Fortune rejigs Mt. Klappan feasibility

VANCOUVER–A lot has changed in the two and a half years since Fortune Minerals’ (FT-T, FTMDF-O) last feasibility study for the Mount Klappan anthracite coal project, 330 km northeast of Prince Rupert, B. C. The price of steel has climbed relentlessly upwards. Labour costs have skyrocketed. And oil has more than doubled in price.

“In the interim, since 2005, we saw the escalating costs,” says Julian Kemp, Fortune Minerals’ vice-president finance and chief financial officer. “So the company recognized it had to update the numbers. But don’t forget, you still have to ask yourself why the price of steel is up. Well, look at the price of coal, that’s up too.”

Some aspects of the project are the same. The 2008 feasibility study, like the 2005 one, still envisions running a 3-million-tonne-per-year operation with at least a 20-year mine life, developing an open-pit mine using truck-and-shovel extraction, depending on diesel power and producing a 10% ash, ultra-low volatile pulverized coal injection product.

But other aspects have changed. At $617 million, capital costs are almost $200 million higher. Reserves are also up about 40 million tonnes to 102 million proven and probable tonnes of anthracite coal. The base case price of coal is $50 dollars higher at $150, although the internal rate of return (IRR) is a bit lower. The current study delivers a 28.9% IRR at an 8% discount rate, whereas in 2005 the IRR was calculated at just over 30%.

As for infrastructure, although Fortune Minerals still likes the idea of improving and extending a railroad to the port of Prince Rupert, it has focused on trucking anthracite to port this time round. As Kemp explains it: “For a ten-million-tonne operation, you must have a railroad –and the economics of building it aren’t so bad. But with a three-million-tonne (operation)? That’s a bit harder to justify.”

Kemp says Fortune Minerals is looking to partner on the project and to that end, has retained CIBC World Markets to help shop Mount Klappan around. The hope, he says, is to close a deal within the next three to six months.

A deal would not only help generate share earnings and increase cash flow, but Kemp says the right partner might also have more clout with the B. C. government when it comes to moving the project forward and looking for investments in infrastructure, such as the extension of the power grid and the railroad improvement.

“I mean, how much clout does a London, Ontario-based exploration company have with the premier of B. C.?” he asks. “Not much,” he answers.

But a big Asian or Canadian company would.

Finding a partner for Mount Klappan is also part of Fortune Minerals’ shifting focus. The 20-year-old company is preparing to emerge from its exploration cocoon and metamorphose into a mine operator with its NICO gold-bismuthcobalt project in the Northwest Territories, slated to begin production in 2011.

With plans to develop that asset itself, 160 km northwest of Yellowknife, Fortune Minerals now wants more than ever to find partners for the Mount Klappan project. “For us to develop two projects at once would be too onerous,” Kemp says.

The plan at Nico is to operate both an open-pit and underground mine. So far, Fortune has outlined 22 million proven and probable tonnes grading 1.08 grams gold per tonne, 0.16% bismuth and 0.13% cobalt that would provide for a 15-year mine life. Although the company envisioned beginning operations in 2010, “that has really slipped into 2011,” Kemp says. He says the delay is largely the result of inefficiencies in the Tlicho First Nations’ permitting process.

Not that he blames them. Fortune Minerals is the first company since the Tlicho settled land claims to go through the band’s permitting process.

But in a sure sign the company is gearing up for a positive outcome, Fortune Minerals has bought the Giant Mine processing facility in Hemlo, Ont., and selected Tri-Venture FE&C to dismantle and salvage the property in preparation for the move north.

And although capital costs were slated to come in at about $215 million, Kemp says he expects they will end up at around $250 million. To finance the project, Fortune Minerals is talking with banks to see if it can line up enough credit, rather than having to go to the market and dilute the company’s position.

On news of the feasibility study, Fortune Minerals share price lost 4 to close at $1.58.