Prophecy Coal sets out financials for Mongolian power project

Vancouver – Prophecy Coal (PCY-T) has outlined the feasibility of its plan to unlock value from its Chandgana coal deposit by building a 600 megawatt thermal power plant.  

The company is considering the unusual route because the coal at Chandgana is of fairly low quality, coming in at about 3,350 kilocalories per kg, making it less economical to transport by truck or rail.

But with Mongolia projected to have significant power deficiencies going forward, and the sizable deposit only 120 km from the power grid and 350 km from China, the potential exists for the company to instead transport the value of the deposit in the power lines.

The pre-feasibility study just released outlines a post-tax US$364.7-million net present value and a 21.9% internal rate of return for the project, based on a 12% discount rate, a 10% debt interest rate, a 30-year life and an exchange rate of 1,250 Mongolian tugriks to the US dollar.

The project will tap into the two deposits at Chandgana. The smaller, but already permitted, Chandgana Tal deposit with 141 million measured tonnes of coal and a 0.5 to 1 strip ratio will be directly beside the power plant. The larger, yet-to-be permitted Chandgana Khavtgai hosts 1.05 billion measured and indicated tonnes of coal, has a strip ratio of 2.2 to 1 and sits 9 km away.

Being a power plant rather than a pure mining operation the Chandgana project is sensitive to both electricity tariffs and coal prices. For the base case study Prophecy assumed an electricity tariff of 6¢ US per kilowatt hour, including coal, while a 0.5¢ US or 8.3% increase would bring the NPV to US$473.4 million and the IRR to 24.8%. Mongolia currently imports some of its power from Russia at 8¢ US per kilowatt hour.

Prophecy Coal expects capital costs for the power plant, transmission lines and administration to come in at US$744 million, not including mine costs. The company plans to raise 30% of the money from equity and the rest from debt with 10% interest and a 10-year payback. Capital costs translate to an estimated 2.23¢ US per kilowatt hour.

The Mongolian Government has already given Prophecy approval to build the project so Prophecy’s next goals are to secure power purchase agreements and continue with engineering, procurement and financing, all of which should be completed later this year. The company plans to start construction in the second quarter of 2013 and finish two years later.

Looking further ahead, Prophecy envisions ramping up the power plant to 3,600 megawatts and then exporting excess power to China.

As to Ulaan Ovoo, Prophecy’s other main asset, the company commissioned the mine in late 2010 but it  is not producing at anywhere near the levels expected because of trouble securing acceptable off-take agreements. Sitting near the Russian border in Mongolia’s north, the 209 million measured and indicated tonnes at Ulaan Ovoo are of higher quality than Chandgana with a minimum of 5,000 kilocalories per kg, but problems securing rail and port allocation has set back the off-takes and mine ramp up. The company reports it will continue to pursue the allocations later in 2012 but is concentration on Chandgana for now.

In 2011 the company produced some 200,000 tonnes of coal from the mine but it sells a good portion of that at or below cost to local power plants in Mongolia’s north. In 2012 Prophecy expects to produce some 300,000 to 500,000 tonnes of coal at Ulaan Ovoo.

Prophecy Coal’s share price climbed 4¢ or 8.7% to 46¢ on the Chandgana news with 3.2 million shares traded. The company has a 52-week share price range between 39¢ and $1.14. The company has 201 million shares out or 237 million fully diluted.