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A look at why this up-and-coming coal region is attracting the attention of major multinational mining companies — and how coal investors can profit.
In the report, Przybylowski highlights junior mining firm Colonial Coal International (TSXV:CAD) as one stock to watch. Desjardins is also initiating coverage on Cardero Resources (TSX:CDU), another junior miner in the Peace River area.
Desjardins sees a lot of upside in Colonial. For one, the company’s properties are close to projects owned by Anglo American (LSE:AAL) and Xstrata (LSE:XTA), both of which are considered potential buyers.
Colonial also seems to have a handle on transportation infrastructure — something that bedevils mining operations worldwide. The company has entered into an agreement with local First Nations and privately-held Hillsborough Resources to acquire land at Watson Island, near Prince Rupert, for a possible future bulk-shipping terminal.
“In addition,” Przybylowski writes, “Colonial’s wholly owned properties are believed to contain high-quality hard coking coal, a relatively scarce product worldwide which commands a premium price on the seaborne market.”
Metallurgical coal reserves give Peace River an edge
The Peace River region, which stretches 400 kilometers across Northeastern British Columbia, appeals to producers because of its abundance of metallurgical coal, of which hard coking coal is a prime grade.
Unlike thermal coal, which is used for power generation, prices for metallurgical coal have remained at higher levels in the past few years. That’s because the mineral, which is used as fuel for blast furnaces in the steelmaking process, has remained in demand largely due to the ongoing urbanization of China, India, and other emerging economies — a trend that is expected to hold over the long term.
As well, according to Przybylowski, the metallurgical coal market has remained “tightly balanced” as opposed to the market for thermal coal, which has been held back by oversupply.
That’s partly because metallurgical coal is produced in relatively few countries. According to Anglo American, Canada, the US, and Australia together make up 90 percent of the seaborne (or exported) metallurgical coal market.
Xstrata has been snapping up Peace River assets
Spurred by the Peace River’s high-value metallurgical coal reserves, major miners have been making big investments in the area in recent years.
Of these companies, Xstrata has been among the most active. In March 2012, it paid Talisman Energy (NYSE:TLM,TSX:TLM) $500 million for the Sukunka hard coking coal deposit. According to Xstrata’s press release announcing the deal, Sukunka has an NI 43-101 compliant coal deposit of 236 million tonnes measured and indicated, with potential for further expansion.
“Based on our due diligence and technical analysis, Sukunka has the potential to be a high quality metallurgical coal mine,” said Xstrata Coal chief executive Peter Freyberg.
“Once developed, Sukunka would meaningfully increase our exposure to hard coking coal, while unlocking synergies with our neighbouring assets in the Peace River coalfield and providing additional regional scale.”
Sukunka was the latest in a string of acquisitions Xstrata has made in the Peace River area. In July 2011, it bought privately-held First Coal, which held licenses or license applications for 94,000 hectares in the region, for $147 million.
In October 2011, Xstrata added Cline Mining’s (TSX:CMK) Lossan deposit for $40 million. Lossan contains a measured and indicated NI 43-101 compliant resource of 186 million tonnes measured and indicated.
Other majors are also increasing their presence
Anglo American, too, has been adding to its Peace River assets. In 2011, it bought the 25.2 percent of the Peace River Coal Limited Partnership that it didn’t already own, plus related rights and royalties, for $166 million.
Peace River Coal currently mines metallurgical coal at its Trend Mine in the Tumbler Ridge area. It also has a 50 percent stake in a joint venture to explore and develop the Belcourt and Saxon properties.
“Peace River Coal is a large and high-quality coking coal resource of approximately 1 billion tonnes, on an attributable basis, supported by well-developed power, rail and port infrastructure,” said Seamus French, CEO of Anglo American’s metallurgical coal business.
“We see significant resource upside and plan to invest in further exploration studies to ascertain its full long-term potential. In the near term, we will be progressing a feasibility study to increase production from 1 Mtpa to 3.5 Mtpa by 2015.”
Which brings us back to Colonial Coal. The company’s Huguenot property, which is the most advanced of its two holdings, is near the Saxon property.
On July 18, Colonial released an updated NI 43-101 compliant resource estimate that showed a measured and indicated 92.2 million tonnes of hard coking coal, up 104 percent over its previous estimate. Its estimated inferred resource rose 271 percent, to 38.2 million tonnes from its previously forecast 10.3 million tonnes.
That expanding resource, along with the property’s promising location, are two reasons why Colonial could be the Peace River region’s next takeover target.
Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.