(MENAFN - ProactiveInvestors - Australia) Continental Coal (ASX: CCC) has begun producing thermal coal from its third operating coal mine, and its first underground mine, in South Africa " the Penumbra Mine.
First saleable export thermal coal is expected to be produced this month following processing of the run of mine (ROM) coal through the company's nearby Delta Processing Operations, with first sales slated for December 2012.
Penumbra is forecast to produce 750,000 tonnes per annum of ROM coal over an initial 10 year mine life at forecast average total free on board (FOB) costs of ZAR490 per tonne (May 2011 terms), about A53 per tonne.
Importantly, financial settlement of the first Penumbra Coal Mine coal hedge contracts in October and November already resulted in a hedging gain of ZAR2.1 million (A226,013).
In fiscal 2013, sales of about 200,000 tonnes of a high quality export thermal coal are forecast from the mine at total FOB costs of ZAR471 per tonne (A51 per tonne).
This is forecast to generate around US17 million (A16 million) in revenue this financial year and forecast to rise to about US45 million in fiscal 2014, with between US15 million and US20 million of forecast free cashflow based on current export coal prices.
Don Turvey, chief executive officer, commented on the major milestone: "To be able to announce that we have achieved first coal production from the Penumbra Coal Mine is a really significant moment for the company.
"It is the result of a huge effort from our operations team and a number of contractors that have been working together on this project for the past 14 months.
"Penumbra will soon be making its first export thermal coal sales and generating its first cashflow. It is set to be a long-life and low-cost operation which should generate significant and sustainable returns for shareholders."
First thermal coal production from the Penumbra Coal Mine was achieved from underground development activities, as the twin declines were advanced into a full face of the C-Upper and C-Lower Coal Seams.
The declines first developed into the C-Upper Coal Seam in mid-November 2012 and subsequent advances of the declines have now fully exposed the C-Upper and C-Lower Coal Seams.
ROM coal has been stockpiled at the mine and is being hauled to the Delta Processing Operations for processing through the existing wash plant.
ROM coal production from development activities in the declines will continue over the next five days as the first of two 14HM15 Joy Continuous Miners is commissioned ahead of commencing full scale underground mining activities later this month and into December.
Production ramp up
ROM production of 5,000 to 10,000 tonnes for the December quarter 2012 is forecast, ramping up to the targeted ROM production rate of 63,000 tonnes per month by 30 June 2013.
The ROM production will be beneficiated through the existing and adjacent Delta Processing Operations, which comprises a 1.8 million tonne per annum coal processing plant and the 1.2 million tonne per annum Anthra Rail Siding.
Sales of 500,000 tonnes per annum of a high quality export thermal coal RB1 specification coal product are now forecast to begin in the December quarter 2012.
The coal from the Penumbra Coal Mine will be transported by rail to the Richards Bay Coal Terminal and sold under existing offtake agreements into the spot market and under existing coal hedging contracts.
Construction and development activities at the Penumbra Coal Mine are scheduled to continue through to June 2013.
Two of the key activities are additional underground shaft bottom development and the construction of the upcast ventilation shaft.
Capital costs for the ZAR325 million mine development have been predominantly funded from Continental's cash reserves.
The outstanding capital costs are fully funded from drawings under a secured project finance tranche of funding from ABSA Capital.
The start of production from Continental's third coal mine, and its first underground coal mine, in South Africa marks a major milestone.
Importantly, the start of production means additional cash flows for Continental, with the new mine set to add around US17 million in revenue in fiscal 2013, increasing to US45 million in the 2014 financial year.
This is a major step forward in export coal sales and earnings growth.
At current export coal prices, Continental looks to have between US15 million and US20 million of forecast free cash flow going forward.
Continental also has a fourth thermal coal mine in development, where a Feasibility Study has been completed and optimisation work is underway.
The addition of another coal mine operation in South Africa will build further on Continental's record run of mine coal production in the region.
The current valuation of 20.9 million (share price of 0.047) for Continental does not reflect the incoming cash generation profile.
Proactive Investors considers that a fair value share price for the company " given the above and value of other coal assets " is closer to 0.075 to 0.10 in the next 12 months.