fifth of the current 350km2 target area has been drilled. Unofficial Indonesian estimates put Churchill’s likely resource at 4BT, but proving up more resource at EKCP is now pointless. Drilling continues, but is entirely directed towards defining a reserve by year end with all drill rigs in the pit area. A combination of aerial laser survey and infill drilling of the northern section will upgrade much of the inferred resource to measured and indicated, but all eyes are of the reserve figure, due by the end of this year. The original baseline target reserve was 150MT, but at that time the resource target was 500MT. Since Churchill surpassed this by a country mile, no-one will be shocked if the reserve figure turns out better by a factor of two or three. The company’s latest RNS drops a heavy hint that this is the case, and it may well turn out to be larger than Pakar’s reserve of 277Mt.
The importance of a reserve is twofold. Firstly, funders love the enhanced security. Secondly, it will trigger the conversion of last year’s Heads of Agreement with Indonesian power utility company PT Ridlatama Bangun Mandiri (PTM RBM) to a final purchase agreement. PTM RBM is currently erecting two local power stations. The terms call for 840,000tpa at a 5% discount to the prevailing price for 30 years.
The same HoA evidences the ready saleability of the coal, which is defined as medium calorific with low sulphur and ash content and moderate moisture, i.e. good quality thermal coal that needs no washing. According to www.coalindoenergy.com, this grade of Indonesian coal was fetching $84 per ton back in July, although Churchill’s conservative calculations assume a coal price of $50/tonne. Today’s RNS suggest that this can be upgraded from low to medium calorific coal, which attracts a 34% premium.
Coal prices have pulled back lately, as China appears to have temporarily built up stockpiles, notably at the port of Qinhuangdao. It won’t be causing Churchill Directors fitful nights. The Chinese are said to be building two power stations per week, all coal-fired, and the existing oil-fired ones are being converted to accept coal. Lest people worry about recession, demand in the east, not the west, will govern Churchill’s success.
The Scoping Study completed in June makes interesting if slightly frustrating reading. The frustration arises from the lack of black and white costings, but in fairness to Churchill, they have been constrained by ongoing negotiations with a range of funders. This includes a smorgasbord of investment banks, joint venture partners and parties interested in off-take agreements. The bright side of this opacity is that there is an element of competition amongst parties to bag a seat at Churchill’s table and finance is not in serious doubt.
In summary, Churchill now anticipates fast-tracking a modest 2 to 4MT per annum (pa) start a year ahead of schedule in late 2009. This is just a start, and the medium term goal involves upgrading to 15-20 Mtpa over time. For comparison, Pakar’s initial planned production is 5MTpa.
Overall, the results of the EKCP Scoping Study were deemed ‘very positive’ and identified a combination of haulage road and conveyor as the most economic option. This contrasts with Pakar, which uses the Mahakam River as its route to port and incurs double-handling costs.
This is where life gets interesting. CEO Paul Mazak reckons that initial development – call it Phase 1 – will simply employ a contractor for road haulage. Based on similar mines in Kalimantan, opex costs should be in the neighbourhood of $32/t, providing useful near-term cash. Under this scenario, Phase 2 could involve construction of a conveyor system, with ballpark opex costs of just $14/t. However, all sorts of permutations exist, since Churchill is now considering building regional infrastructure in concert with other parties in the area. This might even involve construction of a multi-user port.
Three months on, negotiations are well down the road between Churchill and several international engineering companies for final infrastructure design and construction, project management etc. News should be forthcoming before year end. Mazak is quite clear that the engineering firm appointed will be out of the top drawer and have robust Indonesian experience.
The next stage is the completion of the Phase 1 Feasibility Study. Half of this was already covered by Trans Tek Engineering in its independent Scoping Study. Environmental Impact Assessment comes to mind as a potential lurking banana skin, but it is not a particularly sensitive issue. In fact Churchill has been working for some time with the local community, government agencies and an Indonesian university. Regrettably the jungle has already been subject either to slash-and-burn agriculture or logging by local companies, so habitat destruction will be negligible. Once the mine is exhausted, the area will be returned to cash crop agriculture as required by locals.
Sendawar Coal Bed Methane Project
Churchill also holds 70% of the Sendawar Coal Bed Methane Project, also located in Kalimantan (West Kutai). Churchill’s Indonesian partners, RMU hold the other 30%. Coal quality is good, but a structural fault drops the coal seams too deep for open-pit mining. On the other hand, it is perfect for Coal Bed Methane (CBM). Data from oil companies indicates a large CBM basin within the 800km2 tenement. A CBM Joint Evaluation Agreement licence was granted a year ago, the stage prior to a Production Sharing Contract (PSC). Until recently, no-one could sign off a PSC anywhere, since Indonesia’s CBM regulations were still being drawn up. Happily the rules are now written and a PSC should follow.
PSC’s are rather complicated animals. In this case, the Government will take 50-55%, with the remainder held 70:30 by Churchill and RMU. However, it is likely that a third player will enter into a farm-in agreement for the non-government portion. Assuming so, Churchill would retain a free carried interest. This would amount to a small slice of a very large pie indeed. Nor is it pie in the sky. Unlike a number of other prospective CBM projects in Indonesia, Sendawar is not a stranded asset, lying just 60km from the Bontang gas pipeline. This feeds the world’s second-largest LNG plant, whose JV partners include big boys Pertamina and Total.
Spitfire Resources and Woodie Woodie South
PSC’s are rather complicated animals. In this case, the Government will take 50-55%, with the remainder held 70:30 by Churchill and RMU. However, it is likely that a third player will enter into a farm-in agreement for the non-government portion. Assuming so, Churchill would retain a free carried interest. This would amount to a small slice of a very large pie indeed. Nor is it pie in the sky. Unlike a number of other prospective CBM projects in Indonesia, Sendawar is not a stranded asset, lying just 60km from the Bontang gas pipeline. This feeds the world’s second-largest LNG plant, whose JV partners include big boys Pertamina and Total.
Spitfire Resources and Woodie Woodie South
Much water has passed under the bridge since Churchill listed with only a prospective 490km2 manganese property known as the Woodie Woodie South Manganese Exploration Project in Pilbara, Western Australia. Churchill sensibly hived off this original asset and listed it on ASX as Spitfire Resources Limited (ASX:SPI). Churchill continues to hold a 20% direct interest in the project, plus 35.6% of Spitfire, which owns the other 80%. Churchill will also benefit from a royalty arrangement should Spitfire start production.
The big attraction is the tenement’s location 50km along strike from the established Woodie Woodie manganese mine. Early results have been encouraging. Of the first 16 holes spanning six geophysics targets, 10 intercepted manganese. The last hole was particularly encouraging, intersecting 5 discreet layers of manganiferous material, the best of which assayed 12m at 6.53% Mn. Sulphur and phosphorus content are helpfully low. A further drilling campaign is set to resume in October.
Valuation
The big attraction is the tenement’s location 50km along strike from the established Woodie Woodie manganese mine. Early results have been encouraging. Of the first 16 holes spanning six geophysics targets, 10 intercepted manganese. The last hole was particularly encouraging, intersecting 5 discreet layers of manganiferous material, the best of which assayed 12m at 6.53% Mn. Sulphur and phosphorus content are helpfully low. A further drilling campaign is set to resume in October.
Valuation
With a fraction over 66 million shares in issue at 32p, Churchill’s market cap is £21m. Savvy investors will want to file away that there are around 14 million options outstanding, of which approximately 13 million are already comfortably in-the-money. Deadlines are not imminent, and if exercised, around £1.5m would accrue to Churchill.
Even so, there is plenty to encourage. An RM Wise research note in June suggests an average enterprise value of $8 per reserve tonne for producing assets in Kalimantan, based upon recent acquisitions. EKCP is of course not producing, but if we look forwards 15 months and assume a reserve of 300MT (see earlier discussion), the 75% interest in EKCP alone would justify a valuation of £15 per share. If that seems excessively rich, try ascribing a 1% in-ground valuation to 300MT of putative reserve at $50/tonne, and ignore the 1.1BT resource remainder. That gives a value of £1.92. For completeness, ascribe zero value to Sendawar, then add cash of £7.2m and £1.5m for the interest in Spitfire.
It is a sign of our times that Churchill’s share price is the same today as in June 2007, despite the phenomenal progress. In fact, speed of progress has been as impressive as the size of the EKCP resource. The next months should be interesting. Watch this space.
Even so, there is plenty to encourage. An RM Wise research note in June suggests an average enterprise value of $8 per reserve tonne for producing assets in Kalimantan, based upon recent acquisitions. EKCP is of course not producing, but if we look forwards 15 months and assume a reserve of 300MT (see earlier discussion), the 75% interest in EKCP alone would justify a valuation of £15 per share. If that seems excessively rich, try ascribing a 1% in-ground valuation to 300MT of putative reserve at $50/tonne, and ignore the 1.1BT resource remainder. That gives a value of £1.92. For completeness, ascribe zero value to Sendawar, then add cash of £7.2m and £1.5m for the interest in Spitfire.
It is a sign of our times that Churchill’s share price is the same today as in June 2007, despite the phenomenal progress. In fact, speed of progress has been as impressive as the size of the EKCP resource. The next months should be interesting. Watch this space.
