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: Aiming to become part of Indonesia's thermal coal export industry
Fast forward to 2007, and Churchill has a thermal coal discovery which the company believes could be one of the biggest new Greenfield thermal coal projects in the largest thermal coal exporting country in the world. As the markets like focus, Churchill divested itself of the South Woodie Woodie manganese project to Spitfire Resources (ASX: SPI) for a 40% equity stake plus production royalties, to become a pure coal play.
The growth of China has had an impact on the thermal coal industry worldwide, as coal is used big time in the generation of electricity - 70% of China's electricity is generated using coal. India too is industrialising as rapidly as China; however, it is almost impossible to develop new coalmines in India, mainly due to local community objections. This was showcased by Tata Group, which was obliged to demonstrate to the Indian Government that it had a long-term coal supply before a license was issued for its giant 4000 MW power station in Gujarat. Tata's response was to buy 30% of Bumi Resources in Indonesia for US$1.1billion.
So despite apparently abundant quantities of coal across the globe, the supply/demand equation is far more complex that one would first assume. When the Chinese government temporarily banned the export of coal this winter, prices soared - why? Because coal is a bulk commodity so the distance from mine to market effects the cost to the consumer so coal projects located near the coast have a commercial advantage - coal producers in South East Asia and Australia have seen spot prices rise the fastest as they are selling coal to China.
Churchill's move into coal couldn't have been timed much better. Churchill has an agreement to take a 75% interest in the East Kutai Project, which is made up of four blocks covering 575 square kilometres in East Kalimantan, Indonesia. Indonesia is the world's largest exporter of thermal coal, and it can hardly keep up with demand.
Thermal coal spot prices have seen good times recently, driven by a combination of events that have constrained production in South Africa, Queensland, Australia and China. At Kutai, Churchill has medium calorific coal which used to fetch $20 per tonne; however, recently it has doubled in price to more than $40 per tonne and is still climbing. East Kutai is 45 kilometres from the Pakar project where Merrill Lynch has just funded a coalmine to the tune of US$$135 million, and this coal has a lower calorific value than the coal at East Kutai. So it comes as no surprise that Churchill firmly believes the coal from East Kutai will be sold forward - the company is already receiving enquiries on a weekly basis from Chinese and Indian companies wanting to buy.
Like the iron ore market, major coal producers and consumers enter into negotiations once a year to set a twelve-month contract price, which then acts as a benchmark for the industry. The annual coal price will be set on April 1, 2008, and both JP Morgan and UBS are expecting the high calorific thermal coal price to rise to between US$90-100 per metric tonne; UBS forecasts that will rise again on April 1, 2009, to US$125 per metric tonne. Many coal users are now turning to medium calorific coal as an alternative to high calorific thermal coal, and are designing all their new power plants to run on this. High Calorific thermal coal is going to be in short supply for the foreseeable future and medium caloric coal is not only cheaper, but is going to be available for the life of power stations currently being designed – the next thirty or forty years …good news for Churchill Mining.
Churchill recently tucked away a neat £10 million, at 50p per share, following the first 4,000 metres of a 10,000 metre drilling programme at East Kutai. This programme gave the company enough of a glimpse of the seam thickness and coal characteristics, within the key ten by four kilometre zone, to embolden it to take on a considerably more aggressive exploration schedule. With plenty of cash in the kitty, the drilling campaign was expanded to 65,000 metres and the company set a target to define a mining reserve of 100 million tonnes by the end of the year, with a further 400 million tonnes of resource – this is no small target!
Churchill has already updated investors on drilling at East Kutai and plans to announce its first JORC compliant resource statement at the beginning of the second quarter, with subsequent updates at the end of every quarter during 2008. Relevant studies will run parallel to the drill bit in order to fill in the blank spaces before finances are decided - probably in the first quarter of 2009.
Churchill has thrown down the gauntlet at East Kutai – the drilling programme is underway and the development decision has been earmarked for early 2009. In fact, Churchill has already started internal scoping studies for mine and infrastructure development, and is short-listing advisors and consulting companies for the scoping and pre-feasibility work. The formal start date of this work should be announced shortly.
According to a Blue Oar Securities research note, when compared with other coal companies operating in Indonesia, East Kutai already has a value of at least US$120 million. So with a reserve of 100 million tonnes, Churchill Mining's 75% stake in East Kutai is likely to be worth around US$375 million (about £190 million). Churchill currently has a market capitalisation in the area of £36 million, so there appears to be plenty of upside potential in the share price if the mining reserve expands in line with management expectations.
Churchill Mining seems to have positioned itself with a much sought after product on the doorstep of the burgeoning Asian market...not a bad place to be...
