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Allegiance Coal completes coal off-take contract with Marco International

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World Coal,


Allegiance Coal Ltd has, on behalf of its wholly owned subsidiary companies Allegiance Coal USA Ltd (AUSA), New Elk Coal Co, LLC. (NEC) and Black Warrior Minerals, Inc. (BWM), entered into a binding terms sheet with Marco International Corp. subject to completion of formal documentation.

Marco is a New York-based family office that provides financing solutions to companies active in the metals and mining industry. Marco has been providing inventory and receivable finance to NEC and BWM since January this year, pursuant to a US$30 million supply chain facility secured against the coal delivered to port and loaded into a vessel until payment by the purchaser.

Given the well-established and successful working relationship to date, it was relatively straight forward for Marco to convert that existing arrangement (increased to US$40 million) into a traditional loan secured against the producing assets of NEC and BWM, coupled with coal off-take rights for up to three years.

  • The sale by NEC and BWM of up to 40 000 tpm of coal to Marco commencing 1 October 2022 for one year.
  • Marco has the right to extend the contract for another year at the expiry of year one, and if renewed, at the expiry of year two, for a total possible contract term of three years.
  • The price for the coal for the term of the contract is US$220/t.
  • Allegiance has the right in each renewal period to reduce 10 000 tpm of supply for the new term.
  • The target market is European thermal power with target coal specifications (dry basis unless otherwise stated):
    • 14 % ash.
    • 0.85% sulfur.
    • 6% total moisture.
    • 33% volatile matter.
    • 6500 kcal/kg net as received.
  • A 50:50 blend of NEC and BWM (premium) coal will deliver a coal with the above specifications expected to be sourced from approximately 20 000 tpm of NEC and BWM respectively. That is anticipated to leave surplus coal intended to be sold into the spot market.
  • The sale will be DAT (delivered at terminal) where title and risk will transfer, and payment will be made shortly after, the coal being discharged from barge or rail, at McDuffie Coal Terminal, Mobile, Alabama.

Loan

  • Marco will loan to AUSA, the parent company of NEC and BWM, US$40 million on the following terms:
    • Three year term repayable in a single amount at the expiration of year three.
    • Interest rate of 14% per annum on the outstanding principal payable monthly in arrears from the advance date.
    • Senior first secured charge over the assets of NEC and BWM.
  • The loan may be repaid early by payment of a termination fee of US$250 000; plus 103% of the outstanding loan amount in year one; 102% of the outstanding loan amount in year two; and 101% of the outstanding loan amount in year three if repaid prior to the expiration date.
  • Proceeds of the loan will be applied as follows (approximate):
    • US$25 million to repay the Collins Street Convertible Note.
    • US$3 million to equipment capital expenditure at NEC and BWM.
    • US$12 million to working capital.

Funding of equipment at NEC and BWM is expected to assist in driving increases in production rates.

Collins Street Convertible Note

The company refers to its announcement dated 24 May 2022 concerning the AUS$42.9 million secured convertible note with the Collins Street Convertible Note Fund. The company advises that the company and the fund continue to work toward completing Tranche 2 of the note, being a face value of AUS$12.2 million. Following agreement of the Marco loan, the company has informed the fund that it intends to repay the note.

Under the terms of the note, as previously advised, and as approved by shareholders at the general meeting held on 3 August 2022, the company will in due course repay the face value of the note together with a repayment premium of 2.5% and in addition, the company will issue to the fund options over ordinary shares in the company. The company will issue an Appendix 3G at the time the note is redeemed and the options are issued.

Strategic review

As advised on 19 July 2022, following completion of the June quarter 2022, the Board has conducted a strategic review of its two operating mines to decide whether it should continue to ramp-up both mines simultaneously, and invest further capital expenditure to do so, or whether it should invest in one and continue the status quo with the other, or indeed idle one or the other on care and maintenance, until the producing mine achieves its target rate of, and steady, production.

The results of the strategic review, which has now concluded, are as follows:

  • Allegiance will continue to optimise performance at both mines simultaneously and reduce expenditure on Tenas to simply managing the environmental assessment review process (no project ready expenditure or steel mill bulk sample for example), and delay the independent feasibility study of Short Creek Underground until the acquisition of Short Creek is completed.
  • Key drivers behind these decisions are summarised below.
    • Generally, month to month production at both mines continues to improve notwithstanding the challenges each mine faces.
    • Allegiance believes it can address and in due course overcome the challenges in a prudent and business-like manner.
    • The Marco off-take contract provides a fixed sales price per tonne for at least one year which is expected to see each mine generate positive operating cash flow at expected production levels and operating costs.
    • The Marco loan provides the capital expenditure and working capital expected to be required for both New Elk and Black Warrior mines to achieve the next stage of development.
  • Challenges and mitigations at the New Elk mine include (many of which were stated in the June 2022 quarterly report) the following.
    • Retention of skilled labour predominantly from the US East Coast coal mine regions of West Virginia, East Kentucky, Illinois and Alabama. The #1 production unit is well manned with a steady work-force starting to achieve excellent productivity. The company is about to trial a seven day on seven day off roster for the #2 production unit with skilled workers from the East Coast.
    • Equipment performance and availability particularly in relation to our continuous miners. The company is currently updating the electrics on one continuous miner and once funds from the Marco loan are received Allegiance will commence an electrical rebuild of a second continuous miner.
    • Performance to date does not warrant the addition of a third production unit at this stage.
    • Isolated roof falls have occurred in both producing sections which has impacted productivity. Allegiance is gaining a better understanding of the geology and has improving visibility and awareness around what type of roof bolting is required when certain roof conditions appear. Roof support density and pillar sizes have been increased to deal with the risk of roof control in the applicable areas.
    • The roof falls have prompted more intensive inspection and review of our operations by MSHA and the mine safety performance will need to improve as well.
    • An increase in rail cycle times with BNSF Rail from New Elk rail load-out to McDuffie Coal Terminal from 12 days to 20 days experienced in the June quarter will be mitigated by the arrival of a second unit train expected in this month, which will be powered by Union Pacific Rail (UP). In addition, Allegiance is advised by both BNSF and UP that rail cycle times will improve to pre-COVID pandemic levels as they both advance their current recruitment and training initiativesto replace staff laid-off during the pandemic.
  • Generally, challenges at the Black Warrior mine relate simply to additional items of equipment required in order to achieve another ramp-up in production. The Marco loan will enable these acquisitions of equipment to be completed. These include the following.
    • Acquisition of lower hour and more reliable drill rigs for blasting waste rock.
    • Swapping our current fleet of D10 dozers for D11 dozers, which will enable greater and more efficient dozer push as more waste rock is produced from the larger blasting capacity.
    • Four more 150 t dump trucks to increase haulage of waste rock and remove the last of the 50 t dump trucks involved in waste rock removal (these trucks have already been purchased on delayed payment terms with the vendor).

The terms of delivery for the remaining two contracted coal sales of 80 000 t each to an Asian customer, entered into in May 2021, are the subject of ongoing negotiation with the customer. Any material developments in this regard will be advised by the company in due course.

The Board is in the process of considering additional equity raising activities to complete the desired funding package for optimisation of its portfolio of assets.

The Board’s immediate objective is for the company to reach steady state production at both mines by the end of the December 2022 quarter relying on the Marco fixed price off-take contract and loan for capital investment and working capital. With an effective one-year hedge against price volatility at a favourable fixed coal price per tonne, management can focus on optimising performance, productivity, and driving unit costs down in readiness for a lower price environment, if that is what late 2023 brings.

The strategic review also noted key opportunities including the following.

  • New Elk mine has significant potential if manpower can be secured and equipment reliability improved.
  • New Elk low sulfur coal (unlike most US coal supplied into the European energy coal market) is an attractive alternative to low sulfur Russian thermal coal. Potential remains with interest from the Asian steel mills as an alternative supply of semi-coking coal to Hunter Valley.
  • Black Warrior mine can also pivot to supply high energy thermal coal, especially when blended with New Elk, to take advantage of the European energy coal market and is positioned well in Alabama to do so.
  • Expansion opportunities at Black Warrior have been recognised and will be further evaluated.
  • Washing both New Elk and Black Warrior coal at a higher specific gravity for a higher ash product, and in some cases by-passing some Black Warrior coal from washing altogether, will improve yield and reduce unit costs while this coal is supplied into the thermal market.
  • Black Warrior mine can maintain future flexibility to pivot back to hard coking coal when appropriate low ash blending coal is available and will look to continue trial cargos to both European and Asian steel mills during this fixed price period.
  • The Short Creek Project is highly prospective in the medium to long term. Completion of acquisition is not finalised due to delay by the Alabama Environmental Agency in splitting the water permit between the surface coal lease and the underground coal lease. The company will assess means of financing completion.
  • The Tenas Project remains a long-term project of merit. Internal analysis of strategic investment options will be undertaken subject to successful environmental assessment application.

In the immediate term, the company notes that it has previously published production targets for both the New Elk and Black Warrior mines. Following the strategic review, the company has determined that until the issues listed above are resolved, it is in the company’s view unlikely these production targets will be achieved and as such they are withdrawn. The company will not be providing production targets in the near term. The company will continue to provide the market with updates to its operations in accordance with its continuous disclosure obligations, including along with updates on issues mitigation and resolution.

The strategic review also concluded that Mark Gray needs to remain closer to the business in light of a number of recent challenges faced in relation to sales and logistics. Gray’s unique skillset and deep knowledge and understanding of the business is seen as complementary to CEO Jon Romcke’s skill set. As a result, the Board has resolved that Mark will resume his role as Chairman of the Board of Allegiance. Mark’s remuneration and terms of engagement shall remain unchanged. The Board takes this opportunity to thank Mr Bernie Mason for stepping into this role during the strategic review. Mr Mason resumes his former position as independent non-executive director.

Read the article online at: https://www.worldcoal.com/coal/16082022/allegiance-coal-completes-coal-off-take-contract-with-marco-international/

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