A Russian Arctic Coal Dream Fades
A plan by a small Australian-listed company to build two massive coal mines in the Russian Arctic is teetering on collapse as local indigenous landowners voice their concerns, the coal price continues to freefall and banks remain wary of funding the project.
Tigers Realm Coal is a newcomer to the coal industry, having floated on the Australian Stock Exchange (ASX) in August 2011 touting grand plans of building the huge new Amaam metallurgical coal mine in Russia.
Like most coal projects being promoted at the time, the proposed Russian project was big.
In an October 2011 investor presentation Tigers Realm Coal said that building a 5.3 million tonnes a year mine plus the development of a new coal export terminal and associated infrastructure would cost a cool US$1.45 billion. With metallurgical coal nudging US$289 a tonne on the export market in 2011, the estimated production cost of US$88 a tonne looked like a peripheral concern.
Before Tigers Realm Coal arrived on the scene the indigenous landowners – who are heavily reliant on salmon fishing – had a long struggle before finally winning legal title to an area of land around the Amaam Lagoon, near the site of the coal company’s proposed project.
In the decade before Tigers Realm Coal arrived, landowners had objected to the impact of coal exploration. Tigers Realm Coal’s drilling program, which began in late 2010, has compounded the community’s alarm with damage caused by the movement of heavy equipment over the fragile tundra and in the protection zone of Amaam Lagoon during the sockeye salmon breeding season.
Aside from its Arctic coal dream, Tigers Realm Coal was also touting the prospect of developing its Landazuri coking coal project in central Colombia. Landazuri, the company claimed, had a potential resource of 21 million tonnes, with perhaps hundreds of millions of tonnes more.
With one proposed project in Russia to cater for the Asian steel centres of Japan, Taiwan, South Korea, China and India and a Colombian project to cater for the European market and Brazil, the company thought it was well placed to appeal to investors.
In 2011 big-ticket plans for huge new metallurgical coal mines in Mongolia, Mozambique, Indonesia and Australia were all the rage.
Tigers Realm Coal aimed to raise A$250 million from their initial public offering but this proved overly-optimistic and had to be dramatically scaled back twice. (Paywall) Finally the company had to settle for raising a much more modest A$37.5 million.
No sooner had Tigers Realm Coal begun to trade on the ASX than the seaborne metallurgical coal price began to tank and the company’s share price followed it down. After starting out trading at 44 cents each, the company’s shares now sell for just 7 cents.
As the global metallurgical coal price dropped Tigers Realm Coal was forced to pare back its ambitious plans. Early on in 2012 the Colombian metallurgical coal project was jettisoned.
The high global metallurgical coal prices of 2011 had enticed others into the market too, resulting in new mines – especially in Australia – being commissioned at the very time that there was a dramatic slowing in Chinese demand. Increasing global oversupply ensured that the price of seaborne metallurgical coal kept on falling making Tigers Realm Coal’s Arctic coal dream become ever more implausible.
As steel-intensive urban construction in China slowed and the government sought to emphasise the expansion of service sectors rather than heavy industry, the need for new metallurgical coal mines evaporated.
Adding to the coal industry’s woes was the Chinese Government’s crackdown on major sources of pollution following the January 2013 ‘airpocalpyse.’ Just as coal-fired power stations are under pressure from regulators to clean up or close down, so too are coal-burning steel mills. With reports of over 400 million tonnes of excess steel production capacity in China, metallurgical coal imports have plummeted, including from its near neighbours of Mongolia and Russia.
Faced with a metallurgical supply glut and falling prices, Tigers Realm Coal had no option but to change tack. Instead of going for the big new coal mine and port, the company opted to go for a far cheaper option: the Amaam North project.
Flicking the switch to Plan B
Tigers Realm Coal’s Plan B consists of what it refers to as “Project F”: a small low-cost mine producing a little over 1 million tonnes a year to be exported through the existing small capacity dock at the Beringovsky port, 35 kilometres from the mine. (Tigers Realm Coal bought the rights to the port in June 2015 for US$5.1 million, on condition that it continues to export a small volume of coal from the nearby Nagornaya mine). The company’s plan is to run the mine for 11 years and use the profits from a low-cost operation to underwrite the development of the far bigger Amaam project.
In a presentation to the Company’s Annual General Meeting in May this year Tigers Realm Coal’s Chairman Tony Manini said the project would cost a whisker over US$133 million. In a May 2015 investor presentation the company claimed (p.6) that the project would be profitable based on the estimates of future metallurgical coal prices by Wood MacKenzie, a consultancy with a reputation for being boosterish on coal. However, Tigers Realm Coal hasn’t explicitly said what price it was basing its profitability assessment on.
However, in its reports and presentations the company has said that coal from Project F would sell at a 15 per cent discount to the Hard Coking Coal benchmark price, presumably due to lower coal quality. Given the current metallurgical coal benchmark of US$85 a tonne – but still falling – Tigers Realm Coal would be getting in the order of US$72. With a gross cash production cost of US$63 a tonne, there is precious little margin.
One other complicating factor is that Tigers Realm Coal says (p.9) that in the first 2-4 years the bulk of coal produced would be thermal coal, which currently sells for less than the proposed Project F production cost. If the thermal coal can’t be sold, the company’s cash flow will be worse and the production cost of the metallurgical coal per tonne would be higher.
To make matters worse, Tigers Realm Coal doesn’t have sales agreements covering all the coal they propose producing. Nor does Tigers Realm Coal have – at least at this stage – any bank willing to fund the development of the mine and related facilities.
Without any existing projects to generate money, the only cashflow the company could possibly generate is by trying to entice more shareholders by spruiking its Russian Artic coal dream.
Believers in the project do exist: in April 2014 Tigers Realm Coal attracted a A$36 million investment from the Russian private equity firm Baring Vostok Mining and an A$16 million investment by the Russian Government’s Russian Direct Investment Fund.
Apart from having two major Russian investors on side, the biggest factor running in favour of the project has been the dramatic depreciation of the Russian rouble, which has fallen by almost half against the US dollar since the start of 2014. The depreciation of the rouble has in large part been caused by the fall in the international oil price, along with the impact of economic sanctions imposed on Russia over its role in the civil war in Ukraine.
With coal traded in US dollars and most of its costs likely to be in roubles, the project could be viable if the metallurgical coal price goes up, the rouble stays low and willing lenders can be found. However, few analysts are prepared to argue that metallurgical coal prices have yet bottomed while thermal coal is increasingly viewed as in structural decline.
While Tigers Realm Coal says it is aiming to start the project by the end of 2015 and ship its first coal by early 2016, which is perhaps more a reflection on how precarious the finances of the company have become.
In their quarterly report to June 30 – which was issued in late July – the company said it had just $A13 million cash at hand and planned to spend A$3 million of that by the end of September. In their 2014 annual report released in May the company soberly said (p. 28) ”the ability of the Group to fund the ongoing working capital requirements beyond 31 March 2016 is uncertain.”
Plan C anyone?
By early September 2015 even Tigers Realm Coal had to concede that Plan B was on the optimistic side.
In a statement to the Australian Stock Exchange, Tigers Realm Coal had sobering news for shareholders: it was planning to write-down the asset value of the Amaam and Amaam North projects by between A$145-155 million when it released its financial statements for the first half of 2015 on September 11.
In its 2014 annual report the company had valued the two projects at A$196.5 million. The company also listed combined liabilities for the projects as being A$77.45 million, giving a residual value of a whisker over A$119 million.
While the company sunnily stated that the write-down would have “no cash flow consequences”, the reality is that no commercial investor is likely to touch the project. With liabilities on the projects over A$24.9 million greater than the notional value of the project, what is there to borrow against?
In a separate announcement on the same day Tigers Realm Coal advised shareholders that it had been offered US$23 million by the Russian Government’s Fond Vostok to cover the cost of building the 35-kilometre access road from the port to the Project F minesite. However, the funding came with a big condition: the company would only get the money if it had legally binding agreements for an extra US$120 million for the Project F mine.
With the chances of raising the extra funding looking exceedingly remote, the company has now flagged the possibility of Plan C: a 200,000 tonnes a year mine costing US$25 million which it claims could be “cash flow positive as early as 2018.”
With local concern about the project increasing, Chinese metallurgical coal imports falling and along with it the price on the global market, Tigers Realm Coal may well not get much further before they run out of money.