Sitting on a Boatload of Coal
I am not as sure of the technical terms for coal as I am for gold or silver but I think if you are sitting on 1.4 billion tons of high quality thermal coal in the measure and indicated category, the correct way to call it is to say you are sitting on a boatload of coal. A very big boatload.
John Lee, Co-Chairman and CEO of Prophecy Resources (PCY-V), takes a different approach to running a junior mining company. When he bought into the company and took over, one of the first things he did was to define what he wanted the company to accomplish.
Believe it or not, most juniors don't have any goals or mission statements. They exist to spend money and generate paychecks on a regular basis and when the stock price tanks, they realize it's a good time to hand out options [that are valid for 178 years] to all the deadbeats in management. I hate that business model as you may have guessed. Barbara calls it the Kiss of Death, and has begged me to allow her to put KoD after all the 'Incentive Options Granted' news releases she posts on the 321gold home page, but because our sponsors put the bread on our tables I have so far stopped her from doing it.)
I went to the PCY website and downloaded their presentation. Once they got through the blah-blah-blah disclaimer, I read, "Become a major mineral producer with international asset base." That's cool; they actually want to do something. A little background first.
John Lee and Co-Chairman Arnold Armstrong created a company that merged with a Canadian Junior called Red Hill in April of 2010. Red Hill owned two giant coal projects in Mongolia. One is called the Ulaan Ovoo Project and has 209 million tons of high quality thermal coal in the M&I categories. It consists of a single coal seam between 45 and 80 meters thick. The project has a strip ratio of 2-1. The original goal was to have it in production in the 4th quarter of 2010 and it is. The mine is located only 10 km from the Russian border.
Prophecy is aiming at production and sale of 100,000 tons of coal at Ulaan Ovoo in 2010, (they have just started production in mid-October) a million tons in 2011 and two million tons in 2012 with production costs of $8 a ton and revenue from $20 a ton and up depending on which option they take for sales and delivery.
The second major coal project is called the Chandgana Project with some 1.21 billion tons of thermal coal. I visited this project when I was in Mongolia a month back. It's going to take the balls of a brass monkey to accomplish it but John Lee wants to convince the Mongolian government to approve a coal powered electricity plant next to this deposit. PCY will complete a scoping study on Chandgana in 2010 and wants to finish a feasibility study in 2011.
Power generated could be transmitted to Russia, China and of course, used in Mongolia. Mongolia is undergoing incredible growth at present with GDP estimated to quadruple by 2013 as two major mines come on line. Mongolia needs power right now. It may well be easier to finance and advance a major coal fired plant than just a major coal mine. This project could easily turn PCY into a multi-billion dollar company in short order.
Prophecy is valued by the market right now at a tiny $.175 per ton of coal. As production increases at Ulaan Ovoo and hard numbers come in, I expect a substantial increase in market cap per ton. As of now, PCY has a number of options including trucking across the Russian border for immediate cash flow or improving a haul road and trucking the coal to the nearby rail line. Each option has different costs and revenue models.
While it's perfectly accurate to describe PCY as having a boatload of coal, they have a number of other projects. Maybe too many, at some point how many good projects can any management team advance at the same time? They did a takeover of Northern Platinum in September for shares. Interesting drill results were released in late September.
On September 27th, PCY announced a 496-meter intercept at the Wellgreen property that came with their takeover of Northern Platinum. Those results are barn burning. You have to accept that it is the Yukon and there are always issues with different metals. You have to come up with some process that will recover something economic. The more metals in an ore, the more difficult and expensive the process. But $102 rock in a 496-meter intercept is going to be very interesting to a major.
Big projects in hostile environments get expensive. I totally agree with John Lee to get the coal project into production first. It will provide cash flow and lots of cash flow in a relatively short time. But something like Wellgreen might need a $50 million dollar drill program. I suspect John is talking to majors as we speak. It's a project with $25 billion dollars worth of gross metal value in a mining friendly environment.
I've put in a chart taken from the high value potential from the technical report. It shows an incredible $156 in gross metal value. It's only potential but that's a lot of potential. For now John Lee and crew are going focus on Mongolia and coal until they have the internally generated cash to conduct a major drill program at Wellgreen.
Prophecy has other interesting projects in Canada including the Lynn Lake nickel-copper project in Manitoba and an option on a vanadium-titanium project in Ontario.
I really approve of a business model that calls for companies to advance projects. Prophecy exists because as an investor in Red Hill, John Lee, got tired of the lack of progress on the part of management. Red Hill drilled both Mongolian coal projects into the highest categories of resources and then sat on them as if they were eggs waiting to hatch. Lee is leaping forward into production on the one and seeking partners for a power plant on the other. Those are the kinds of actions that add value to shares in a hurry.
John Lee is a financial analyst and not a miner per says. That has both advantages and disadvantages. A big advantage is that he thinks outside the box. Most exploration companies are run by guys who think their job is to spend money. Profit is one of those unusual concepts that they have heard of but have never come across. And it shows, exploration companies blow through a lot of money without much progress. Failure is the norm, not the exception.
However, even in exploration companies, they understand the difficulties in operating in different time zones and different countries with different minerals. Mining coal and mining gold are both mining but there is a lot of difference between them. Lee's ability to hire and manage people with a lot of different skill sets is going to be key here. If he succeeds, the company succeeds. If he fails. . . Well, you get it.
The market has no idea of how to value Prophecy at the present time. They have giant coal resources and are putting them into production. If they can find the right partner for the coal fired generating plant, they will have a billion dollar company in a hurry.
Prophecy has three company-making projects in the works. Their Ulaan Ovoo Project has 52 years of production of thermal coal at 4 million tons a year. It wouldn't take much investment to make it into a $200 million dollar a year cash-flow cow. Their Chandgana Project is a natural for a power plant. If John can find the right partner with deep pockets and contacts, it would turn the company into a billion dollar company overnight.
And Wellgreen is screaming for a major who wants a giant polymetallic project with a lot of tonnage. It's a giant project with highly encouraging results already.
I've visited Mongolia and it's an interesting place to work. It is where China was 15 years ago. Prophecy is on the ground and building relationships. I like their approach.
Prophecy is very very cheap. It's because it's a young company with aggressive management. When the market wakes up, it's going a lot higher
I was a buyer of PCY shares and I have participated in a private placement lately. Prophecy is an advertiser and as such we have a vested interest in their success. John's people have done a good job with the website and they are good communicators. Go to the website, call the company but do your own due diligence, please.
Prophecy Resource Corp