Xinergy Ltd., which acquired the Red Bird coal property in eastern Kentucky at the end of 2011, has the potential to develop new mining operations there along with the operations at its existing Straight Creek properties.
On March 30, Xinergy, which has stock listed in Canada, filed a new technical report from consultant Summit Engineering with Canadian regulators. That report, compliant with National Instrument 43-101 standards, covers both the new Red Bird and existing Straight Creek properties of Xinergy.
Xinergy’s current Straight Creek/Red Bird production plan through 2018 is summarized in the report. Its current active mining operations include the KY#5, KY#6, and KY#8 surface mines and KY#2 deep mine. The KY#4, KY#7 and KY#9 operations on the Straight Creek property are scheduled to come on-line in 2013. Laurel Fork #2, Potato Knob #5, and Rainbow Gap highwall mining is currently estimated to begin production in the fall of 2012.
The production plan for the combined Straight Creek/Red Bird operations calls for output of 719,000 tons this year, rising to 1.8 million tons in 2013, 2.6 million tons in 2014, 2.7 million tons in each of 2015 and 2016, then falling to 2.5 million tons in 2017 and 2.1 million tons in 2018. The estimated sales price realizations for this coal start at $70/ton in 2012, rising gradually to $74.31/ton in 2018. The estimated cash production cost for these operations is $59/ton, rising gradually to $62.57/ton in 2018.
Notable is that these are only estimates for financial accounting purposes of future production and coal market prices, since the market between now and 2018 will actually determine what those figures will wind up being.
The total project area for the Straight Creek property covers about 29,000 acres. The recently-acquired Red Bird property immediately adjacent and to the north of Straight Creek covers about 18,900 acres. Red Bird was once owned by the South Mississippi Electric Power Association, and later operated by Chas Coal LLC.
The Straight Creek and Red Bird properties are located in Harlan, Leslie, Clay, Knox and Bell counties. The Straight Creek properties are named for Straight Creek, the southwest flowing stream that forms most of the southern boundary of the properties. The properties are mostly contiguous tracts that extend in a northeasterly direction from about 2 miles west of the town of Stoney Fork to an area west of Beech Fork and north of the town of Helton, a distance of about 14 miles.
The Red Bird property is along the headwaters of the Red Bird River. The nearest named community to the leases is Beverly, which lies near the intersection of county route 66 and route 2011.
Leases and agreements have been obtained by Xinergy for the mining rights necessary to conduct surface and underground operations within portions of 22 permits on the Straight Creek property, and 18 permits on the Red Bird property. In addition to the 18 permits for Red Bird, the surface and mineral rights within the boundary of permit No. 807-5210 have been acquired by Xinergy, but the permit itself has not been acquired by Xinergy. Negotiation is ongoing for other properties that lie to the east of this area. There are several coal seams within the project area that are of mineable thickness for surface or underground mining operations.
Xinergy is currently conducting exploration activities on a new leasehold area east of and adjacent to the Straight Creek properties known as the Peters Knob properties, Summit noted.
The exploration of the currently-held coal reserves will potentially extend through calendar year 2013. This will allow time for mine planning and permitting activities to take place on new mine areas to expand or replace ongoing operations. The leasing and acquisition program is actively seeking new potential mine properties on which to conduct future exploration and subsequent mining activities. To date, at least 642 drill holes have been bored in the Straight Creek property area and 286 drill holes were bored in the Red Bird property area. Currently all mining operations on the Red Bird property are idle.
There are three existing exploration permits in the Straight Creek property, covering approximately 29,000 acres and one existing exploration permit on Xinergy’s newly-acquired lease holding in the Rye Cove area of Kentucky, which is approximately 4,600 acres and is commonly referred to as the Asher Lease. That lease is generally for the Hazard 4 seam and associated Rider seams.
Summit’s reserve evaluation indicates that there is in excess of 42 million proven and probable mineral reserve tons on the property. Coal quality appears to be reasonably good. All mineral resource tons are classified as measured or indicated (demonstrated). About 11 million tons of the reserve is currently permitted.
Summit: Xinergy’s projections for the reserves are reasonable
The projected production tonnages included in the mine pro-forma calculations are reasonable based on the reserves associated with the property. Xinergy’s projected coal sales price of $70/ton to $74.31/ton is reasonable, Summit said. The U.S. Department of Energy (DOE) reports spot coal prices as of March 9 for Central Appalachia, 12,500 Btu/lb, 1.2 lb SO2 coals at $58.75/ton and the NYMEX has Central Appalachia coal futures at $65.85 per ton as of March 9.
Estimates of required capital, manpower, and equipment for the surface mine operations are realistic and operating costs are reasonable. Summit said its net present value (NPV) estimate of the company is consistent with the Xinergy estimate of the company’s value of around $59.9m.
Xinergy is in a strong position in the Appalachian coal fields related to the need for U.S. Army Corps of Engineers Section 404 permits. Several areas of the property planned to be used for excess spoil storage have the potential to be deemed non-jurisdictional by the Corps, Summit said.
The company needs to diligently pursue compliance with Kentucky Department of Natural Resources agreed orders related to the Chas Coal/Red Bird property. Summit said Xinergy also needs to comply with the terms as related to the asset purchase agreement between Aspen Century LLC, Red Bird Mountain Coal Co. LLC, Chas Coal and Xinergy dated Dec. 30, 2011.
The facilities within the Straight Creek property were owned and operated by Straight Creek Resources from 1998 through 2003. Appalachian Fuels conducted limited contract mining on the property on 2004. During 2005 through April 2008, National Coal owned and operated the facilities. From April 2008 to the present Xinergy has controlled 22 permits within the property area. Permits 807-0363, 807-0399, 807-0401, 848-0285 and 848-0295 are new permits. The remaining 17 permits on the Straight Creek property were previously owned.
Straight Creek, Red Bird infrastructure has seen upgrades
The Brittain prep plant on the Straight Creek property was built in 1997 and can handle up to 500 tons per hour of material using automated controls. Upgrading of the Viall Loadout and Tipple Facility at Straight Creek has been primarily completed. A new 110-car rail siding, rebuilt conveyors and replacement parts for many vital components have been installed. The loadout will utilize the existing rail car siding served by CSX Transportation. CSX is in the process of rebating up to $500,000 back to coal operations as an incentive to extend the side track, Summit reported.
The Red Bird prep plant began operation in 1980 and went to open circuit, slurry pumping in 1985. A stoker circuit was installed in 1990. The plant was retooled in the early 2000s, with the wash box, Diester tables, conveyor belt, clean coal bin, and piping replaced throughout. This plant has been idled since early 2009. The Alamo loadout at Red Bird began operation in 1980. This facility has a 100-car unit train loadout, certified belt scales, an automatic sampling system, 80,000 tons storage capacity, and two truck dumps with a crusher for oversized coal. An overhaul of this facility was done in 2009, which replaced the conveyor belt, all electrical circuits, belt scales, crusher, and sampling system. The loadout has been idled since 2007.