Taking the Tiger by the Tail: Unlocking Russian Coal

BRISBANE, Australia - July 24, 2013 - PRLog -- Last week, Russian major Mechel added five years to its plans to bring the Elga deposit into production, first coal now slated for 2018. The development added to the list of new coal regions falling short on promises to bring fresh coal to market, including Mongolia and Mozambique.

Meanwhile, in an isolated state in Far East Russia, home to 50,000 mostly Chukchi people, junior Australian-listed company, Tigers Realm is quietly positioning itself to carve out a position bringing new coking coal supply to Asia, based on a deposit containing an exploration target of between 220mt to 735mt.

Tigers Realm, which listed on the ASX in 2011, aims to develop a large scale, coking coal operation in Chukotka province, with cash costs in the first quartile and exporting to Asia. Almost sound too good to be true? Sovereign risk the first thing that springs to mind?

The semi-autonomous Chukotka province lies just 300km below the Arctic Circle and some of its ports are ice-bound for over half the year. As Tigers Realm, CEO Craig Parry remarks, being so remote and far away from Moscow and the steel producing regions in central Russia, has meant the deposits – known since the 1920s - have not been treated as strategic by the central government. BHP held some of the ground for a while but relinquished the lease which was picked up by Tigers Realm in 2010.

“In Russia, until recently there’s been little export focus and the country was very Eurocentric. Now they see they have a window to Asia and they want to encourage development of an export market,” Parry said.

In its latest country ranking for investment risk, Behre Dolbear Group does not rank Russia favourably on any metrics, but from the key milestones Tigers Realm has hit, this has not been their experience of doing business in Russia. In fact, the ease and speed with which the company appears to have navigated the bureaucracy and got approvals would be the envy of any Australian developer bogged down in red-tape.

Take one simple example: the Minister of Natural Resources of the Russian Federation recently put forward a proposal to the Prime Minister to eliminate royalties on coal extraction for the Far East region where TIG’s deposits are situated. The impact on the cash cost is only of the order of about $1.70/t but the fact a government is talking about removing taxes is noteworthy indeed.

The company’s major asset, the Amaam project, is 35km from a greenfield port site which will be able to load coal year round, according to studies. A pre-feasibility study included a 10mtpa ROM open-pit mine with first production in mid-2017 and a 3mtpa ROM underground mine with first production in 2022.

Cash operating costs for the open-pit are estimated to average US$100.55/t of product, excluding royalties, over the life-of-mine, assuming a 12.3bcm/t strip ratio and product yields of 48.8%, according to a research note from Investec.

So far, Tigers Realm has been awarded a mining lease for Amaam which hosts indicated and inferred resources of 412mt, largely focused on the Chuckchi seam, and is well underway with work on infrastructure, including road and port.

While capex of well over $1 billion will be needed for Amaam, (most likely a combination of debt and equity financing), the company has about $20m in cash to see it through the next phase of studies.

Strategically, the company is now chasing early cashflow from its second project, Amaam North, 40km or so north of Amaam, where Tigers Realm has exploration rights over 30km covering the northern extension of the Chuckchi seam. Coal quality (rank) deteriorates slightly to the north but early drill core indicate a good quality coking coal.

Subject to a pre-feasibility study Amaam North could be producing about 1mtpa of ROM coal by 2015 to be shipped via the under-utilised Beringovsky port, 35km away by road. This port has previously exported 900kt of coal during the five months the bay is not ice-bound.

Capital cost to get a truck and shovel operation up and running are estimated by Investec at around $80m, which the company may tap the market for next year. This will put the company in an excellent position to debt-fund the main Amaam project, hopefully by end 2014.

Labour is not seen as a problem with the closest town of 2500 people having among them 300 experienced miners. Fly-in/fly-out is not uncommon in Russia’s frozen tundra and Parry says the company would probably look to utilize a combo of local workers and miners flown in from Moscow.

“Coal miners in Russia are relatively well paid but still not at the very high rates we see at some Australian coal mines,” he said.

When the company develops the larger and higher value Amaam it will develop a new port further south which will be navigable year-round, with a bit of help from specialist tugs during colder months.

Meanwhile, asked to comment on any impact Mechels’ delay may have, Parry said it might make Tigers Realm more attractive to some of the sovereign wealth funds in Russia as an investment vehicle.

This article first appeared in Australian Coal Report. In addition to the weekly Australian Coal Report, IHS Energy Publishing produces the weekday Inside Coal, weekly Coalfax, Indian Coal Report and South African Coal Report, and importantly, we also deliver key market price indicators for all regions, including the Newcastle Export Index (NEX) and the world's first Coking Coal Index as well as a Database of Prices & Indices.

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