Coalspur’s Vista project to start production in 2015

Coalspur Mines (CPT-T) believes its Vista coal project — located 2 km from a Canadian National Railway (CNR) line on the eastern edge of the Rocky Mountains in Alberta — has the potential to become one of the largest export thermal coal mines in North America.

In March, the junior signed a seven-year transportation agreement with CNR that will enable it to transport up to 12 million tonnes a year of coal to the Ridley Island Coal Terminal, a deepwater, ice-free port in Prince Rupert, B.C., about an 11-day’s sail from Asia.

“The agreed terms reduce Coalspur’s projected total freight-on-board (FOB) operating cost by $20 million per year over the first five years of production when compared to the Vista feasibility study,” writes Robin Kozar of RBC Capital Markets in a research note. “Coalspur projects total FOB costs to be $57 per tonne in the first five years of production and below $60 per tonne in the first ten years of production.”

Coalspur and CN have also agreed to build a 6.5 km rail line that will give CN access to Coalspur’s loading site so that the junior can load an entire train in one go. Construction of the rail line is expected to start in this year’s third quarter, and be completed by 2015.

Coalspur had already nailed down a port-allocation agreement with Ridley Terminals, “one of the few coal-shipping ports located on the western seaboard of North America,” Kozar says.  Ridley, he adds, “has significant expansion potential, and provides a shorter shipping distance to Japan and North China, versus the port of Newcastle in Australia.” 

He continues that “the expansion at Ridley from 12 million tonnes per annum to 25 million tonnes per annum is proceeding as planned, and the port is seriously considering increasing annual shipping capacity to 60 million tonnes per annum.”

Other notable developments so far this year include securing a US$350-million senior debt commitment from EIG Global Energy Partners that will fund most of the development capital needed for first production, and hiring Richard Tremblay in February from Teck Coal as Coalspur’s new vice-president of operations, charged with bringing the Vista project into production.  

“Global markets and thermal coal and commodity markets are weak at the moment, and that was part of the pressure in getting the deal done,” Gill Winckler, Coalspur’s CEO, said in an interview. “To secure the US$350 million in these markets was a good accomplishment,” she adds.

Coalspur cannot draw down more than US$157 million of the US$350-million debt facility, however, until it secures more funding to build the project’s first stage at 3 million tonnes per year. On a conference call on April 17, management told analysts there are various parties that are looking into financing agreements for phase-one capital, which they estimate will be around $445 million, assuming contract mining. The US$350-million debt facility has an effective 11% interest rate, made up of an 8% cash coupon per year and principal capitalized at 3%, with the option to pay cash rather than having it capitalized. The cash payments are not due until production starts. At the end of last year, EIG — a leading institutional investor in the global energy sector — had about US$10.4 billion under management. Its clients include pension plans, insurance companies, endowments, foundations and sovereign wealth funds.

Coalspur plans to build the Vista project in two phases. In phase one, development would be broken down into two stages, with the first producing 3 million tonnes of coal and the second producing another 2 million tonnes.   

In phase two the mine would add another 7 million tonnes per year of production starting in 2019.

The company expects to get regulatory approval to start phase-one construction in the second quarter of 2013. (It submitted its final environmental impact assessment and Energy Resources Conservation Board applications to the Alberta government for 5 million tonnes of production on April 12, 2012.)

After the company completes the regulatory process for the first 5 million tonnes per year, it will apply for regulatory approval for another 7 million tonnes annually later this year.

Engineering studies are also underway, and Coalspur is preparing for civil earthworks and pre-development work before June. The company also anticipates completing some bid processes and award contracts to mobilize equipment and start building by mid-year.

The Vista project, which covers 100 sq. km of leases, consists of surface-mineable thermal coal and is designed to reach a maximum production rate of 12 million tonnes per year over a 29-year mine life. Construction is expected to start this year with first production in 2015.

In October 2012, Coalspur completed an optimization study that slashed the estimated capital needed to bring Vista into first production. It’s down 40%, from $870 million to $527 million.

“The revised capital expenditure (capex) budget means that existing shareholders will likely experience limited — if any — equity dilution in 2013, assuming completion of an off-take agreement,” Kozar writes in a 2012 research note to clients.

A feasibility study completed in January 2012 defined a marketable reserve at Vista of more than 313 million tonnes from a recoverable reserve of 566 million tonnes.

“Everyone is of the view that the project is robust, and even at these prices it would be making money — it wouldn’t be making great money, but it would be making money,” Winckler says. “The view is that it’s the one greenfield project that stands out. Of all the thermal coal projects globally it has the resources, the infrastructure and the port and rail, so it ticks all the boxes.”

The coal seams at Vista are also gently dipping and come right to surface, making mining conditions easier.

On a site visit in 2011, management told The Northern Miner that it expects the mine will be similar to the prairie coal mines west of Edmonton that supply coal to the Alberta power plants — a mix of large truck-shovel and dragline.

In addition to the leases it holds at the Vista project, Coalspur holds leases to the south covering 23,300 sq. km that it is calling the Vista South project. Vista South contains 471 million tonnes of coal in the measured and indicated categories and another 605 million tonnes in inferred. The company also owns 144 sq. km of leases on the northeastern boundary of the Vista project that it calls the Vista Extension.

Highland Park, a group of experienced mining executives, is Coalspur’s largest shareholder with a 24.3% stake.

Colin Healey of Haywood Securities describes the Vista project as “peerless across North America,” and notes that the potential scale of the project “is unchallenged across other development-stage company projects, given the combination of scale, access to infrastructure, potential permitting expediency and coal quality.”

But like all projects, it comes with risk. Vista “requires company-estimated capital of between $445 and $527 million to enter initial production, and significant additional capital to expand to full-scale production capacity by 2019,” Healey writes in a research note. “The potential for capex to exceed estimates for both the initial requirement and in support of incremental ramp-up represents a core risk for the company. Furthermore, the company’s success in securing more non-dilutive financing sources for initial capital represents a core risk. Either of these issues could result in potentially dilutive financings beyond those assumed in our model to the detriment of shareholders.”

But Winckler does not seem too concerned. With the US$350-million deb
t facility nailed down, she says “it’s easier to secure the balance in the short-term,” and that “we should go into construction in June with regulatory approval, obviously, but we’re in final discussions on that, and once you’re building the project, I think you de-risk it a lot.”

Winckler also points out that the time is right to build Vista.

“It’s a good time to be building the project when the oilsands are slowing down and projects in general around the world are slowing down,” she remarks. “A lot of big mining companies have cut back on capital projects, so with steel prices where they are and commodity prices generally being weak, it’s a good time to build a mine.”