Prophecy Coal: Mining

The Company

Prophecy Coal is an international company focused on developing its Ulaan Ovoo coal project and Chandgana 600-MW mine mouth power plant project in Mongolia. The company’s stock trades on the Toronto Stock Exchange, OTC Markets QX and the Frankfurt Stock Exchange with current market capitalisation of around $20m.

The Ulaan Ovoo mine is located in Selenge province of northern Mongolia. The mine is 17 km from the Mongolian-Russian border and less than 140 km west of the Trans-Mongolian Railway. Total resources are over 200m tonnes of high-quality thermal coal with an average calorific value of 5000 kcal per kg, low ash (10%) and low sulphur (0.5%). The firm invested over $60m into the development of Ulaan Ovoo, which includes mine equipment, infrastructure, roads and bridges. The mine is producing about 40,000 tonnes per month and supplies Mongolian industrial customers such as cement factories, metallurgical plants, direct reduced iron plants and railways. Coal price trends and demand in Mongolia are very encouraging, resulting in strong margins.

Development Strategy

Prophecy is projecting significant ramp up of coal sales and production from Ulaan Ovoo in 2014-15. The company is planning to enter the residential coal market in Mongolia and coal market in the Republic of Buryatia, Russia. Residential coal consumption in Mongolia exceeds 1m tonnes per year and Prophecy is planning to sell coal in major residential areas from September 2014. The Buryatia coal market consumes 5m-6m tonnes of coal per year.

Due to the proximity of the mine to Russia and high quality of the coal, the company can competitively supply coal to the region. The initial coal delivery route to Buryatia is through the Sukhbaatar rail station. The company plans to open the Mongolian-Russian border crossing Zeltura to reduce delivery costs to Buryatia, and plans to start coal sales to Russia in April 2014.

Chandgana 600-MW power plant project is an advanced, fully licensed greenfield mine mouth project. The proposed power plant will be located close to Chandgana coal resources (100% owned by Prophecy Coal), which has over 1bn tonnes of resources. The power plant project has secured all major licences including an approved detailed environmental impact assessment, power plant construction licence, land use approval, water and power supplies during construction permits, coal supply agreement and an engineering, procurement and construction contract. The firm is negotiating with various Mongolian ministries on the concession agreement, power purchase agreement and tariff proposal. The company is also negotiating supplying power to large industrial customers located in southern Mongolia. The power plant project signed a binding coal supply agreement for 25 years with Chandgana mine in June 2013. The mine has secured all major permits such as coal mining licence and an approved detailed environmental impact assessment.

Several major power generation groups from Asia have paid visits to Prophecy’s power plant project and carried out technical and commercial due diligence of the project. Prophecy has received strong interest from these groups to participate in the project and is currently working on the joint-venture formation.

The share price has been stagnant since the beginning of 2011 when coal prices peaked. However, the following events can cause the market to re-rate Prophecy’s valuation: announcement of strong margins for coal sales to Mongolian industrial customers; successful entry into the coal market in Russia and Mongolia residential areas; opening of Mongolian-Russian border crossing Zeltura; approval from Mongolian government of the concession agreement, PPA and tariff proposal; formation of the joint-venture with strategic investors; and progress with the power plant project financing.

We strongly believe that demand for electricity in Mongolia will double over the coming three to five years. Therefore, although investors have been frustrated by the rather slow progress made to date, once the government has approved the proposals from the company, the share price may start to rise sharply in 2014.