Recently, there has been a clear reduction in appetite for growth stocks; particularly those with large capital expenditure requirements.
Due to tight capital constraints in today’s markets, there will be limited opportunities for large capex projects to get off the ground and these companies’ share prices have been discounted heavily to reflect this.
The market’s focus for now has shifted away from long term growth potential to near term cash flow; cash as they say, is king.
The team at The Next Mining Boom is taking advantage of the recent battering of small cap mining companies on the ASX to take bargain basement (long term) positions in high quality, huge potential companies that have been relentlessly oversold in the current market conditions.
We are building up an exciting portfolio that we believe will perform exceedingly well in the medium to long term… and today’s addition to our portfolio is certainly no exception.
How do we identify stocks to add to our portfolio? We’ll tell you more in the article, but in summary here is what we look for:
A strong management team with a proven track record of success.
Recently raised capital or strong cash position.
Currently developing a low capex, low operating cost project that will generate near term cash flow.
As always, a high score on our Pre-Investment Check List.
The company we are writing about today came on to our radar after they recently implemented a strategy change which will see them secure significant, quick and easy cash flow by developing a low capex but highly lucrative starter project, which will help fund development of its world class, tier 1 asset.
Currently cashed up and with a proven management team at the helm and an exciting world class asset that would make BHP jealous, we are pleased to introduce Tigers Realm Coal (ASX:TIG) to our portfolio:
Put TIG on your watch list and thank us later.
Note to traders* The publishers of this article/information/promotion wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article/information/promotion.
TIG is a $100 million market cap ASX listed company developing coking coal projects in Far East Russia. TIG is currently trading at 17c
The TIG management team come from a company called Oxiana limited. Oxiana merged with Zinifex in 2008 to form Oz Minerals (ASX:OZL). At the time this merger was worth $12 billion.
One of the directors of TIG, Owen Hegarty, was the founder of Oxiana and CEO from 1996 to 2008. Owen took Oxiana from a small exploration penny stock to a multibillion dollar producer and we trust he intends to do the same with TIG and their world class coking coal asset.
But isn’t coal seriously out of favour at the moment?
Of course it is! That is what makes it a good time to take a position! Especially in what could be one of the lowest cash cost (per tonne) coking coal projects in the world.
Never buy at the top of the price cycle. Always buy at the bottom.
Regular readers will know that the team at The Next Mining Boom is taking this once in a lifetime opportunity to secure bargain basement LONG TERM positions in quality junior companies during times of panic selling.
TIG has recently initiated a starter project that aims to produce $100 million in earnings (PER YEAR) in the next few years. Not bad for a $100 million market cap company.
To appreciate the value proposition of TIG, it is important to understand the difference between COKING coal, which is used for steel making, and THERMAL coal, which is used for producing energy.
Many believe that “coal” will be replaced by cleaner energy sources and renewable energy in the coming years – these folks are referring to THERMAL coal… NOT the COKING coal that TIG is looking to develop.
Later in this article you will find a brief summary of the important difference between thermal coal and coking coal, including the specific uses of coking coal, the global demand for coking coal in steel making from countries such as China India and Japan, and why we believe the demand will increase over the coming years.
Topics covered include:
Coking coal versus thermal coal – what is the difference?
What coking coal is actually used for – (TIG has coking coal assets)
The “washing process” of coking coal and why the high quality nature of TIG’s Amaam North deposit may allow TIG to completely skip this expensive processing step.
Coking coal’s role in the production of steel
The world market for coking coal
Future demand for coking coal
Once you appreciate the intricacies of coking coal, you will understand why we are so excited about TIG, and their two key projects in far East Russia, called Amaam North and Amaam.
‘Quick cash flow’ Amaam North - a small, high grade, direct shipping coking coal project close to an underutilised port. This project has been initiated by TIG to provide near term significant cash flow. The project also has great exploration upside which may see it deliver a larger project from this area in the longer term.
‘Tier 1’ Amaam - A much larger, tier 1, world class coking coal mega project. Amaam (when in development) will have some of the lowest cash cost production in the world. This project is the longer term company making project for TIG.
Coking coal projects in Far East Russia…?
Interestingly, the Russian government has recently introduced a number of initiatives to stimulate economic growth and investment in Russia’s strategic eastern region (which is close to China). East Russia’s recent mining friendly policies are bucking the global trend of mining tax increases and nationalisation that generally make life difficult for miners.
Russia is actually encouraging mining and investment, particularly in the far east of the country (where TIG’s projects are located) right near resource hungry countries China, Korea and Japan.
Encouraging mining and mining investment is certainly a ‘breath of fresh air’ particularly when we see headline after headline of countries around the world introducing mining taxes or even threats of nationalisation of mining projects.
35km away from TIG’s ‘quick cash flow’ Amaam North project is the export terminal of Beringovsky. This port is currently is so severely underutilised that it’s no wonder the government is rushing to stimulate mining exports in the region.
The location of TIG’s planned export facility (Beringovsky Port) will make the ‘quick cash flow’ Amaam North project one of the most competitive suppliers into Asia – way closer to the east coast of China then any of the potential competitors.
Another point to note is that due to the high quality nature of much of TIG’s coking coal – no washing plant will be required initially, which could save TIG about $300 million in development on the Amaam North Project … more on this later in the article.
TIG currently has around $23m cash on its balance sheet and holds no debt. TIG raised $21m in Feb 2013 and received $1m worth of oversubscriptions – we love taking positions in companies that have recently raised cash (instead of opening up our own wallets to contribute to the raising!)
This article will provide a detailed analysis of TIG and their projects against our pre-Investment Check List Criteria. Before we further discuss the details of coking coal and our in depth analysis of TIG against our pre-investment checklist, let’s start with a short summary of TIG:
About TIG:
TIG is a ~ $100 million market cap ASX listed company that owns two high quality coking coal projects in the Chukotka Province, Eastern Russia.
As mentioned earlier, TIG has suddenly jumped onto our radar after a significant change in strategy a few months ago, which has seen the management team shift their focus to a smaller starter project that will deliver quick near term cash flow, and help fund their tier 1 mega project.
A very smart strategy in the current market climate.
Here is a corporate snapshot of TIG:
As mentioned in the intro, TIG has two key projects
‘Quick cash flow’ Amaam North - a small, high grade, direct shipping coking coal project close to an underutilised port. This project has been initiated by TIG to provide near term significant cash flow. The project also has great exploration upside which may see it deliver a larger project from this area in the longer term.
‘Tier 1’ Amaam - A much larger, tier 1 world class coking coal mega project. Amaam (when in development) will have some of the lowest cash cost production in the world. This project is the longer term “company making” plan for TIG.
Both projects are located on the eastern coast of Russia and have defined transport and port solutions, which we’ll elaborate on later in the article (proximity to infrastructure is important!)
The team at The Next Mining Boom is very excited about the TIG story, its new strategy, and the progress it has been making (on time and on schedule).
It is rare for a junior mining company to be punctual in executing its targeted achievements that it has communicated to the market.
TIG has been doing exactly that.
Too many times we come across companies that ‘over-promise and under-deliver’. TIG seems to be going against the grain by ‘under-promising and over-delivering’ to great effect, a very impressive trait to have in this market.
Take a look at TIG’s historical stated schedule and when they hit their milestones:
It is widely known that the mining industry is notorious for delivering projects late and over budget.
Achieving their stated project milestone dates speaks volumes about the quality of the management team at TIG.
Introduction to Coking coal
At The Next Mining Boom, we strongly believe in the importance of a having a detailed understanding of the value proposition of a company before investing, and this means knowing the product and target market inside out.
Not everyone is an expert on coal, so we are pleased to provide a quick educational overview of coal to help explain the value proposition of TIG.
[WARNING – this explanation has been heavily simplified, coal experts may skip this section]
What you will find in this section:
Coking coal versus thermal coal – what is the difference?
What coking coal is used for – (TIG has coking coal assets)
The washing process of coking coal and why the high quality nature of TIG’s Amaam North deposit could allow TIG to skip this expensive processing step for a significant part of the deposit
Coking coal’s role in the production of steel
The world market for coking coal
Future demand for coking coal
Coking coal versus thermal coal
If you aren’t familiar with coal, you might assume that there is downside risk to the demand for coal as more people become concerned about the environment and switch to renewable energy.
You are thinking of THERMAL coal, which is used in power generation.
TIG has COKING coal projects. Coking coal is used in steel making.
So while coking coal and thermal coal have similar geologic origins, their commercial markets and industrial uses are vastly different. This is important to note in the case of TIG because coking coal is necessary in the production of steel, hence there is a long term need for coking coal when considering global growth.
So when you hear people talking about “coal” being “a dirty source of energy”… remember, this is NOT the coal we are talking about here.
What is regarded as quality coking coal?
Australian coking coal is regarded as the benchmark for quality.
BHP has continued to set the industry standard when producing quality coal. Its Goonyella Hard Coking Coal mine is a global leader and upholds the highest standards in coal production. We use this mine (as well as other BHP Hard Coking Coal mines) specifically as an indicator for quality:
Focus here on ash content in particular.
Washing Coking Coal
Before coking coal can be used in steel production, common naturally occurring impurities must be removed. This process is called “washing” and requires an expensive processing plant to be built, and is generally an all-round expensive process to run.
Typically, when preparing coking coal there is an aim to achieve 75-80% ash reduction, 15-80% trace element reduction and 85-90% Btu recovery.
The coking coal found in ‘quick cash flow’ Amaam North (the smaller TIG project) has unusually low levels of impurities and low ash (approx. 6%) straight out of the ground, based on early indications from historic drilling. Much like that annoying friend in high school that was good at every sport without trying, some coal deposits are just naturally better than others. Genetics isn’t fair… neither is coal.
The high purity nature of much of the Amaam North coal may mean it is ready for sale as soon as it comes out of the ground, so TIG will NOT have to build a washing plant (usually about $300 million just to build it). No washing plant means much lower costs, and a much faster time to market.
Coking coal’s role in the production of steel:
Step 1 - Coke Making: Coking coal is converted to coke by applying heat in an oxygen-less environment. It is cooled with either water or air before storage or is transferred directly to the blast furnace for use in iron making.
Step 2 - Iron Making: During the iron-making process, a blast furnace is fed with the iron ore, coke and small quantities of fluxes (minerals, such as limestone, which are used to collect impurities). Heated air causes the coke to burn, producing carbon monoxide which reacts with the iron ore, as well as heat to melt the iron. The slag (impurities) and molten iron are then separated, and we move on to steel production.
Step 3 - Steel Production: Steel can be produced one of two ways, either through an electric arc furnace or oxygen furnace. A furnace fed with high quality coke requires less coke overall, resulting in higher quality hot metal and better productivity. As a result, steel producers are always looking for high quality coke.
To give you an idea, around 0.6 tonnes (600 kg) of coke produces 1 tonne (1000 kg) of steel, which means that around 770 kg of coking coal is used to produce 1 tonne of steel through this production route.
The important point to take from this is that the carbon in the coking coal is required in the chemical reaction of producing new steel. This bodes well for TIG because coking coal cannot be replaced in this process and therefore represents sustainable long term demand.
What is coking coal used for?
Almost three-quarters of the coking coal produced around the world is used in the iron and steel industry, with the remainder being mostly used in the smelting of other metals materials, such as zinc. Therefore coking coal is highly geared to the construction, automobiles and industrial equipment sectors.
Current moderate global growth has reduced demand in these sectors which has weighed on the coking coal price, and hence TIG’s share price. This highlights it as an attractive entry point into a long term growth play in TIG.
The world market for coking coal
Coking coal demand and prices reached record levels during 2008 due to China's dramatic increase in production of steel, helped along by to a lesser extent by India.
Coking coal prices hit around US$360/$380 per metric tonne in mid-2008 from around $140/$160 per metric tonne in the previous 3-4 years. The fall in demand and price since 2008 is largely due to the steel industry being affected by softening demand from China and other countries.
The credit crisis and global economic slowdown have hurt customers in key markets placing downward pressure on prices and prompting steel companies to reduce production, scale back shipment forecasts, delay expansion and cut back the workforce.
Consequently, prices returned to the US$120/$140 per metric tonne levels during 2009. Hard coking coal closed at $152 a ton on May 1st 2013, according to data compiled by Bloomberg.
The forecasts for the third quarter 2013 ranged from $155 to $180 a ton in the Bloomberg survey from May 6 to May 9. We believe that coking coal prices are around their fundamental lows and that this presents an opportunity to benefit from the potential pricing upside when growth returns by having exposure to TIG.
Future demand for coking coal
Asia has the highest demand for imported coking coal with 73% derived from Japan, China and India in 2010. China is expected to go past Japan in import demand by 2015 largely driven by major infrastructure development. These two countries already accounted for 57% of 2010 demand.
Geographically, TIG is well placed to service these markets. TIG might experience competition for Chinese customers from Mongolian mines… however Mongolia is notorious for lacking available infrastructure to make this possible.
TIG’s ‘quick cash flow’ Amaam North project is well placed to gain access to the underutilised Port of Beringovsky on the east coast of Russia which is only 35km from the site. This places TIG in great proximity to both China and Japan to service their import demand for coking coal.
At present, demand levels are soft but we expect that a rebound in global growth over the course of the next few years will significantly increase China’s coking coal import demand and therefore the value of TIG’s assets.
Crucial Pre-Investment Check List: TIG
The Next Mining Boom Pre-Investment Checklist Criteria has been carefully considered and put together by a team of contributors that has been successfully investing and trading mining stocks for many years.
The check list explains exactly what to look for prior to making any investment in a speculative mining stock. We use the check list to carefully assess any potential stocks to add to our portfolio,
You can find out about the full check list (and much more) in our eBook here:
We will be assessing TIG against a select few of the checklist criteria:
Pre-Investment Checklist Criteria What is the track record of management? Does management own stock in the company? Are they buying on market? How much are directors and management being paid? Is the company a 'lifestyle company'?
As we mentioned in our most recent research article on Cleveland Mining (ASX:CDG), there is a saying when in vesting in property - ‘location, location, location’.
In small cap stocks it’s “management, management, management”.
The management of a company is almost as important as the main asset itself.
Part of our interest in TIG is driven by Owen Hegarty’s involvement and a number of other senior high calibre executives.
Owen was the founder and CEO of Oxiana (which merged with Zinifex to form Oz Minerals (ASX:OZL) in 2008). Some of the OZL assets were acquired by MMG (Hong Kong listed) in 2009. OZL is currently capped around $1.3 billion but was valued around $12 billion when the Oxiana and Zinifex merger happened in 2008.
Owen was CEO of Oxiana from 1996 to 2008 and took Oxiana from a small exploration penny stock to a multibillion dollar copper producer.
A number of other individuals on the TIG board were involved with the success of Oxiana and we imagine they are aiming to repeat this success at TIG.
Here is the current TIG board, (Note the number of ex directors from Oz Minerals/Oxiana) with a bit of experience from Rio Tinto thrown into the mix:
TIG provides a similar management proposition to our most recent stock Cleveland Mining (CDG), who boast a number of the original management team from Fortescue Metals (ASX:FMG). The original article on Cleveland Mining can be found here:
We’ll say it again: management, management, management!
Pre-Investment Checklist Criteria: What assets do the company own?
Up until early this year, TIG’s focus was on the development of the large capex, large scale ‘Tier 1’ Amaam coking coal project in the Chukotka Province, Eastern Russia.
TIG recently came onto our radar when the company acknowledged the market’s current preference for near term cash flow and changed its strategy to bring forward significant cash flow generation from its secondary project, ‘quick cash flow’ Amaam North.The change in strategy was instigated by Craig Parry who was appointed CEO in November 2012.
Craig is a founding shareholder of TIG and the individual who negotiated the acquisition of “tier 1” Amaam and “quick cash flow” Amaam North for TIG. Craig recognised that while “tier 1” Amaam is a large scale, world class project, it required large capex and would not be in production before 2017.
“Quick cash flow” Amaam North has the potential to be a low capex, high quality coking coal project that could potentially generate for TIG almost its entire market cap per year in EARNINGS within a couple of years, and all this while continuing to advance the ‘tier 1’ Amaam project.
The team at The Next Mining Boom believe this is a smart strategy by smart management in today’s market climate. To produce cash flow is of utmost importance in the market at present (cash is king) and TIG now has both a short game and a long game.
‘Quick cash flow’ Amaam North Coking Coal Project (TIG own 80%):
A recent discovery of high grade, high quality coking coal at Amaam North will allow TIG to develop a small, direct shipping, coking coal operation by 2015/2016.
TIG’s most recent presentation notes that the ‘quick cash flow’ Amaam North project is a game changing opportunity, and we agree:
On a side note, check out that outcrop! It looks like the thin layer of topsoil is literally melting off a giant mountain of high purity coking coal! Pretty sure I can see the nearby, underutilised Beringovsky export terminal in the background of the image too... (just kidding).
TIG is aiming to produce approximately 1mtpa of coking coal from ‘quick cash flow’ Amaam North by 2015/2016. Analysts estimate capex to get in to production of around $80m and estimated operating costs of around $60-70/t.
At today’s coking coal prices, TIG could be earning just shy of $100m per annum from its ‘secondary project’.
We note that $100m is TIG’s current market cap! Not bad for a ‘secondary’ project.
You will recall from our ‘Introduction to coking coal’ that coking coal quality around the world can be benchmarked against coking coal from Australia.
The ‘quick cash flow’ Amaam North project boasts coking coal of similar quality to BHP’s Goonyella coking coal mine in specification.
It is thick, close to the surface and contains low ash
Here is BHP’s Goonyella specification:
And here is Amaam North’s specification:
‘ Tier 1’ Amaam Coal Project (TIG own 60% increasing to 80% when a Bankable Feasibility Study is completed):
TIG’s large scale, large capex ‘Tier 1’ Amaam coking coal project recently released a ‘prefeasibility study’ (PFS) in April 2013 showing the potential of Amaam to be a ‘Tier 1’ asset.
A PFS is a comprehensive study of the viability of a mining project where the mining method has been established.
‘Tier 1’ Amaam is a potential large scale, high quality, long life coking coal project with production estimated from 2017 with operating costs of around $100/t. The mine life of Amaam is significant, with initial estimates around 20 years.
Here is TIG’s estimated BASE CASE production schedule for Amaam. (Note the line graph which shows the estimated sales in mtpa)
Cash costs are always very important to the team at The Next Mining Boom. We tend to prefer low cash cost operations as they are less susceptible to shocks in the underlying commodity, as opposed to high cost operations.
‘Tier 1’ Amaam (when in development) will have some of the lowest cash cost production in the world.
Funding
Because of the project size, TIG will likely require a major strategic partner to assist in the development of ‘Tier 1’ Amaam.
This is why we are so impressed by management’s foresight and TIG’s two pronged strategy and recent focus on a “quick cash flow” project in Amaam North.
Amaam will require around $1.3bn of funding which could come from a number of partners.
Interestingly, the Russian Government has initiated a number of ventures to encourage economic growth and investment in Russia’s east which may benefit TIG.
A US$10.0 billion Russian Direct Investment Fund [RDIF] has been established in partnership between the Russian Federal Government and China Investment Corporation to focus on co-investment with foreign entities to encourage their entry into Russia
A US$3.0 billion Far East and Baikal Regional Development Fund [FEBRDF] has been established to support development of private projects in eastern parts of Russia including the Chukotka Province, where TIG is located.
Quality
Similar to the ‘quick cash flow’ Amaam North project, the ‘Tier 1’ Amaam project also has high quality coking coal quality comparable to a number of other quality coking coals being mined now and historically (after a washing process).
Pre-Investment Checklist Criteria: What is the political risk of the country the company is operating in?
TIG’s projects are located in the Chukotka Province, Eastern Russia.
We are always careful in areas that we invest.
There have been a number of key policy developments recently to encourage investment in Russia, making us more excited about TIG’s investment proposition.
Many countries around the world have recently seen government introduced policies that make life difficult for miners. Today’s threats of mineral resource taxes and even nationalisation clearly make it more difficult for mining companies to operate.
Russia is bucking the trend and actually encouraging mining operations and investment in mining, particularly in east Russia where TIG operates. The team at The Next Mining Boom feel this is a ‘breath of fresh air’ and makes us much comfortable with the sovereign risk aspect of TIG:
Russia appears to be aiming to remove the stigma of the 80’s and the ‘Cold War’ - encouraging foreign investments by opening up their markets and providing investment incentives.
One example of this is a recent proposal for the removal of royalties for companies operating in the Far East of Russia (where TIG’s assets are located):
Further improving our confidence in backing TIG is super major gold producer Kinross Gold establishing a presence in the Chukotka Province:
Traditionally conservative majors like Kinross venturing into east Russia underlines our confidence in backing TIG.
Here is a great article with TIG CEO Craig Parry titled ‘Russia: waiting for world to wake up from history’
Pre-Investment Checklist Criteria: Is the company’s asset close to infrastructure: roads, rail etc?
When analyzing a potential addition to our portfolio, the team at The Next Mining Boom would generally shy away from assets without defined infrastructure solutions.
Logistics and infrastructure are key to the development of projects, particularly for a high volume product such as coking coal:
The ‘quick cash flow’ Amaam North project has access to existing infrastructure and is positioned 18km away from road and 35km away from the underutilized Port of Beringovsky:
The ‘Tier 1’ Amaam coking coal project requires the development of a new port facility which is expected to be 30km from the site.
The Russian Federal Government has approved the proposal to advance towards construction of a 15Mtpa capacity coal terminal specifically for the ‘Tier 1’ Amaam project through its commitment to develop the area.
TIG’s available (or soon to be available infrastructure) will allow it to be more effective in exporting to China than the potential coking coal competition:
Canada – Lacks infrastructure
Mongolia – Inland position and sacks infrastructure
Australia – Further away hence higher shipping costs
Pre-Investment Checklist Criteria: Does the company have cash in the bank? What is the rate of cash burn? Does the company have debt? Is a capital raising imminent?
TIG currently has around $23m cash on its balance sheet and holds no debt.
TIG raised $21m on Feb 13 2013 and received $1m worth of oversubscriptions.
An oversubscribed equity raising is yet another strong vote of confidence for TIG, particularly in today’s tight capital markets.
As a result of the recent placement, we do not foresee an imminent capital raising in the near term.
Pre-Investment Checklist Criteria: Is there upcoming catalysts?
TIG has plenty of news flow in the near term we are looking forward to as can be seen below:
We’ll be sure to keep you updated on TIG’s progress.
The team at The Next Mining Boom is taking this once in a lifetime opportunity to secure bargain basement positions in quality junior companies during times of panic selling, and TIG is no exception.
If you are reading this from outside of Australia and want to trade on the ASX, send us an email and we’ll put you in touch with a broker who can assist (please consult your advisor first).
Remember to always seek professional advice and this this is just our opinion on TIG. Do not take this as investment advice. All information presented in this article is publicly available.
Click here for for further information on TIG and broker research reports.
Stay tuned for more articles and analysis on high quality companies.
Note to traders* The publishers of this article/information/promotion wish to disclose that they hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article/information/promotion.
S3 Consortium pty ltd does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
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