Australia-based Paringa Resources on Dec. 1 released extensive results from a Bankable Feasibility Study (BFS) on the Buck Creek No. 1 Mine project in the Illinois Basin, which would be an underground mine in western Kentucky.
The BFS confirms that the Buck Creek No.1 Mine will be a world class, low capex, high margin coal mine, and will generate EBITDA of over US$87 million (A$121 million) per annum, even at current depressed coal prices.
Paringa President and CEO David Gay said: “The BFS has produced an excellent result and has confirmed the Buck Creek No. 1 Mine to be a compelling world-class mining project, generating strong EBITDA margins of over 35% despite the current depressed coal market in general. The 17% reduction in Capex to only US$105 million has also resonated well with US funding providers, and with the Project’s average annual EBITDA of US$87 million (A$121 million) per annum, has resulted in a much shorter payback period of upfront funding. Importantly for current funding activities and for investors, the BFS is based on actual contracted sale prices from the Company’s binding agreement with a major Illinois Basin utility and a final bidding process with a large pool of local contractors for all major Capex items. In addition, we expect the Project’s strong financial returns to increase even further as domestic coal markets recover.
Gay added: “With the required environmental permits already in place, the BFS was the final stage before we commence construction of the Buck Creek No. 1 Mine next year once funding has been finalized.”
Compared to the results of the Pre-Feasibility Study (PFS) released in March 2015, the BFS results show a significant decrease in the total initial capital by US$23 million to US$105 million as a result of conducting a competitive bidding process with a large pool of local contractors experienced in developing coal mines in the Illinois Basin, said the company. With an additional 10% contingency, the total capital figure increases to US$115 million.
In addition, the BFS results indicate a slight reduction in the average annual operating costs (FOB Barge) of US$0.82 to US$29.37 per ton as a result of a reduction in leased equipment costs (on a per ton basis), reduction in employee benefits insurance costs and the assumed removal of the vendor override royalty (0.5%) as part of the re-negotiation of the remaining vendor payments announced to the Australian Securities Exchange (ASX) in June 2015.
Following the execution of the cornerstone sales agreement with Louisville Gas and Electric and Kentucky Utilities and the completion of the final bidding process for major capital items to develop the project, Paringa said it will continue to progress advanced discussions with debt and equity financiers.
The cornerstone sales contract executed with LG&E and KU is a seven-year deal covering an initial two-year construction period (2016 to 2017) and a 5-year production period (2018 to 2022). LG&E and KU are two of the largest fuel buyers within the company’s initial target Ohio River market, with significant resources to undertake a 12-month due diligence process, and are subsidiaries of PPL Corp. (NYSE: PPL).
Paringa has also completed 12 months of due diligence identifying and building relationships with local utilities who operate scrubbed coal fired power plants along the Ohio River Market and who are buyers of the project’s Western Kentucky No. 9 (WK No. 9) coal specification.
Following execution of the cornerstone sales agreement and completion of financing activities, Paringa said it will contract additional coal sales by participating in future solicited bids with local utilities and will also approach local utilities to make unsolicited offers to sell coal outside of the solicitation periods. In addition, the Company will assess opportunities to sell coal into a secondary target southeastern U.S. market, which is a growing market for Illinois Basin coal.
Paringa has also begun assessing opportunities to incrementally expand production at the Buck Creek Mining Complex, forming part of a staged multi-project development program. The company announced to the ASX in November 2014 that it had begun technical studies (now Scoping Study) at the Buck Creek No. 2 Mine. This second mine development has the potential to be a low capital cost project due to the shallow depth of the coal seam from the surface at the mine portal. The results of the Scoping Study for the Buck Creek No. 2 Mine are expected to be released during the December quarter of 2015.
Paringa sees an opening with industry ‘rationalization’
Consistent with the “rationalization” of depleting resources and high cost mines across the U.S. coal industry, several Illinois Basin producers have recently announced the closures of older or higher cost operations with continued consolidation into newer and lower cost mining operations. In relation to the Onton No. 9 and Hopkins mines in western Kentucky owned by Alliance Resource Partners LP, Paringa said it has been announced that the company is effectively transferring coal production to its recently acquired White Oak longwall mine in Illinois and the expanding western Kentucky River View room-and-pillar mine, which is estimated to produce nearly 10 million tons in 2015, making it the largest and most productive underground room-and-pillar coal mine in the US.
This rationalization of production within the Illinois Basin is a positive indication that producers are focused on maximizing margins which carefully protecting the market from over-production, said Paringa. This willingness from multiple producers to protect the market from oversupply is one of the primary reasons for the exceptional margins produced from this region.
Given Illinois Basin’s position on the delivered cost curve, it will continue to take market share from other higher cost coal basins as it has done over the past decade, typically displacing the higher cost Central Appalachian coal basin (CAPP), the company added.
Even at currently depressed natural gas prices, coal remains a highly competitive and dominant energy source for the Ohio River market, which is the initial target market for the Buck Creek No. 1 Mine, Paringa said. This is primarily due to the lower production costs of the Illinois Basin coals and the extremely favorable logistical and transportation costs of barge supplied coal. With Illinois Basin coals supplying this region for a delivered cost of less than US$2.50 per mmBtu, it is expected the Ohio River Market will remain strongly in favor of coal going forward.
Based on feedback from Paringa’s potential “tier-1” customers within the Ohio River Market, the Buck Creek No. 1 Mine’s Coal Handling and Preparation Plant (CHPP) was redesigned as part of the Pre-Feasibility Study (PFS) released to the ASX in March 2015, to produce both a fully-washed and a blended product. It is estimated that 30% of total sales from the Buck Creek No. 1 Mine will be a fully washed 11,800 Btu/lb product and 70% of total sales will be a 11,200 Btu/lb product.
Paringa is expected to begin production at the Buck Creek No. 1 Mine in 2018, reaching full production of 3.8 mtpa by approximately 2020. Under the coal sales agreement, Paringa is contracted to deliver a total of 4.75 million tons over a 5-year period of its 11,200 Btu/lb product, with 750,000 tons to be delivered in 2018 and 1,000,000 tons to be delivered in each year from 2019 to 2022.
The contracted fixed coal sales prices for Paringa’s 11,200 Btu/lb coal spec begins at US$44.50 per ton in 2018, escalating to US$48.20 per ton in 2022.
Paringa has adopted the LG&E and KU long-term contract prices for the project’s blended product (11,200 Btu/lb) for the BFS from 2018 to 2022. Hanou Energy Consulting LLC‘s latest Illinois Basin coal price forecast has been adopted for the project’s Fully Washed Product (11,800 btu/lb) for years 2018 to 2035 and for the Blended Product (11,200 btu/lb) for years 2023 to 2035.
Total initial capital for the project is estimated at US$105 million which includes the cost of surface property, surface and underground mine development and infrastructure estimated at US$61 million and the cost of a 700 tph wash plant, barge load-out and surface facilities of US$44million. The total initial capital cost with an added 10% contingency reserve is US$115 million. Sustaining capital for the mine, mine site infrastructure and CHPP have been estimated at US$1.28 per ton.
Proposed production from the mine will come exclusively from utilising the room-and-pillar method. The room-and-pillar mining method with continuous miners has received all of the necessary approvals from regulatory agencies at nearby operations and is supported by well-established equipment models with a ready supply of repair and replacement parts.
The slope is designed as an 18-foot wide by 18-foot high slope constructed at a 16 degree gradient that measures approximately 2,500 feet in length from the bottom of the box cut to the coal seam. This length includes an allowance for a vertical curve at the bottom of the slope to provide room for a level segment of the slope belt for conveyor transfer points.
A dual-compartment vertical airshaft will be constructed in order to ventilate the mine. One-half of the shaft will be designed for intake (fresh) air, and the other will carry return air which has coursed through the mine. The shaft will be constructed on the permitted surface site by conventional drilling, blasting and mucking from the surface to a depth of approximately 650 feet. The finished (concrete-lined) inside diameter of the shaft will be 24 feet and divided by a concrete wall.
Production will be by room-and-pillar mining with four super-section units with a total of eight continuous miners (i.e. two continuous miners per super-section unit). Each super-section will be equipped with four battery haulers discharging onto a belt feeder/breaker, which provides surge capacity to reduce hauler dump time.
In addition, each super-section will be equipped with two dual-head roof bolting machines to provide roof support in mined entries. The super-sections will also require scoops for clean-up of spillage, and supply cars for distribution of supplies and materials, rockdusting, and other utility purposes.
The BFS mine plan includes a total production of 86.3 million raw (ROM) tons and 63.5 million clean, marketable tons over an 18-year period. This schedule includes a two-year ramp-up period and a period when production declines (Year 18) as the current mine plan area is depleted. At planned productivity, each super-section will produce approximately 2,300 to 2,400 tons of ROM coal per shift. ROM production for the Project will total approximately 5.2 million tons per year at full production.
Average product yield is estimated at 73.5% (which includes direct shipment/preparation plant bypass of approximately 14% of the ROM production). This will yield an average of approximately 1,675 to 1,765 tons of clean coal from each unit-shift of production. Annual production will total approximately 3.8 million marketable tons at full production.
Mine surface facilities will be in McLean County
The mine portal, coal preparation plant, and refuse disposal facility will be located in McLean County in the east-central portion of the property. An overland conveyor will connect the mine and plant to a barge load-out on the Green River, approximately two miles to the northeast along Kentucky Route 138.
The project will include a modern, fully integrated, coal preparation plant in order to provide a consistent product, which meets the specifications of its customers. At full production, the coal preparation plant will be capable of processing 5.2 million tons of ROM coal annually, which equates to approximately 3.8 million marketable tons per year. The plant will be scheduled for operation 302 days each year, which represents an average six-day per week work schedule for 52 weeks (less 10 holidays).
Based on feedback from Paringa’s potential Tier-1 customers, the project’s CHPP has been redesigned to produce both a fully-washed and blended product:
- Product A – Fully Washed Product (11,800 Btu/lb) – Raw coal from the underground mine is transferred via conveyor belt to the CHPP for screening and processing. All raw coal is immediately washed and stockpiled as a fully washed, higher heating content 11,800 Btu/lb product. It is estimated that 30% of total sales from the Project will be a fully washed product (Product A) with a preparation plant yield, for this product estimated at 67.1%.
- Product B – Blended Product (11,200 Btu/lb, 12% Ash) – Raw coal from the underground mine is transferred via conveyor belt to the CHPP for screening and processing. About 20% of raw coal bypasses the processing stage and is subsequently blended with fully washed coal. This blended product is stockpiled, separately from Product A, as an 11,200 Btu/lb product with maximum 12% ash. It is estimated that 70% of total sales the Project will be a blended product (Product B) with a preparation plant yield, for this product, estimated at 76.7%.
The company holds necessary permits required to construct the barge load-out facility approximately two miles northeast of the project’s plant site. The barge load-out facility will consist of a ground-based tower connected to a floating work barge by a 48-inch wide, 170-foot long, loading conveyor. The tower will stand approximately 45 feet above the river and 90 feet away from the river bank with a 30-foot wide by 120-foot long work barge anchored on piers situated 30 feet from the river bank. The system will have a design capacity of 2,500 tons per hour.
The project’s permitted barge load-out facility is located at mile marker 62 on the Green River, as measured from the confluence with the Ohio River. The Green River meets the Ohio River at mile marker 784, which is approximately 169 miles (271 km) from the Mississippi River and 145 miles (233 km) from the Tennessee and Cumberland rivers.
Occasional shipments to nearby power plants by truck may be arranged. Future studies will assess the possibility of utilizing barge to rail trans-loading services on the Tennessee, Ohio, and Big Sandy rivers.
A reputable surety bond provider has provided a surety bond to the Kentucky Department for Natural Resources on behalf of the company’s subsidiary, Hartshorne Mining LLC, in connection with the permitting process for the Buck Creek Mine No. 1.