Visitors to Energybuild's (AIM:EBG) coal projects near Neath in West Glamorgan, Wales, UK, will immediately be struck by the uplifting team spirit, by the company's passion for the coal mining heritage of South Wales and by the sense of corporate citizenship which permeates every aspect of the business. They will also quickly become aware of the company's record in making the most of opportunities. It is probably this seize the day vision and the hard work and determination of the team which has enabled Energybuild to acquire an estate with a flooded abandoned anthracite mine but huge potential, and to convert it relatively quickly and at low capital cost into a profitable debt-free business which produced just over 100,000 tonnes of coal last year. It is on target to produce 265,000 tonnes this year and, global coal market conditions permitting, will ramp up to 440,000 tonnes in 2010 and 750,000 tonnes by 2011.
The diversified mining group Cambrian Mining Plc [AIM:CBM] provided financial and commercial support to Energybuild in its early days, has a director on its board and currently holds 50.6% of Energybuild's shares. But Cambrian itself is now in the process of being acquired by Western Canadian Coal [AIM:WTN TSX:WTN]; shareholders of both companies will be voting on the acquisition at Special Meetings on 24 June. It is not yet clear what impact this will have on Energybuild, though amongst the hundreds of pages of acquisition documents published by Western Canadian on 25th May there is a 175 page technical report prepared in March by consultants Wardell Armstrong on Energybuild's coal properties in which the first conclusion was that the development and operation of Energybuild's mines is a very interesting and rewarding mining project and is likely to be so for a considerable time.
Back then to the Energybuild story.
Energybuild's primary assets are now two underground anthracite mines, Aberpergwm and Treforgan, which together host one of Europe's largest deposits of anthracite, the Nant y Mynydd open cast coal mine and sandstone operation, and a coal tip recovery JV project. The mining projects are on neighbouring properties between the Neath and Dulais valleys, some 7 miles from Neath. The tip recovery project is some 20 miles away, near Abertillery.
Both Aberpergwm and Treforgan mines are historic, (Aberpergwm mine was first recorded, though under another name, in 1670), and both were nationalised by the National Coal Board (later British Coal) in 1947. In the 1970s and 1980s British Coal embarked on a programme to develop a mining complex to access and mine the virgin coal seams between the two mines with an annual planned production of 640,000 saleable tonnes. However in 1985 the mines were closed, along with almost all others in the area, as part of the national closure programme following the miner's strike. Rhidian Davies, the current CEO of Energybuild, who comes from a Welsh mining family, cut his teeth in the industry in the late 1970s and early 1980s working on several mines in the locality, including Treforgan itself, so he knew of the potential of the mine.
When the mines were closed the surface infrastructure was demolished, the entrances were sealed and the mines left to flood. Aberpergwm was eventually reopened 11 years later, in 1996, by a subsidiary of Consolidated Coal, with Davies on the board. Over the next seven years, which were a testing and depressed time in the global coal markets, ownership changed hands several times, but along the way programmes were begun to dewater, repair and ventilate the mine.
Meanwhile production began from an open pit above the mine in 2003. Over the next four years Energybuild was incorporated and the company negotiated a number of sales contracts, raised private funds, won grants from the Department of Trade and Industry under the Coal Aid Investment Scheme, obtained planning permits, and acquired options for and a licence to mine Treforgan. It also undertook major mine roadway recovery and repairs, recovered some 7,750 metres of intake and return airways and resumed limited underground coal extraction to offset costs, mostly by extracting remnant pillars of coal, all the while continuing to develop towards the access drifts formerly driven by British Coal. Much of the work was funded by the production of 340,000 tonnes of coal over the period from the open cast mine.
But funding remained one of the key bottlenecks for further development, (the other two being equipment and labour), so in August 2007 Energybuild took advantage of the rising coal prices and listed on AIM to raise £9.7m net of loan repayments and expenses. Its plan was ultimately to develop large scale mining operations in the virgin areas of the Aberpergwm/Treforgan mines by a combination of (a) capital investment in infrastructure, machinery and ventilation, (b) the continuation of drives into the Eighteen Feet Seam and the Nine Feet seams, and (c) the building of a new drift from the surface to facilitate better ventilation, coal clearance and material handling.
Since listing Energybuild has been successful in achieving its targets thus far, completing the drive into the Eighteen Foot Seam on time and on budget in the autumn of 2007, and completing the first air circuit by February 2008 and the second by December of that year. The company's plans were given a particularly significant boost in early 2008 when Tower Colliery, some 6 miles away, was finally exhausted after 203 years of mining and Energybuild was able to recruit approximately 150 ex-Tower miners and acquire Tower's entire pool of equipment for £1.4m. Now all the planned dewatering, ventilation and roadway recovery and repairs are complete, the mining fleet has been expanded, production is fully mechanised and the surface infrastructure has been improved to allow for increased production and manpower. The new drift should be completed in late 2010.
The company became profitable from the beginning of 2008. Full year production for the financial year ending June 2008 totalled over 100,000 tonnes with revenue up 37% to £6.5m and an operating profit of £802,000. In the following six months to December 2008 production from the underground mine, at 65,000 tonnes, was double the production for the full financial year to June 2008, while the 53,000 tonnes produced from the open cast mine was double the equivalent period in 2007. The projects, together with the coal tip recovery JV which began towards the end of 2008, generated a half-year revenue to December 2008 of £9.6m (up year-on-year from £1.4m) while the gross margin rose to £1.7m (compared to the previous year's loss of £113,000).
CURRENT PROJECTS AND FUTURE PLANS
The company is thus now producing high quality low sulphur high calorific content anthracite coal from its underground mine and opencast projects, with steam coal from its tip washing project.
The underground mines at Aberpergym and Treforgan, which together have a proven and probable coal reserve of 7.6 million tonnes, a further measured, indicated and inferred resource of 36.2 million tonnes and an overall in-situ resource of 112.2 million tonnes (according to the AIM admission document).
The open cast activities on the Aberpergym and adjoining estates which have a 25 year surface lease covering 2,428 hectares (24 square kilometres) and all the mineral rights to this land. Open cast coal production on the estate is has been running at a rate of 2,000 tonnes per week and in December 2008 the company also commenced sandstone quarrying operations on the site in a JV with Gerald D. Harris Ltd which serves the dual function of generating revenue while accessing the coal seam below. There is an estimated resource of 800,000 tonnes of high quality sandstone which is ideal for use in road construction. The company is actively seeking further sites on the estate and has a positive record on the restoration and rehabilitation of old derelict sites.
A 50 /50 JV with Coal Recovery Investments (CRI) to recover and wash coal from disused coal tips. The project, which began in late 2008 and is expected to yield over 200,000 tonnes of coal over an 18 month period generated an initial profit of £63,000 for Energybuild in the six months to December 2008.
All the projects are served by excellent road and rail infrastructure, and the marketing arrangements are neatly tied up too. Energybuild has sales contracts with Aberthaw power station (60 miles away by rail) and coal distributor Evans and Reid, while it is in the last stages of negotiating a contract with Corus in Port Talbot. It also sells a small proportion of its premium coal directly to domestic customers. Energybuild's long term objectives are to achieve accelerating growth and to create shareholder value both through organic growth of its existing operations (with a target of achieving 265,000 tonnes by June 2009, 440,000 tonnes by June 2010 and 750,000 tonnes by June 2011), and through acquisition of additional coal reserves. Its immediate plans are to look for further investments that could improve the mining system, to renew its long term contracts and to obtain planning permission for further open cast activities.
The biggest commercial risk facing the company right now is the price of coal. As Davies points out developing the mine in the midst of global economic meltdown is not ideal. But the price of coal, even though it has halved since its peak last July is still above the assumptions made at listing in 2007. Other risks include the current weakness of the rouble which is making Russian imports attractive, the geological risk of developing into virgin seams, and the requirement for further planning permission.
That said Energybuild has a large number of bull points including:
· The high quality of its anthracite coal which is clean with low sulphur and a high calorific content.
· The size of the in-situ resources, which are one of Europe's largest anthracite deposits.
· The breadth and depth of the experience of the board and management team several of whom have deep and longstanding roots in the Welsh coalmining industry. Rhidian Davies has been involved in local mining for more than 30 years, the Chairman Colin Cooke has expertise in steel and marketing and is the director of a major supplier of conveyor belts, while non-executive director Robert Morgan has been an investor in the company since 2003 and has considerable experience in fund management and the City.
· The quality of the workforce, now 208 strong, up from 73 in the last 18 months
· The financial strength of the company which has little debt and had cash of £3.5m in the bank at December 2008. · The relatively low capital cost of development in view of the development already undertaken by British Coal and the acquisition of Tower's equipment. Energybuild has also benefited from Coal Aid Investment Grants.
· The excellent transport connections with an ‘A' road to the mine gate and a railhead at Tower colliery 6 miles away. Energybuild is investigating the possibility of a conveyor belt linking directly to a local railhead which might be built with the aid of grants from the Welsh Assembly.
· Energybuild's comprehensive marketing contracts and the ready local market for the coal. Future prospects for UK coal are likely to remain favourable (unless there is a massive swing in exchange rates) in view of rising transport costs which increase the attractiveness of UK coal over imports and the fact that UK infrastructure for importing coal is already at its limits. Moreover there is a threat of an energy deficit in the UK, local production is seen as a strategic resource and the recent energy review by the Welsh assembly highlighted the need for the continued use of coal
· The additional revenue streams from sandstone and coal tip recovery
For shareholders right now the biggest uncertainty is the impact of Western Canadian Coal's acquisition of Cambrian Mining, though to date there has not been any immediate reaction to the May 25th announcement with the share price currently hovering around the 20p mark, valuing the company at £26m.
Energybuild has put in all the groundwork and thus far has succeeded in delivering on its targets. As discussed above there are a number of risks which could deflect the company off course, but for the moment it appears firmly on track for tripling its production of clean anthracite coal, as planned, by 2011.Published courtesy of Proactive Investors - www.proactiveinvestors.co.uk