The company has, in recent months received a number of unsolicited approaches from buyers of thermal coal (ranging from trading houses to industrial consumers) from Africa, Europe, and Asia. In the last 12 months, it is well documented that thermal coal prices have increased dramatically from approximately US$125/t to US$450/t due to the increased demand from energy displacement and severe shortage of supply due to closure of thermal coal mines.
The Lubu deposit contains significant quantities of both coking and thermal coal, and has a current NI 43-101 resource totalling more than 1 billion t of coal. The company has initially focused on extraction of coking coal from Block 2, given the seams have strong coking coal characteristics and thermal coal was historically seen as a by-product. At Block 2, it is expected that approximately 60% of coal extracted will be thermal coal, whilst 40% will be coking coal.
The company continues to focus on delivering the coking coal and coke development strategy outlined below, however, it believes it can create substantial additional shareholder value by also selling thermal coal internationally. The company believes the development of thermal coal sales would only require modest capital costs, funded from internal cash flow, to increase the scale of operations and infrastructure, whilst the cost of mining is negligible as the thermal coal is effectively a by-product of the coking coal mined. Given the thermal coal price movements and current interest expressed in the product, the company is now exploring the feasibility of exporting thermal coal internationally via ports outside of South Africa (which no longer has export capacity).
The company anticipates that it will be able to deliver 10 000 t of coking coal and 10 000 t of thermal coal per month based on current capacity. Also, the company believes it can expect to benefit from margins of US$100 – 150/t on sales of thermal coal based on recent offtake discussions and in the current thermal coal pricing environment. The company anticipates it can begin delivering thermal coal in 1H23 subject to finalising transport and export routes.
Carl Esprey, CEO of Contango, commented:
"The global energy crisis has seen the demand for thermal coal dramatically increase, which in turn has been reflected in the thermal coal price, which has nearly tripled over the last year. What was initially a by-product in our coking coal and coke development plan, is now a highly profitable and complementary product.
"Whilst no one can be certain how long the market imbalance and demand for thermal coal will remain at these levels, or potentially higher, given the synergies with ongoing operations and limited additional costs, the ability to initially generate over US$10 million/yr of additional earnings by selling our thermal coal makes clear financial sense.
"At over a billion t of coal, the Lubu project is vast. The company always intended to expand its production capacity of coking coal and coke given the size of the deposit and highly attractive economics. The foreseeable market conditions will also now enable thermal coal to be brought into the development scenario during 1H23.
Read the article online at: https://www.worldcoal.com/coal/22092022/contango-holdings-provides-lubu-update/