Morien Resources (TSXV: MOX; US-OTC: APMCF) is three steps closer to putting the massive Donkin coal deposit into production next year.
In July the federal and provincial governments granted the project all of the environmental-assessment approvals it needs to advance to production, and earlier this month, Morien submitted an offer to Glencore Xstrata (LSE: GLEN) to acquire the mining giant’s 75% stake in the project.
Xstrata decided to sell its share in the project in April 2012 because it was focused on larger-volume, multi-project mining complexes, but was unable to find a buyer. It called off the search in March 2013, with the understanding that it could work out a deal with Morien.
Before Morien could make an offer, however, it had to find a potential operating partner, with which it could advance the project and lock up an off-take partner to buy the coal, and enhance the odds of getting project financing.
These two steps were completed earlier this year, when Morien put the finishing touches on a memorandum of understanding (MOU) with a potential operating partner and finalized a letter of intent (LOI) with an off-take partner.
“With Donkin fully permitted, an operator lined up, and a solid sales base with an off-take partner, we have now reached the stage where we can undertake the last step of the transaction with Glencore to arrange reasonable terms for the purchase of this world-class asset,” says the company’s manager of corporate development, Dawson Brisco.
In an interview Brisco described the MOU and the LOI as “milestones” for the company, but declined to identify either party in the negotiations.
In previous statements the company has made over the year, any potential joint-venture partner — whether a producer, trader or steelmaker — would have to have the right operating team in place, with both the technical and financial wherewithal to operate an underground mine. And in terms of an off-take partner, the most logical would be a local utility in Eastern Canada.
Nova Scotia Power is likely the obvious choice. Last year it imported 1.7 million tonnes of thermal coal and owns two thermal-generating stations on Cape Breton Island: the Lingan generating station and the Point Aconi generating station.
Donkin’s rich coal seams lie under the Atlantic Ocean, and will be accessed via two 3.6 km tunnels that were built in the 1980s by a federal organization called Devco. Between 1977 and 1988, Devco spent $100 million completing the tunnels and drilling 11 holes, which identified eight coal seams ranging from 0.5 to 4 metres thick.
The deposit lies within Nova Scotia’s Sydney Coalfield, a large coal basin of Carboniferous age extending north and northeast from Cape Breton Island under the Atlantic Ocean towards Newfoundland. According to Donkin’s technical report, open-cut mining and submarine underground mining have been carried out in the area for more than 150 years, and the province’s last underground mine — the Prince mine — closed down in 2001.
The Donkin project is 30 km from Sydney Harbour, a deepwater port that the government dredged for $38 million more than a decade ago to accommodate Capesize vessels.
A May 2011 prefeasibility study estimated that Donkin’s after-tax-net present value, at an 8% discount rate, would be in the order of US$1.1 billion, with a 36% internal rate of return.
Technically owned by the Nova Scotia government, the deposit holds 227 million tonnes of indicated resources and 254 million tonnes of inferred. Coal from Donkin’s target Harbour seam is characterized by low-ash, high-energy content, high fluidity, a high crucible-swell number and medium sulphur levels.
Dawson says that Donkin would produce “a crossover product of high-quality thermal and metallurgical coal” for more than 30 years at a 3.5-million-tonne annual production rate, or 2.8 million tonnes of saleable coal a year.
Given the deposit’s “simple geologic conditions” and “short transportation distance,” he adds, total cash costs should ring in at US$58 per tonne.
Seventy-five percent of the coal will be targeted at the international market, and 25% at the domestic and export thermal coal markets.
Brisco reasons that Donkin’s coal could compete with its peers on the eastern seaboard of the U.S., because the project is close to deepwater port facilities.
“The coal at Donkin has a significant delivered-cost advantage relative to its peers in Australia, Canada, Europe and the U.S.,” he outlines in a follow-up email. “While geographically proximate to Europe and South America, Donkin coal is also highly competitive into Asia.”
In terms of long-term coal demand, he adds, the European Union remains one of Donkin’s target markets. The 28-nation bloc imports the same amount of thermal coal as China does, he points out, and Germany is adding 5 GW of coal-burning capacity this year alone, with another 3 GW planned for 2014.
Brisco says management is shooting to be in production in late 2014, or early 2015, as it is essentially shovel-ready.
“There’s not a whole lot that needs to be done before mining can start,” he explains. “There is a little bit of remediation work on the tunnels, but that shouldn’t take any longer than 10 to 12 months.”