QGX Likes Baruun Naran Economics

Vancouver — QGX (QGX-T, QGXLF-O) has commissioned a prefeasibility study on its Baruun Naran coal deposit, in the Gobi region of southern Mongolia, following a major resource boost and a positive preliminary economic assessment (PEA) for the project.

Looking at a conventional open-pit operation with an on-site wash plant, early stage economics show a robust net present value (after tax and with a 10% discount rate) of US$481 million along with a 39% internal rate of return. The study projects coal deliveries beginning by 2011 via rail into China.

The PEA is based on QGX’s recently updated resource calculation of 252.9 million measured and indicated tonnes of both coking and thermal grade coal.

The study anticipates a 23-year production life mining a total of 201 million tonnes of coal for average annual output of 9 million tonnes of run-of-mine coal. An overall strip ratio of 4.1:1 (waste bank cubic metres to tonne of run-of-mine coal) is projected.

Typical annual sales from the proposed mine are anticipated at 3.2 million tonnes of coking (metallurgical) grade coal with an ash content of about 10%, about 400,000 tonnes of premium thermal coal (about 14% ash content) and 1.7 million tonnes of standard thermal coal (about 25% ash content).

Cash mining costs are expected to come in at US$23.45 per tonne of coal, including royalties. Coal sales are projected to generate average annual revenue of US$320 million with average after-tax annual net profits of US$90 million. Payback is forecast in 4.3 years.

Initial capital spending to get the mine into operation is projected at US$285 million, with additional ongoing and replacement costs of US$175 million.

About two years of preproduction development (site preparation, infrastructure construction, waste prestripping and stockpiling of coal) is anticipated, and could begin in 2009. At full production, the workforce at Baruun Naran will number more than 600.

In terms of benefits to Mon- golia, it is expected the mine will contribute about US$996 million in taxes and royalties to the government over its oper- ating life. QGX points out that in Baruun Naran’s first full year of operation, the roughly US$50 million in royalties and taxes paid would equal about 2.5% of Mongolia’s current gross domestic product.

Baruun Naran is strategically located near the Chinese coal markets. The premium coking-grade coal produced there will have no problem finding takers in China’s booming steelmaking centres. Likewise, the premium thermal-grade coal from the proposed mine could feed the abundant number of power generating plants in northeastern China. Most of the standard-grade thermal coal would likely be sold within Mongolia for power generation.

The PEA used coal prices (coal cost plus freight) of US$85.49 per tonne for premium coking coal, US$63.72 per tonne for premium thermal coal and US$23.12 per tonne for standard thermal coal.

The company anticipates completion of the prefeasibility study by year-end.

The resource at Baruun Naran is contained in a number of major coal seams hosted in the Permian sedimentary basin environment. The project is located in a 22-km-long northeast-southwest-striking valley extending westward from the large Tavan Tolgoi basin, about 20 km away. Tavan Tolgoi, held by a Mongolian consortium, is estimated to host about 5 billion tonnes of coal resource, with a significant portion of that metallurgical grade and amenable to open-pit extraction.

Drilling within the Baruun Naran valley has tested multiple 2- to 18-metre-thick coal seams in the Tavan Tolgoi Formation with a stratigraphic thickness of more than 800 metres.

In Mongolia since the mid-1990s, QGX acquired its licence for Baruun Naran in late 2002, and started work programs in early 2005. The company has now completed almost 400 drill holes on the deposit.

In addition to its coal project, QGX also has the Golden Hills gold-silver-copper project in western Mongolia, where it completed a positive preliminary economic assessment earlier this year. It is moving to convert the Central Valley zone of the project from an exploration licence to a mining licence and has undertaken an advanced geotechnical drilling program.

Barrick Gold (ABX-T, ABX-N) holds a roughly 9% interest in QGX.

Shares of the aspiring coal miner have recently traded at around $2.40, giving the company a $110-million market capitalization based on its 46 million shares outstanding. The stock has a 52-week trading range of $1.10-$3.88.