Paringa Resources Ltd. announced May 25 that it has successfully amended its coal sales contract with Louisville Gas and Electric (LG&E) and Kentucky Utilities (KU) following the company’s recent change in strategy which will see the low capex Buck Creek No. 2 mine developed first, ahead of the Buck Creek No. 1 Mine’s proposed 3.8 million tons per annum (Mtpa) project.
In October 2015, Paringa signed a coal sales agreement with LG&E and KU, both of which are subsidiaries of PPL Corp. (NYSE: PPL) and do coordinated coal buying, to deliver coal from the No. 1 Mine. In February 2016, the company decided to develop the No. 2 Mine first following what it called exceptional results from a Scoping Study which demonstrated the No. 2 Mine to be a high-margin 1.8 Mtpa mine with low capex of only US$44 million.
As a result, the amended cornerstone coal sales agreement with LG&E and KU now reflects delivery of coal from the No. 2 Mine. The amended contract is on substantially the same terms as the original contract. Most importantly, coal volumes and coal specifications remain unchanged. Fixed sale prices have changed slightly to reflect recent sales data, and the project development milestones and delivery schedule have been updated for the No. 2 Mine.
Paringa President and CEO David Gay, said: “We are extremely pleased to formalize the transition of our coal sales contract from the No. 1 Mine over to the No. 2 Mine. The fact that LG&E and KU are prepared to sign this major amendment to our sales contract confirms their belief that we will become a significant new source of production in the Illinois Basin and confirms the quality of the No. 2 Mine. We are progressing rapidly with our Bankable Feasibility Study on the No. 2 Mine and have already identified significant reductions in our operating and capital costs which have the potential to increase the value of the project considerably.”
Paringa said it expecs to start construction of the No. 2 Mine during second quarter of 2017, begin production by mid-2018, and reach full production of 1.8 Mtpa during 2019.
The fixed sales prices contained in the original coal sales agreement have changed slightly and have resulted in a fall of 7% in the nominal total value of the coal sales contract from US$220 million to US$205 million.
Under the amended coal sales agreement, Paringa is contracted to deliver a total of 4.75 million tons of its 11,200 Btu/lb product over a five-year period, starting in 2018. The amended contracted fixed coal sales prices for Paringa’s 11,200 Btu/lb coal spec begins at US$40.50 per ton for the first 750,000 tons of coal delivered to LG&E and KU, escalating to US$45.75 per ton for the final 1,000,000 tons sold.
The No.2 Mine’s access to the Green and Ohio River systems provides a significant transportation advantage to other Illinois Basin coal producers, the company saud. The LG&E and KU coal sales agreement calls for fixed sales prices based on a Free-on-Board (FOB) basis delivered at the Buck Creek barge load-out facility on the Green River in western Kentucky.
The amended LG&E and KU agreement includes standard project development milestones that are in line with the proposed Buck Creek No. 2 Mine construction program. During this construction period, LG&E and KU will progressively monitor Paringa’s performance in meeting these milestones. If the company fails to achieve the relevant milestones, then LG&E and KU may terminate the agreement and the company will have no further obligations.
LG&E and KU own three power plants within Paringa’s initial target Ohio River Market (Trimble County, Ghent and Mill Creek) that are almost exclusively supplied with Illinois Basin coal.