PR NewswireLodgement of Open BriefingContinental Coal Limited - Operations Update & OutlookOpen Briefing interview with CEO Don Turvey, Executive Director Jason Brewerand CFO Maritz SmithContinental Coal Limited (ASX: CCC; AIM: COOL, US-OTCQX: CGFAY) is a thermalcoal producer with projects located in South Africa's major coal fields.Continental currently has two operating mines, Vlakvarkfontein and Ferreira,producing 2Mtpa of thermal coal for the export and domestic markets. In 2012Continental will continue development of its flagship project, the fully fundedPenumbra coal mine. Continental is targeting a ROM production rate of approx.7 Mtpa and sales of approx. 5Mtpa once Penumbra and its De Wittekrans projectreach steady-state.In this Open Briefing, Don, Jason and Maritz discuss: * Penumbra project update * Financial outlook * Coal market outlook * Botswana projects updateRecord of interview:openbriefing.comContinental Coal Limited (ASX: CCC; AIM: COOL, US-OTCQX: CGFAY) has reportedthat development activity at the Penumbra project (CCC 80%) is progressing wellwith the twin declines having advanced significantly over the last quarter. Isprogress in line with your schedule? Are you confident that the mine will becommissioned and producing in Q4 CY2012?CEO Don TurveyDevelopment activities at Penumbra, our third thermal coal mining operation inSouth Africa, only commenced in September 2011 with the commencement of theinitial site civil works and then followed by the box-cut excavation. Declinedevelopment work is being undertaken by highly experienced contractors and onlystarted in February 2012. After six months of decline development we hadcompleted 460 metres of combined total twin decline development as at 6 August2012.We set ourselves an aggressive timetable to bring Penumbra into production andhave overcome some poor geotechnical issues in the first 100 metres ofdevelopment. With the advance rates continuing to improve and with strongperformance from Murray and Roberts, we remain confident we can achieve firstmine production coal from Penumbra early in Q4 CY2012 with the coal immediatelywashed through our existing Delta Processing Operations and available forexport from our existing rail siding to Richards Bay Coal Terminal.openbriefing.comThe development cost of Penumbra is estimated at US$40 million which is beingfunded from existing cash and debt funding provided by ABSA Capital. What arethe key risks to the project budget at this stage of development?CEO Don TurveyThe development costs of Penumbra are fully funded. We have largely contributedour share of the costs and will be drawing on the ZAR257million (approximatelyA$30 million) ABSA Capital secured debt facility to fund the balance of thecosts.The key risks we face in completing the mine development are primarilyassociated with potential delays to the decline development, associated costoverruns due to this and other capital cost increases. Our decline developmentis proceeding well and we are actively managing its progress. In addition, themajority of our capital costs have now been procured and/or secured with firmtenders. We have further mitigated the risks associated with cost overruns byalready establishing and funding a contingency fund of approximately US$4.5million to cover any unforeseen events.openbriefing.comWhat is the outlook for thermal coal prices both domestically in South Africaand for Richard Bay Coal Terminal export prices? What operating margins are youexpecting to achieve across the portfolio of production?CEO Don TurveyThe domestic market remains buoyant with significant increases in demand andEskom, South Africa's state utility company continuing to seek long termoff-takes for most of its coal fired power stations. The Eskom coal pricing hasincreased significantly in recent years. As it is linked to relevant escalationindices, it ensures that our operating margins remain largely intact androbust.At our Vlakvarkfontein Mine, where we executed a coal supply agreement withEskom earlier this year (becoming one of only 25 direct suppliers to Eskom), wehave consistently generated operating margins of above 30% and in 2011/12 themining operation reported a record year in terms of thermal coal production,sales, revenues, earnings and profits. The same cannot be said for the exportcoal market which has been under pressure due to the global economic outlookand its impact on coal demand. However, importantly the weaker ZAR/US$ exchangerate is off-setting some of the lower dollar denominated export prices.However, current export coal price levels are not considered sustainable in thelong term and the expectation is that prices will recover to above the US$100/tonne in the next 12 to 24 months.We are already seeing export prices and exports increase out of South Africa inrecent months and according to some reports, the recent rally in the exportprices is due to market participants covering short positions which are drivingprices back up.In the medium to long term, we expect global demand for thermal coal tocontinue particularly from China and India on the back of further urbanisationand the resultant increase in energy use.openbriefing.comAs Continental ramps up production to its targeted ROM rate of approximately 7Mtpa, will it have secured Richards Bay Coal Terminal allotments for theplanned export deliveries and is there sufficient allocation available forContinental's targeted increase to 2 Mtpa through the terminal?CEO Don TurveyContinental's growth and expansion plans are forecast to see substantialincreases in both our domestic coal sales and export coal sales in the mediumterm. We are confident with our capacity to sell into the domestic market giventhe demand from Eskom and that sales are typically made at mine-gate. Ourforecast increase in export sales will require us to increase our rail and portallocations through the Richards Bay Coal Terminal and other established coalports, and despite the challenge that poses, we remain confident.Since producing our first tonne of export quality coal from the Ferreira Mine(CCLSA 85%) in November 2010, we have successfully secured rail and port accessto export 100% of its production of a high quality export thermal coal throughthe Richards Bay Coal Terminal, and the Ferreira Mine has exported almost 1million tonnes since then. Our Anthra Rail Siding, adjacent to the FerreiraMine and our new mine at Penumbra, have clear advantages in being so close tothe main Richards Bay Coal Terminal rail line and rail junction.With substantial investment in excess of US$2 billion being made into SouthAfrica's rail infrastructure and increased capacity becoming available there tomatch the excess capacity at South Africa's and Mozambique's coal export ports,we continue to advance our negotiations to secure our medium term requirementsthrough the Richards Bay Coal Terminal and other coal loading ports in RichardsBay and at Maputo to match our medium term export coal sales growth.openbriefing.comYou plan to commence production from four separate mining areas at DeWittekrans. Estimated production from these mines is 3.6 Mtpa. The developmentcost of De Wittekrans is estimated at US$220 million, including undergrounddevelopment and a coal wash plant. Are you confident about the De Wittekransdevelopment schedule and how will you fund its staged development?CEO Don TurveyThe Feasibility Study completed on the De Wittekrans project late last yeardemonstrated a technically and economically feasible project. Its developmentis forecast to double both our production of domestic and export coal anddouble our forecast earnings. It is a key component of our growth strategy andimportantly one of a few new mine developments of its size in South Africa withplanned sales of export thermal coal. We are completing further optimisationstudies focused on leveraging existing and nearby infrastructure. This willlikely further enhance the project economics, influence the developmenttimetable and capital costs and clearly influence the proposed fundingstrategy.We are currently finalising the permitting process in respect to the issuanceof the mining right and also key development permits including the water uselicense and hope to be able to announce progress on these shortly.The financing of the De Wittekrans project is equally as important as theinvestment decision itself. We will embark upon a process of determining anappropriate risk-based debt/equity funding mix following the optimisationstudies and finalisation of the life-of-mine model.openbriefing.comContinental Coal went from zero revenues in FY2010 to US$82.1 million inFY2012. With Penumbra's development on schedule and the De Wittekrans projectramping up, when do you anticipate that Continental Coal will be cash-flowpositive?CFO Maritz SmithThe company has undergone substantial growth over the past two years in bothoperational and financial performance. Our mining operations have beengenerating positive operational profits and that is budgeted to continue inFY2013.Looking forward to FY2013, the Vlakvarkfontein Coal Mine (CCLSA 60%) shouldcontinue generating strong cash flows on the back of robust Eskom demand andprices. The Ferreira Coal Mine (CCLSA 85%) although reaching the end of itsmine life, will benefit from the extensions secured recently over adjacentresources once the necessary permits are in place. Whilst costs at the FerreiraCoal Mine are forecast to increase as a result of processing higher volumes ofraw coal purchased from nearby mines that do not have the processing or railcapabilities, we are forecasting Ferreira mine and the associated DeltaProcessing Operations to at least cover its operational costs during FY2013.The Penumbra mine should become Continental's flagship operation in FY2013 asproduction is ramped up following first coal production that is expected inOctober 2012. Cash flow from that operation will first be applied to meet thescheduled debt repayments under the ABSA Capital project financing and also toaccelerate debt repayments. Average EBITDA of US$15 million per annum isforecast over the life of mine, based current prices and given the low cost ofproduction.We have successfully brought new mining operations into production andtypically within a 12 month period. We have invested strongly in our managementteam and we believe we have the management capacity to successfully operate anddevelop several new mining operations in the medium term.Whilst operationally we are steady going forward, the current market conditionshave impacted our corporate cash and working capital position. With the sale ofour interest in VanMag remaining outstanding and our South African cash flowsbeing dedicated to the new Penumbra mine, we are working on various optionswith a view to injecting liquidity at a corporate level for working capitalpurposes and the settlement of the final $8.5 million Mashala payment due 30September 2012. We furthermore envisage lower corporate costs at the holdingcompany level for FY2013.The notice of meeting issued to shareholders last month seeking ratification ofrecent share issues and a possible approval to raise further equity wasconvened to ensure that the company has the ability to access capital should itbe required. Issuing a significant amount of shares for cash as part of aprivate placement is not our first priority considering our current share priceand the dilutionary impact on shareholders. As a result, we are activelypursuing the closure of the VanMag deal, the sale of non-core assets as well asa strategic investment in our South African and Botswana businesses by anestablished industry partner.With the Penumbra mine commissioned and in production later this year, we thenhave the proposed development of the De Wittekrans project to advance, as wellas other opportunities outside of South Africa. As we advance these we need tobe mindful of the capital markets, our working capital position and our abilityto fund these and other opportunities that continue to present themselves.openbriefing.comIn spite of Continental's significant increase in revenue, its share price hascontinued to fall over the past 12 months. How are you attempting to restoreshareholder confidence?CFO Maritz SmithThe share price performance of Continental Coal has like many of its peers inthe thermal coal sector, experienced a significant fall and is trading at newrecord lows. This is despite significant progress made by the company inimproving operating efficiencies at its mines and in advancing a new minedevelopment. The current global economic outlook hasn't helped, nor has thebearish sentiment on the demand for thermal coal and the 20 to 30% fall inthermal coal prices over the past 12 months. Recent short term capital raisingscompleted by the company, as well as substantial short term and algorithmictrading in the stock, have not helped and have compounded the impact.Undoubtedly the successful commissioning and first coal production from thePenumbra mine will be a key milestone and potential catalyst for a re-rating ofthe share price. Not only will it confirm our ability to bring such value-addprojects into production but its cost profile and projected mine life willprovide shareholders with a significantly long term and low cost cashgenerating asset within the portfolio that will have a marked impact on futuregroup earnings. In parallel, results from our Botswana exploration program, andthe finalisation of the De Wittekrans optimisation studies and associatedinvestment decision and funding plan should move this project up the valuecurve and closer to becoming a reality. Securing further port allocation tocater for our long term growth plans is another major milestone that we expectwill bring confidence back to Continental and its share price.The transitional period from an explorer to a producer was by no means withoutits challenges and we feel proud with what we have achieved operationally.openbriefing.comContinental Coal has recently unveiled a JORC compliant maiden inferredresource estimate and an increase in the exploration target at its projects inBotswana. Could you provide some context to these results and what are thefuture plans for the Botswana projects?Executive Director Jason BrewerA maiden inferred coal resource of 2.2 billion tonnes was established at theKweneng Coal Project (CCC 100%) in Botswana and in addition to the JORCresource the company's independent geological consultants determined a further5 billion tonne exploration target at Kweneng and a further 4 billion tonneexploration target at the Serowe Coal Project (CCC 100%). This is a significantincrease on the initial 6 to 7 billion tonnes determined in late 2010.Unfortunately the majority of coal resources across all three of the company'sprospecting licenses cannot be classified as JORC compliant due to the widelyspaced nature of the first phase of drilling, however we are now committed to aPhase 2 exploration drilling program that is expected to raise the level ofconfidence in the extent, continuity and quality of the JORC resource atKweneng and potentially deliver a JORC resource at the Serowe Project.Both projects are located close to established infrastructure and majoroperating coal mines. Serowe lies only 10 kilometers north of Botswana's onlyoperating coal mine, the Morupule mine, while Kweneng lies 25 kilometers westof CIC Energy's Mmamabula coal project that is currently subject to a takeoverbid by a major Indian group.On the back of the latest upgrade in exploration target and maiden JORCresource, our Botswana projects have grown to become truly significant assetsfor the company and we now look forward to advancing discussions with severalstrategic parties that have already expressed an interest in participating inits exploration and long term investment activities.openbriefing.comThank you Don, Jason and Maritz.For more information about Continental Coal, visit www.conticoal.com or callJason Brewer on (+61 8) 9488 5220For previous Open Briefings by Continental Coal, or to receive future OpenBriefings by email, visit openbriefing.comDISCLAIMER: Orient Capital Pty Ltd has taken all reasonable care in publishingthe information contained in this Open Briefing; furthermore, the entirety ofthis Open Briefing has been approved for release to the market by theparticipating company. It is information given in a summary form and does notpurport to be complete. The information contained is not intended to be used asthe basis for making any investment decision and you are solely responsible forany use you choose to make of the information. We strongly advise that you seekindependent professional advice before making any investment decisions. OrientCapital Pty Ltd is not responsible for any consequences of the use you make ofthe information, including any loss or damage you or a third party might sufferas a result of that use.Competent Persons StatementThe information in this report that relates to the Coal Resources and Reserveshas been prepared in accordance with the Australian Code for Reporting ofExploration Results, Mineral Resources and Ore Reserves as published by theJoint Ore Reserves Committee (JORC Code). The Australasian Joint Ore ReservesCommittee (JORC) and the JORC Code requires that Competent Persons must belongto the Australasian Institute of Mining and Metallurgy (AusIMM), or theAustralian Institute of Geoscientists (AIG), or a Recognized OverseasProfessional Organisation (ROPO). ROPOs are professional organisations that theASX, acting on advice from JORC and its parent organisations, accepts as bodiesto which Competent Persons may belong to for the purpose of preparingdocumentation on Exploration Results and Mineral Resources, on which reports tothe ASX are based. The South African Council for Natural Scientific Professions(SACNASP) as well as the Geological Society of South Africa are considered asROPOs by JORC.The information in this report that relates to Exploration Results and CoalResources is based on data and coal resource estimates completed by Mr. NicoDenner, a full time employee of Gemecs (Pty) Ltd. Mr. Denner is a member ingood standing of the South African Council for Natural Scientific Professions(SACNASP No. 400060/98) as well as a Member and Fellow of the GeologicalSociety of South Africa. He has more than 15 years' experience in the SouthAfrican Coal and Minerals industries. Mr. Denner has sufficient experiencewhich is relevant to the style of mineralisation and type of deposit underconsideration and to the activity which he is undertaking to qualify as aCompetent Person as defined by the 2004 Edition of the `Australasian Code ofReporting of Exploration Results, Mineral Resources and the Ore reserves.Within the constraints mentioned above, all work undertaken by Mr. Denner andrelated to the resource estimate was carried out following industry bestpractice standards using the South African Code for Reporting of MineralResources and Mineral Reserves (the SAMREC Code, 2007) in conjunction with theSouth African guide to the systematic evaluation of coal resources and coalreserves (SANS 10320:2004) as a basis. As such the resource statementscontained in this report may be considered compliant with the JORC Code. Mr.Denner consents to the inclusion in the ASX release of the matters based on hisinformation in the form and context in which it appears.ENDThe content and accuracy of news releases published on this site and/ordistributed by PR Newswire or its partners are the sole responsibility of theoriginating company or organisation. Whilst every effort is made to ensure theaccuracy of our services, such releases are not actively monitored or reviewedby PR Newswire or its partners and under no circumstances shall PR Newswire orits partners be liable for any loss or damage resulting from the use of suchinformation. All information should be checked prior to publication.
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