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TABLE OF CONTENTS Jan 10 - 16, 2011 Volume 96 Number 47 - 0 comments

Coalspur develops Vista project in Alberta

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By: Trish Saywell
Hinton, Alberta 2011-01-10

Four months after he was hired as managing director and chief executive of Coalspur Mines (cpt-t, cpl-a) Gene Wusaty was still working out of his home and a local coffee shop in Calgary and putting business expenses on his personal credit card.

Today the company's flagship Vista coal project just outside the town of Hinton at the foot of the Rocky Mountains in Alberta has proven up a project with a 31-year mine life and 9 million tonnes a year of saleable thermal coal that will be sold to markets in Asia.   

Vista will be an open-pit operation producing 18 million tonnes of run-of-mine coal a year, within 2 km of the Canadian National (CN) Rail. 

CN has allocated space to Coalspur on its track for a coal loadout just east of Hinton, a scenic town of 10,000 people, 280 km west of Edmonton, whose council strongly backs the project. 

Vista's coal will be transported 1,000 km from Hinton to the Ridley Island Coal Terminal, a deepwater, ice-free port in Prince Rupert, B.C., about an 11-day's sail to Asia.  

"We've got rail right outside our doorstep and anybody with port and rail capacity will do well in today's coal business," Wusaty maintains.   

The rail siding and load-out facility to the CN Rail line Coalspur plans to build will be within 2 km of some of its leases. It will include a 7-km rail spur designed to handle up to 176 cars with a potential capacity of 20,000 tonnes.

"To build a new rail and coal port is infrastructure, is expensive and difficult, so we are in a bit of a unique position," explains Wusaty.

Wusaty should know because his career in coal mining spans nearly three decades. Prior to joining Coalspur he was president of the coal division at Ivanhoe Mines  (ivn-t, ivn-n, ivn-q) including a stint as chief operating officer for SouthGobi Energy Resources (sgq-t) and its Ovoot Tolgoi coal deposit in Mongolia. Wusaty has also worked for Grande Cache Coal (gce-t), Elk Valley Coal, Fording Coal and Quintette Coal.

Coalspur, headquartered in Perth, Australia, acquired the 87.8-sq.-km Vista property in 2008 when it was still a small shell company called Xenolith and brought Wusaty on board to run the operation out of Calgary.

Wusaty likes the Vista project for a lot of reasons. It is in the heart of coal mining country and in a province that, according to a 2010 mid-year update of the Fraser Institute's Survey of Mining Companies, is now seen as the world's most attractive jurisdiction for mineral exploration and development.

But Wusaty also likes the Vista project because of its size. The deposit could become the largest export thermal coal operation in North America and one of the top-tier mines globally producing thermal coal for export, he says.

"In North America there aren't any dedicated export thermal coal projects that are bigger and with a reserve that can still get larger," he notes. "This mine will be very 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, which results in low operating costs."

The coal Vista will produce should also sell very easily into Japan, Korea and China, he says. Sherritt International's (s-t) nearby Coal Valley mine has been selling its coal to Japanese customers since the 1980s.

Already Coalspur is attracting interest from Asia. "With such bullish coal markets we continue to have initial discussions with companies interested in Vista," he says.  

Wusaty believes Vista could be in production as early as 2014. "If everything goes well we'll be in full feasibility in the first quarter of 2011 and by the end of 2011 we expect to get board approval to go ahead."

So far, Coalspur has raised $120 million in four financings and is sitting on $18 million in cash with no debt. 

Management estimates it will spend about $26 million this year, which will include an upcoming feasibility study, exploration and property payments. Coalspur's burn rate in 2011 will be about $2 million a month.

In Toronto, Coalspur is currently trading at about $2 per share, up from its October 2010 TSX-listing price of $1.30 apiece. The junior has 435.1 million shares outstanding. 

Crunching the numbers

In December 2010, Coalspur released a preliminary economic assessment (PEA). The PEA calculated cash operating costs deliverable free-on-board Ridley, and excluding royalties, would amount to about US$51 per tonne during the first 10 years of production and roughly $56.50 per tonne over the first 20 years. Life-of-mine operating costs come in at about $60 per tonne.

In the first decade of production, annual cash flow is estimated to fall in the range of $361 million and $375 million over the mine life.

"The coal seams are gently dipping and come right to surface and the mining conditions are relatively easy," Wusaty says. "We have a beautiful 10.2-to-1 strip ratio over the mine life and our mine design allows for low operating costs especially in the first ten years of operation."

Development expenses to first production are estimated at $580.9 million and include building infrastructure such as conveyors, a coal load-out, tailings area and ancillary buildings.

Additional development costs of $348.2 million to reach full capacity of 9 million tonnes a year include run-of-mine handling equipment, a second process plant module and additional mining equipment that will be purchased at the four-year mark.

Management is looking at ways to reduce the $930 million in capital with capital leases on equipment, mining contractors, and possibly buying and upgrading used draglines.

Half of the capex will be spent on equipment including two 72 cubic metre second-hand draglines, 56 cubic metre electric cable shovels, 220- and 360-tonne haul trucks and 311 millimetres of blast-hole drills. (Each of the sixty-five 400-tonne trucks the company plans to buy cost about $6 million apiece.) 

Based on the prefeasibility result, Coalspur expects to pay off the project in four years.

Vista's proven and probable marketable coal reserves add up to 260.1 million tonnes defined from 522 million tonnes of recoverable coal reserves.

National Instrument 43-101 compliant measured and indicated resources total 920.5 million tonnes and inferred resources add 282.3 million tonnes. The resource calculation was based on drilling by Coalspur in 2010 and drilling by previous owners Manalta Coal and Esso Resources in the 1980s and 1990s.

The tonnes are large and the geology is simple, Wusaty says, explaining Vista is a gently dipping limb of an anticline - the same coal formation Sherritt is mining at Coal Valley to the south.

Vista is a deposit with no folding or faulting, he adds. "The coal is reasonably flat, more typical of prairie geology and not the more complex geology you find in the mines located in the mountains."

Moreover the land is covered in second-growth timber. "We're not going to be displacing any people," he says. 

There are three main seams at Vista, averaging in combined thickness from 25 to 30 metres over a strike length of 20 km. (The minimum recoverable cutoff for the seams used in the prefeasibility study was 0.5 metre.)

The coal is low-sulphur, high-volatile, bituminous C thermal coal with a thermal value of 5,800 kcal/kg.

Vista's coal will be indexed for pricing against Newcastle Coal, the benchmark for thermal coal sold to Asia. Consulting firm Wood MacKenzie estimates Vista's coal will sell at a 6% discount to the Newcastle price. At the end of December, Newcastle coal was selling above US$120 per tonne. 

The timeline

The focus in the Vista project's first phase is to initially develop a portion called McLeod River, which already has an existing mine permit for producing 4.2 million tonnes of saleable coal and comes with an existing environmental impact assessment permit. 

Currently Coalspur is working with Alberta regulatory agencies on the framework for moving ahead with the project. "The existing feasibility study on McLeod River was completed, put on the shelf because thermal coal prices were low in the 1980s and 1990s," Wusaty says. "In Canada everyone has been focused on coking coal and nobody was looking at thermal coal until we started to consolidate the properties that now form Vista."

Coalspur believes it can complete permitting requirements for McLeod River by the first half of 2012 and major project construction can start in the second half of that year. The project could then be commissioned with the first coal mined in the fourth quarter of 2013. Coal sales could start as early as the first quarter of 2014.  According to the prefeasibility study, Coalspur could reach a production rate of 2 million tonnes for the full year.

About 60% or $590 million of the development capital Coalspur has allocated for the Vista project will be spent on the first phase or the 4.2 million tonnes of coal at Mc-Leod River. But the infrastructure being built will be constructed on a scale with a capacity of 9 million tonnes.

Wusaty calculates that the operating life-of-mine cash flow for the project should be about $375 million.

The mining approach will be based on 15-metre benches along strike. In the first 30 years, waste dumps will be situated within an average one-way haul distance of about 4.5 km, with backfilling of the pit used where possible to reduce haul distances. The average coal haul to the coal dump point will be within 5 km.  

"We'll be backfilling as we go so we can complete reclamation work sooner," he explains.

About 6 km to the southwest of the Vista project is Vista South, an area spanning 196.7 sq. km. Vista South was drilled by previous owner Denison Mines (dml-t, dnn-x) in the 1970s and 1980s and has a 168-million-tonne resource.

Drilling programs are now underway at Vista South and Coalspur believes the project has the potential to host a large coal resource on the limbs of a large syncline, which extends for about 25 km on each limb.

"Vista South is different from Vista in that the geology is more complicated," Wusaty says. "Vista South has the potential to be developed as a satellite operation one day. We'll probably be drilling there for the next several years to see the extent of what we've got. We have a big coal syncline with a lot of potential."

The coal scene  

Coal mining in this part of Alberta has been going on for more than a century.

Teck Resources' (tck.b-t, tck-n) Cheviot mine is about one hour south of the Vista project and Sherritt's Coal Valley thermal coal mine is about 20 km to the south.   

Alberta produces about 30 million tonnes of coal a year and about 60% of its energy comes from coal. The province is also home to 12 coal-fired power plants, with more in the works. Capital Power and Trans-Alta have just commissioned Keephills, a 500-megawatt supercritical power plant 70 km west of Edmonton, and Maxim Power is currently working through regulatory channels for a proposed 500-megawatt supercritical plant at Grande Cache, about 150 km from Hinton.

The new plants being built today are supercritical and run on hotter temperatures and higher pressures meaning that less coal is required to generate the same amount of power.   "The new plants are more efficient and they can meet the criteria on NOx/SOx particulates," Wusaty says.

Currently about 25% of Canada's national energy needs come from coal. The country produced about 63 million tonnes of coal last year. Of that, 28 million tonnes was thermal coal (burned in Canada) and another 5 million tonnes was thermal coal destined for the export market. The remaining 35 million tonnes was coking coal.

And according to Wusaty, it's getting harder to find new high-quality thermal and coking coal projects. "Take a look at all the more exotic places people are looking for coal these days," he says, "Mongolia, Siberia, Mozambique. The easy coal deposits are mostly all gone and in many traditional coal exporting countries projects lack infrastructure such as rail and ports."

As for political backing for Coalspur's project - it doesn't get much better than Hinton. The town, just 50 km west of the gates to Jasper National Park, on a two-lane highway, boasts a lumber industry, coal mining, and oil and gas projects. The town is building a 100-acre industrial park at the same time as it is diversifying into eco-tourism and building two new subdivisions to accommodate an expected 12,000-strong population by 2012.

"We're a well-planned community that makes no apologies about how we make a living," Bernie Kreiner, Hinton's town manager, told a group of analysts and media during a recent presentation in Edmonton.

"The town is run like a professional business and it's very refreshing," Wusaty adds. "Nothing is guaranteed in the mining business, but if you don't have the community behind you it becomes really difficult."

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