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Waterton global value lends 10m USD at 14% per annum for one year to prophecy coal

According to Prophecy Coal on July 16, 2012 “Prophecy Coal Corp. (TSX: PCY, OTCQX: PRPCF, Frankfurt: 1P2) has arranged a $10 million secured debt facility with Waterton Global Value, L.P. The funds will be used to complete the purchase of the Tugalgatai, Mongolia coal licenses on which a large coal resource is known to exist as described in the Company’s news release of June 18, 2012.  The Loan has a one year term and bears interest at 14% per annum.  A structuring fee of 2.5% plus a bonus of $600,000 are payable through the issuance of 2,735,617 of the Company’s common shares on closing of the Loan which occurred today.  These shares are subject to a four month hold period.

  • “John Lee, CEO of Prophecy, stated “The proceeds will fully fund completion of the acquisition of Tugalgatai coal licenses which are expected to significantly increase our coal resources.”

About Prophecy Coal

“Prophecy Coal Corp. is a Canadian listed company engaged in developing energy projects in Mongolia. Prophecy’s Ulaan Ovoo mine has achieved production status.  Prophecy’s proposed 600 MW mine-mouth power-plant adjacent to the Chandgana coal deposit has been permitted by the Mongolian government.  Negotiations on financing, power purchase agreement and construction management are being pursued.” 

Earlier, according to Prophecy Coal on June 18, 2012 the Company announced that “it has entered into a binding Sale and Purchase Agreement to acquire assets relating to certain Tugalgatai coal exploration licenses from Tethys Mining LLC, and subject to approval from the Minerals Resource Authority of Mongolia, to have such exploration licenses transferred to it.  The Tugalgatai licenses are contiguous to the Company's Chandgana licenses which host a measured resource of 650 million tonnes and an indicated resource of 540 million tonnes of thermal coal.

According to records reviewed by Prophecy, on March 15, 2011, Tethys applied to register a resource estimate of 2.33 billion tonnes of thermal coal for the Tugalgatai licenses with the Minerals Resource Council of Mongolia.  The resources registered by Tethys are not NI 43-101 compliant.  Prophecy expects to conduct work in due course with a view of preparing its own NI 43-101 estimate of the contained resource at Tugalgatai.

Since 2005, Tethys performed detailed exploration on the Tugalgatai licenses including drilling and geophysical methods, and conducted geotechnical, hydrogeological, environmental and topographic studies.  Exploration results indicate a large and geologically simple coal occurrence within the Tugalgatai licenses that is similar to Prophecy’s Chandgana licenses.  The coal seam is continuous across the Nyalga Basin and outcrops to the northwest, with the main coal seam measuring up to 30m in thickness.

The terms of the Agreement include a US$10 million upfront payment and an 8.5% royalty on future coal sales from both the Chandgana and Tugalgatai licenses.  The royalty can be extinguished by paying Tethys US$20 million before 2021 or US$25 million from 2021 onwards.  Of the purchase price, $2 million will be immediately deposited in escrow.  The total payment will be paid to Tethys upon the transfer of the licenses.

John Lee, Chairman and CEO of Prophecy states: “By consolidating the Chandgana coal basin of approximately 300 squared kilometers, Prophecy is looking for greater economies of scale to potentially produce low-cost electricity at the Chandgana mine mouth power plant, and further develop coal to chemicals and coal gasification projects.  It’s also possible to further increase the resource through exploration in this highly prospective basin.”

The transaction is expected to close in Q3, 2012, subject to regulatory approval from the Minerals Resource Authority of Mongolia.  

According to Waterton Global Value, “it identifies strategic investment opportunities including providing equity financing and working with public junior resource companies on an operational level to create shareholder value.  The fund also participates in traditional and non-traditional investments such as:

Secondary transactions

Private placements

Underwrite/Guarantee rights offerings

Joint venture agreements

Private equity

Waterton Global Value has a strong track record of helping companies create value though successful joint ventures.

Waterton Global Value is an affiliate of Waterton Global Resource Management, a Toronto-based family office focused on resource investments. Waterton Global invests in resource companies with strong management teams, and high-quality assets in safe and stable jurisdictions in the mining, precious and base metals, and bulk commodities industries. Waterton Global fosters long-term partnerships with companies who have proven world-class potential and enduring growth prospects by providing senior-secured customized debt solutions with a relationship focus.

Waterton Global leverages its experience as a leader in resource investing in Canada, one of the largest mining nations in the world. Waterton Global’s position in the local market and extensive network in key geographic regions around the world enable us to execute effectively across the globe.”

According to Prophecy Coal,

“In June 2012, Prophecy Coal consolidated the Chandgana coal basin by agreeing to acquire the Tugalgatai licenses from Tethys Mining LLC. Prophecy’s existing Chandgana licenses host a measured resource of 650 million tonnes and an indicated resource of 540 million tonnes of thermal coal.  According to records reviewed by Prophecy, on March 15, 2011, Tethys applied to register a resource estimate of 2.33 billion tonnes of thermal coal for the Tugalgatai licenses with the Minerals Resource Council of Mongolia. The Tugalgatai resources registered by Tethys are not NI 43-101 compliant, however, Prophecy expects to conduct work in due course with a view of preparing its own NI 43-101 estimate of their contained resource.  Upon finalizing the acquisition of the Tugalgatai licenses, Prophecy will control one of the largest coal basins in all of Mongolia.

Prophecy has determined the most effective approach to harness the potential energy of the massive coal resources contained in the Chandgana basin is to construct a thermal coal power plant near or adjacent to these coal licenses. Mongolia's economy has experienced significant growth over the past several years; a trend that is projected to continue well into the future. Many of Mongolia’s existing power plants are dated, having low-efficiency output and lacking in clean technologies. As a result, the country's domestic electrical power production has been unable to keep up with the rising demand, leaving a deficit that has been offset by costly imports of electricity from Russia. To help address this, in November 2011, the Mongolian government granted Prophecy Coal Corp. a license to construct the 600MW Chandgana power plant and continues to advance the project by commissioning studies, applying for approvals and exploring financing options. A Cooperation Covenant with the Mongolian Energy Authority (EA) was signed in May 2011 and a power purchase agreement (PPA) is now in negotiations the Mongolian Ministry of Mineral Resources and Energy. Prophecy has also been in ongoing discussions with Engineering, Procurement and Construction (EPC) management firms and anticipates awarding a construction contract in Q2 2012. The power plant will be a mine mouth power plant where the coal is supplied from a contiguous or nearby mine.

Coal Supply:

The coal required to fuel the Chandgana TPP will be supplied from a mine located on a contiguous or nearby license. Two of the likely sources include Prophecy Coal’s 100% owned Chandgana coal resources which consist of three licenses. Chandgana Tal, located in the northeastern end of the basin includes two licenses and has a measured resource of 141 million tonnes. Khavtgai Uul contains one license and is located in the southwestern end of the basin with a measured and indicated resource of over 1,000 million tonnes (509mt measured and 539mt indicated). These resources are contiguous or near the power plant, are a mere 14 km apart, and are close to important infrastructure – towns, roads, and electric transmission lines. They are linked by paved highway to Mongolia's capital, Ulaanbaatar, and the Trans-Mongolian Railroad, giving direct rail access to China to the south and Russia to the north. Read more >>

The coal from any of the licenses can be mined using surface mining methods and then crushed and trucked directly to the power plant.

Mine Highlights:

Measured and indicated resource of 1.19 billion tonnes (650 mt measured and 539 mt indicated).

Thick coal seams with an aggregate minable thickness of 30 - 60 meters.

Coal seams are shallow with depth ranging from 0 to 267 meters.

Coal is moderate grade with moderate ash and calorific value and low total sulphur.

Coal quality is well-suited to fuel the 600MW mine mouth power plant.

Low weighted average strip ratio of 2.0:1.

Resources are amenable to simple truck-shovel surface mining method.

Close proximity to infrastructure: 160 km from rail, 45 km north of the proposed Choibalsan Mongolian Railway extension, maximum 16 km from paved highway, and 150 km from 2x220 kV power line connecting to the main Mongolian electricity grid

Chandgana Coal Resource:

           Chandgana Coal Resources (Tonnes)

           Chandgana Tal  Khavtgai Uul     Chandgana (Total)

Measured         0.14 Billion        0.51 Billion       0.65 Billion

Indicated           -           0.54 Billion        0.54 Billion

Total M&I          0.14 Billion        1.05 Billion       1.19 Billion

 

           Chandgana Coal Quality

           Chandgana Tal  Khavtgai Uul

Moisture           40.7 (ar)           36.5 (ar)

Ash      12.5 (ad)           10.1 (ar)

Heating Value   4,238 (ad)         3,636 (ar)

Total Sulfur       0.7 (ad) 0.6 (ar)

ar = as-received basis, ad = air dried basis

Chandgana consists of two properties-Chandgana Tal and Chandgana Khavtgai. Chandgana Tal consists of 141 mt of measured resource. Chandgana Khavtgai consists of 509 mt measured and 539 mt indicated resource. Chandgana Khavtgai's resource estimates are based on the September 2010 NI 43-101 Chandgana Khavtgai Technical Report by Kravits Geological Services, LLC. The report is authored by Christopher M. Kravits CPG, LPG of Kravits Geological Services, LLC., who is an independent Qualified Person under NI 43-101. And the Chandgana Tal resource estimate is also based on the September 2007 NI 43-101 Chandgana Tal Technical Report by Behre Dolbear & Company (USA), Inc..The report is authored by Mr. Gardar G. Dahl, Jr., CPG of Behre Dolbear & Company (USA), Inc., who is an independent Qualified Person under NI 43-101. Detailed Resource/Grade Table

Next Steps for the Power Plant:

Conclusion of the Power Purchase Agreement (PPA) with Mongolian Government (early 2012)

Selection of an EPC contractor for power plant construction (early 2012)

Obtain project financing (Q3 2012)

Start power plant construction (early 2013)

Further, 2012 election platform of Democratic Party that obtained current plurality of 31 seats in 76-seat national parliament and is in negotiations to form a new Coalition Government (http://www.demparty.mn/news.php?type=9) includes following excerpts that might relevant in this case

“MINING SECTOR

  • “State regulation and control in mining will be strengthened and state participation limited, participation of national enterprises and citizens supported
  • While issuing mineral license  principle of getting opinion of local citizens and establishing agreement will be implemented
  • Issuance of mineral license from Mineral Resources Agency will be stopped and Government will be in charge of issuance
  • Certain limits will be imposed on number of license that can be owned by legal entity
  • Minerals exports will be implemented by policy “ One window”
  • Legislation will be created and implemented to have Mongolian stake in companies to be established on mining deposits not less than 51%
  • Mining will poor economic benefits and significant environmental damage will be prohibited
  • Environmentally friendly and best technology’s introduction into mining production will be supported, counting of damaged areas finished , rehabilitation done by guilty party and in the future rehabilitation expenses will be placed in state budget account
  • Level of processing of mining products will be increased and valued added final products producers will be supported by tax policy
  • Legislation will be formed to have national enterprises to work as subcontractors to supply goods and services to mining and other major projects in Mongolia
  • State will own not less than 51% of companies to be established on deposits explored by state budget funds
  • Strategic minerals such as thermal and coking coal, copper, iron ore and rare earth elements will be classified and special for them policy implemented
  • Policy will be implemented of adding value-add to mineral sector raw materials, half-processed and final products produced and exported”

ECONOMIC DIVERSIFICATION – KEY GOAL OF ECONOMIC POLICY

  1. Industrialization policy

Thermal power plants will be established in provinces based on thermal coal mines

Power will be produced from sun, wind and coal and  will be connected to Asia’s united power grid

Enterprises working in the field of renewable energy will be supported by state by taxation policy

Hydropower plant will be established at Selenge river

First stage of 5th power plant to supply consumption of UB will be commissioned

60M Wt. thermal power plant based on Mogoi gol coal deposit in order to provide permanent and reliable source of power for Altai-Uliastai system

 

  1. POLICY OF IMPORT SUBSTITUTION AND SUPPORT OF EXPORTS PRODUCTS PRODUCTION

Processing plants will established and minerals and crude products extracted in Mongolia will be supplied to domestic plants on priority basis

Duty for domestic procurement for goods and services required for mines will be legislated

Extraction of crude will be increased in order to ensure economic security of Mongolia and crude processing plants will be established at Dornod and Zuunbayan

Amount of state reserves will be increased in order to ensure stability of supply of petroleum products, retail price will be kept stable

Coal to gas, coal to liquid research will be boosted, advanced technology introduced and domestic source established to separate from dependence from abroad in gas, fuel and petroleum products

Methane gas, oil shale and other sources research will be boosted, policy on use and extraction developed and legal environment formed

Provincial centers will be connected with UB and nearest border crossing by total of 5572 km of paved roads

Policy to enroll each employed person in residential financing will be implemented in reality,  ger districts will be turned into apartment districts according to urban planning, infrastructure programs will be implemented on city, provincial and soum village levels

 

1000 families apartments project will be implemented in each province”

 

CHIEF INVESTMENT STRATEGIST

Dale Choi

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