By ETimes
Contango Holdings, the London listed natural resource company developing the Lubu Coal Project in the Zambezi basin has said it will begin coal wash plant installation this quarter as it seeks to start selling washed coal.
Contango is now fully funded to achieve positive cash flows from the sale of coking coal in the near term under its current offtake arrangement and to fund future growth.
Contango chief executive, Carl Esprey said, “Demand for our coking coal, thermal coal and coke products is as strong as we have ever seen. We have an existing coking coal offtake in place, utilising only half of our wash plant capacity and I do not foresee any issues in entering another offtake and doubling our earnings potential from our existing production capacity.
“Most of the site preparation work has now been completed. We are now in full construction mode and opening up the pit further. Our focus remains on being in a position to deliver on first sales by year end before rolling out our coking coal expansion, as well as our thermal coal and coke products.”
The current offtake agreement for the sale of 10 000 tonnes per month of washed coal, at the prevailing MMCZ market price of US$120 per tonne, is expected to provide an estimated margin of circa US$80 per tonne.
With the wash plant being installed this quarter at the Lubu Project has the capacity to wash 20 000 tonnes per month of coal which is double the existing contracted coal production under offtake of 10 000 tonnes per month.
“Therefore, in the current quarter, the company expects to enter additional offtake arrangements for washed coking coal to utilise this spare capacity,” the statement read.
According to the company, any further offtake agreements for coking coal above the 20 000 tonne per month capacity of the wash plant would require the installation of further similar wash plants on site which cost US$1.5-2m each.
The company said it can fund any future capex from internally generated cash flow from the sales anticipated to begin shortly.
Directors want to capitalise on the strong coal pricing and demand environment and given the material coal resource of 2.6 billion tonnes at Lubu, with a significant weighting of coking coal, there is clearly scalability in both production capacity and sales.
As previously reported the company intends to produce coke by installing coke batteries that process coking coal into coke for the industrial and ferro alloy industries.
The capex related to the installation of the coke batteries is circa US$5m and according to reports, the company has received heightened interest from a number of potential partners and off takers with respect to the manufacture of coke at Lubu.
Contango is looking to actively accelerate the coking coal plan, especially given current market prices and ongoing discussions have outlined the margins on the manufacture of coke are as much as four times those achieved on coking coal production at Lubu.
For the avoidance of doubt, the company said it does not intend to raise any additional equity to fund the capex on the installation of coke batteries. “This capital will be sourced from a combination of pre-payment of coke product via offtake, project level debt and the Company’s own cash resources,” the statement read
Contango recently announced a potential thermal coal strategy given the favourable thermal coal pricing and demand dynamics, which has seen thermal coal prices rise more than threefold to all-time highs of circa US$450 per tonne this year.
The miner has received a number of requests for the regular delivery of thermal coal from a variety of international markets and is currently looking to finalise logistics to enable an export solution.
Contango expects that thermal coal could generate margins of over US$100 per tonne and this could be further improved if they are successful in their current efforts to secure a rail transport solution rather than trucking to port – Harare