Robust economics confirmed with expanded coal reserves
Issued Capital: 117,076,976
LONDON, ON, Oct. 15, 2012 /CNW/ - Fortune Minerals Limited (TSX-FT) (OTCQX-FTMDF) ("Fortune" or the "Company") (www.fortuneminerals.com) and POSCO Canada Ltd. ("POSCAN") are pleased to announce the results of an updated Definitive Feasibility Study ("DFS") for the Arctos Anthracite Project ("Arctos") in northwestern British Columbia ("BC"), Canada. Arctos, formerly known as the Mount Klappan project, is a collaborative international development project by the Arctos Anthracite Joint Venture ("AAJV") between Fortune (80%) and POSCAN (20%), the Canadian subsidiary of Korea's POSCO, one of the world's largest steel producers. The updated DFS was prepared by Marston, a Golder Associates Company ("Golder-Marston") and incorporates the results of additional drilling and survey data for the Lost Fox deposit area, which together with updated operating and capital costs, confirms an increase in reserves and robust economics for the Arctos project. Because of a more rapid planned project start-up, initial capital costs to achieve commercial production has increased only 2.6% over the initial capital in the previous 2010 DFS. The updated FOBT cash cost of C$ 127.61 / tonne would place Arctos among the lowest cost Canadian metallurgical coal producers. Innovation in the global steel industry continues to drive the increased use of anthracite in the manufacture of steel and in metal processing, while scarcity of high quality deposits and declining exports from the traditional suppliers highlights the importance of having a new reliable Canadian source of supply.
HIGHLIGHTS OF THE UPDATED DEFINITIVE FEASIBILITY STUDY:
- 17.5% increase in Run of Mine ("ROM") Coal Reserves to 124.9 million tonnes ("Mt") and 13.8% increase in 10% Ash Product Reserves to 69.2 Mt in the Lost Fox deposit area;
- Extension of mine life from 20 to 25 years;
- Production of premium pulverized coal injection ("PCI") coal used to manufacture steel;
- Ability to diversify production to other metallurgical coal products that are short of supply;
- Initial capital (first 3 years) of C$ 788.6 million for the mine, surface facilities and railway;
- Cash cost FOBT loading vessel in Prince Rupert of C$ 127.61 / tonne (US$ 121.22 / tonne);
- Base Case pre-tax IRR of 17.0% and pre-tax 8% discounted NPV of C$ 615.9 million;
- Expansion case from 3 to 4 million tonnes per annum ("Mtpa") in year eight of the mine life, increases Pre-tax IRR to 17.5% and 8% discounted NPV to C$ 657.1 million;
- Significant additional improvement to economics when using higher coal prices and / or incorporating railway capital contributions from third party users or government;
- Advancing railway with Canadian National Railway Company ("CN") and BC Government.
Robin Goad, Fortune's President and CEO, commented that, "we are pleased to confirm the Arctos project as a future long-life, low-cost producer of high quality anthracite metallurgical coal and are especially pleased to have confirmed the capital requirements for this project with minimal escalation from the previous study."
The AAJV is proceeding with the Environmental Assessment ("EA") and community engagement to permit the proposed open pit mine, wash plant and railway infrastructure. The railway expansion for the Arctos project is a high priority for both the AAJV and CN which is collaborating on this initiative, which is also consistent with the BC Government Pacific Gateway Policy that includes significant investments in rail, port and power infrastructure in the northwest part of the province. The railway provides a simple and scalable transportation solution for hauling coal from the mine to the port of Prince Rupert for export of products to the global steel industry. Deloitte & Touche Corporate Finance Canada Inc. ("Deloitte") is continuing to work with Fortune as its financial advisor with a mandate to help identify additional strategic partners to provide financing for the Arctos project.
The AAJV retained Golder-Marston to update the geological model, coal resources and reserves and economics for the Lost Fox deposit, one of four deposit areas that are part of the Arctos project (see Fortune news release, dated February 7, 2012). This DFS is an update to the 2005 DFS and 2010 DFS that were prepared by Marston & Marston Inc. prior to it being purchased by Golder Associates. The updated study is based on an open pit mine and wash plant producing 3 Mtpa of washed coal, consisting of a premium 10% ash ultra-low volatile PCI product used to manufacture steel. The study is based on railway transportation of coal to the Ridley coal terminals at the port of Prince Rupert for export to the overseas steel industry. This will be accomplished by an upgrade to the existing Dease Lake Railway Line and a 150 km extension of this rail to the mine site along the railway right-of-way and roadbed that was substantially constructed by the BC Government during the 1970's. The railway project is being conducted in cooperation with CN and the BC Government, but the study assumes that the AAJV would be responsible for paying 100% of the cost.
COAL LICENSES AND LOCATION:
The AAJV has 16,411 hectares of contiguous coal licenses in Tahltan traditional territory in northwest BC, located 330 km northeast of the port of Prince Rupert. The licenses straddle the aforesaid BC railway right-of-way and roadbed, which provides road access to the site from Highway 37 and extends south into Gitxsan traditional territory. The project also has an active airstrip.
RESOURCES AND RESERVES:
The Arctos project consists of four resource areas referred to as the Lost Fox, Lost Fox Extension, Hobbit-Broatch and Summit deposits. The geology of the property includes at least 33 individual coal seams up to 11 metres in true thickness, 14 of which are considered economic in the initial open pit mine in the Lost Fox deposit area with a minimum true thickness of 1 metre. Golder-Marston prepared an updated digital block model of the geology and coal seams and estimated In-Pit Coal Resources and Run of Mine ("ROM") and 10% Ash Product Coal Reserves for the Lost Fox deposit area. The updated resources and reserves were prepared using Maptek™-Vulcan 3D mining software based on the results of 152 cored drill holes, 19 rotary drill holes, 5 winkie holes, 301 mechanical and hand trenches, 4 underground adits, and a 200,000 tonne bulk sample, pilot plant test and trial cargo.
The drill hole database includes 14 additional drill holes completed by Fortune in 2005 in order to verify the geological model and coal resources and reserves in an area that had previously been classified as Inferred within the former open pit shell. This drilling also tested for lateral extensions to the coal seams beyond the former pit limits and provided geotechnical and environmental information to support project permitting. The results of Fortune's drilling confirmed the coal and its geometry within the former pit configuration, and also extended the Lost Fox deposit beyond the former pit limits. A detailed airborne LIDAR laser topographic survey of the project area and proposed mine site was also incorporated into the geological model to improve the accuracy of calculating the mine rock to coal ratios and strip volumes, as were updated coal price assumptions.
|IN-PIT COAL RESOURCES FOR LOST FOX DEPOSIT|
|Mt, Raw Coal Ash Wt. %, air dried basis|
|Measured||Indicated|| Total Measured
|COAL RESERVES FOR LOST FOX DEPOSIT AREA|
|ROM COAL RESERVES (Mt)||10% ASH PRODUCT RESERVES (Mt)|
Historical estimates of additional coal resources for the Arctos project include Indicated Resources of 38.1 Mt and Inferred resources of 359.5 Mt within the Lost Fox Extension, Hobbit-Broatch and Summit deposit areas. In addition, there is a historical estimate of 2.2 billion tonnes that were classified as Speculative Resources, however, Speculative Resources are no longer considered NI 43-101 compliant and should not be relied upon. Significant additional drilling and sampling is required to verify these historical estimates.
| The Arctos Coal Resource and Reserve estimates were prepared in 2012 by Golder-Marston in compliance with National Instrument 43-101. Mr. Edward (Ted) Minnes, P.E. is the Qualified Person responsible for the estimates. Further information regarding the Arctos Coal Resource and Reserve estimates is available from the Company's disclosures under the Company's profile on the SEDAR website at www.sedar.com.
The historical resource estimate was developed by Gulf in 1988 and updated in 2002 by Marston-Golder to reflect changes in the estimation of Inferred Resources under Paper GSC 88-21. The Speculative portion of the resources is not compliant with current reporting standards and is not included in the current mineral resources. Speculative Resources were developed based on estimated average coal thickness applied to the projected aerial extent of the coal.
The updated 10% Ash Product Coal Reserves for the Lost Fox deposit area will support production of 3 Mtpa over a minimum mine life of 25 years. The mine will utilize conventional open pit mining using 177 tonne class trucks, with 26 m3 hydraulic shovels for mine rock removal and 17 m3 backhoes to mine the coal from 10 metre high benches. The life of mine average in-pit strip ratio is 6.2 bank cubic metres ("bcm") of mine rock / tonne of in-situ coal and the washed coal strip ratio is 11.3 bcm of mine rock / PCI product tonne.
PROCESS PLANT AND ON-SITE INFRASTRUCTURE:
Coal from the Lost Fox deposit area will be processed in a wash plant constructed at the site for the production of a 10% ash, ultra-low volatile PCI product for sale to the overseas steel industry. The Arctos wash plant will use standard processing methods of heavy media separation, cyclones and froth flotation with a washability yield averaging 55.4% for the 14 coal seams that are economic in the initial open pit mine. The plant will also be configured to produce other premium anthracite products in the future, including charge carbon for electric arc steel manufacturing, coke replacement and ferroalloys processing; carbon filters for water purification, as well as sinter.
| PCI COAL QUALITY
10% Ash Product (air dried basis)
|Gross Calorific Value||31.1 GJ / t|
|Gross Calorific Value||7423 kcal / kg|
|Gross Calorific Value||13,352 Btu / lb|
Source: Gulf Canada Resources Coal Quality Handbook
A camp will be constructed to accommodate the work force of approximately 470 employees (580 at peak), primarily from nearby communities, and working on a rotational basis. Electrical power supply for the process plant, camp and other facilities would be generated by diesel with an installed load of 10.9 megawatts and consisting of eight, 1,500 kilowatt generators. The BC Government is extending the electrical grid north along Highway 37 to Bob Quinn Lake, and if the grid is extended by the AAJV to the mine, there is potential to significantly reduce operating costs.
CN operates on the Dease Lake Railway Line under a long-term lease with BC Rail between Fort St. James and Minaret, the current terminus of track, which is 150 km south of the Arctos project. This railway requires an upgrade to the track and sub-grade to achieve a modern operating standard of at least 263,000 pounds gross weight per car on rail that will enable efficient haulage of coal to Prince Rupert. The railway right-of-way and roadbed has been substantially completed beyond Minaret to the project site. Capital of C$ 330 million has been estimated to upgrade and extend this railway to the project site and is included in the initial capital for the project with the AAJV assumed to be paying 100% of this cost. The DFS contemplates that the AAJV will lease six, 127 car train sets with capacity of 95 tonnes per car to transport the production of 3 Mtpa to the port. CN will supply the locomotives and train crews. The cost of leasing the rail cars is included in the operating costs and the locomotives and train crews are included in the CN haulage rate. Railway transportation of coal is a simple and scalable transportation solution that allows for potential expansion of production in the future to leverage the large resource base of the Arctos project.
Railway transportation of coal provides access to the Ridley coal terminal at the port of Prince Rupert, which is a modern government-owned, bulk handling facility capable of handling full Capesize ocean vessels up to 250,000 dead weight tonnes. It is also about 30 cruising hours closer to north Asia than other west coast ports. The terminal is currently undergoing an expansion to 24 Mtpa and is permitting a future potential expansion to 60 Mtpa. The terminal is also handling metallurgical coal from other western Canadian mines that provides an opportunity for blending and split cargos.
The Golder-Marston DFS uses a base case price of US$ 175 / tonne of PCI product, unchanged from the previous 2010 DFS update. The Canadian to US dollar exchange rate is C$ 1 = US$ 0.95. The project generates an attractive rate of return using base case assumptions.
|LOST FOX MINE BASE CASE ECONOMICS|
|NPV (8% Discount Base case)||C$ 615.9 M||C$ 405.8 M|
|NPV (5% Discount Sensitivity)||C$ 1,058.2 M||C$ 749.8 M|
|Capital (Initial 3 Years)||C$ 788.6 M|
Capital costs to achieve full production is C$ 788.6 million during the first three years of the project and includes the mine, process plant and all required on-site and railway infrastructure.
|Capital Item||Cost C$|
|Mine & Equipment||192.0 M|
|Process Plant & Facilities||259.6 M|
|Off-site transportation||330.4 M|
Operating costs for the Arctos project includes all mining, processing, transportation, royalties and administration FOBT vessel in Prince Rupert and totals C$ 127.61 / tonne (US$ 121.22 / tonne). This is within the lower range of cash costs for all current Canadian metallurgical coal producers.
|OPERATING CASH COST SUMMARY C$ / TONNE|
|Drilling & Blasting||9.39|
|Stripping & Topsoil Removal||31.75|
|Coal Loading & Haulage||5.52|
|Operations Support & Interim Reclamation||8.47|
|Coal Processing & Loadout||10.02|
|Supervision & Administration||3.06|
|Total Direct Operating Cost||73.31|
|Coal Transportation Rail||33.63|
|Selling, General & Administration||0.20|
|Total Indirect Operating Costs||54.30|
|FOBT Vessel Cash Cost C$||127.61|
|FOBT Vessel Cash Cost US$||121.22|
The Arctos project produces even higher rates of return for the development at coal price sensitivities above US$ 175 / tonne. Coal price sensitivities were prepared for the project to assess the economics at prices up to US$ 300 / tonne, the approximate price for metallurgical coal attained in 2011. The project is well positioned to benefit from the projected global shortage of high quality metallurgical coals that is expected to support strong prices for the foreseeable future.
|COAL PRICE SENSITIVITIES|
| FOBT PRICE
(US$ / t)
| Pre-Tax NPV
| After Tax
| After Tax NPV
|$175||17.0%||C$ 616 M||14.7%||C$ 406 M|
|$200||24.8%||C$1,245 M||21.5%||C$ 883 M|
|$225||32.0%||C$ 1,887 M||27.8%||C$ 1,366 M|
|$250||38.3%||C$ 2,510 M||33.3%||C$ 1,835 M|
|$275||44.6%||C$ 3,154 M||38.7%||C$ 2,318 M|
|$300||50.4%||C$ 3,784 M||43.7%||C$ 2,791 M|
Initial rail capital for the Arctos project totals C$ 330 million for the upgrade and extension of the Dease Lake Rail Line to the mine site. The updated DFS assumes the total capital cost for this infrastructure would be paid by the AAJV. Sensitivities were prepared, which demonstrate the impact on project economics in the event of a third party user or government paying a portion of the railway infrastructure costs, which would lower the AAJV development capital and improve project economics.
|THIRD PARTY RAIL CONTRIBUTION TO CAPITAL|
|25% Contribution||50% Contribution|
|Pre-Tax||After Tax||Pre-Tax||After Tax|
|NPV (8% Discount)||C$ 688 M||C$ 466 M||C$ 758 M||C$ 525 M|
|Capital (1ST 3 Years)||C$ 706.0 M||C$ 623.4 M|
The updated 10% Ash Product Coal Reserves for the Arctos project will support production of 3 Mtpa over a 25 year mine life. Using base case data developed for the 3 Mtpa case, a sensitivity analysis was also prepared to determine the impact on project economics in the event of an increase in production rate from 3 Mtpa to 4 Mtpa in year eight of the mine life. This analysis demonstrates the positive impact on project economics when the production rate is increased and the fixed cost associated with the railway infrastructure is spread over greater annual throughput volumes. In this sensitivity analysis, the additional expansion capital to accommodate the production rate increase is assumed to be paid from cash flows.
|LOST FOX MINE ECONOMICS WITH RAMP UP TO 4 Mtpa in Year 8|
|NPV (8% Discount)||C$ 668.9M||C$ 389.9 M|
|Incremental LOM Capital||C$ 100M|
ABOUT ANTHRACITE COAL:
Metallurgical coal together with iron ore are the principal raw materials needed to make steel. Anthracite is the highest quality metallurgical coal, measured by carbon and energy content, and represents just 1% of world coal reserves. It is the most versatile coal, suitable for use in a broad range of metallurgical, thermal, water purification and composite material products. The natural high carbon and very low volatile (gas) content of anthracite makes it ideal for use as a premium ultra-low volatile PCI product that is injected into the blast furnace to reduce the amount of coke used in crude steel production. High carbon and low volatiles also allows anthracite to be used as a direct coke replacement and as a blend coal with hard coking coal to make metallurgical coke. Anthracite is the only coal that can be used as sinter feed. Anthracite reductants are used in electric arc / direct reduction steel manufacturing and for the processing of ferroalloys and other metals. Carbon filters for water purification are made with anthracite coal as well as some carbon composite materials. The high carbon content of anthracite makes it the preferred coal for gasification and liquefaction technologies to make urea fertilizers, plastics and high quality synthetic fuels, particularly in Asia where natural gas supplies are scarce.
The global shortage of high quality metallurgical coal is driving innovation in the steel industry as producers develop new technologies to be globally competitive, reduce greenhouse gas emissions, and diversify their sources of key raw materials. Many of these new technologies use even greater amounts of anthracite.
The world's reserves of high quality metallurgical coal are in decline, while consumption of anthracite is increasing in metallurgy. The historical dominant sources of supply of anthracite have been in China, which has been a significant net importer of anthracite since 2004, and Vietnam which is curtailing exports in order to preserve their own reserves for domestic use. This emergence of China as a net importer coupled with depletion of supplies from other historical producers allows for the development of a new Canadian source of supply to service the global steel and metal processing industry.
Opportunities exist to further improve the economics for the Arctos project, some of which are identified in the updated DFS and in previous studies. The property has a very large resource base that is well in excess of the current reserves. There is good potential to expand the reserves in the Lost Fox deposit and identify additional reserves in the adjoining deposits to extend the mine life or expand the production rate. Additional drilling is planned in the future. An expansion of production would improve the project economics by achieving greater economies of scale and spread the fixed costs associated with the railway infrastructure upgrade and extension on greater throughput volumes. The AAJV is also engaged in discussions with the BC Government and potential third party users of the proposed railway extension with the objective of securing additional investment to share some of the capital cost to upgrade this rail.
The DFS is also predicated on diesel-generated power and the use of diesel mining equipment. The BC Government is extending the provincial electrical grid along Highway 37 north towards the Arctos project. Access to grid power would eliminate the need for on-site power generation, allow for the use of more efficient electric-cable shovels and electric drills, and alleviate uncertainties associated with fluctuations in the price of diesel.
Opportunities also exist to finance mobile equipment for the mine through a "lease-to-purchase" program, and / or use contract mining during the construction phase, to lower the up-front capital for the development.
Substantial engineering, feasibility and environmental work have already been completed for the development of the Arctos project, totalling nearly $100 million. The project is currently in the BC EA process and the development plan is being designed to minimize impacts on the environment. The AAJV is working with the local communities to explain the project including its benefits and potential impacts. Development of the Arctos project will bring long-term employment to a region already adversely impacted by the downturn in the forestry industry, as well as provide important infrastructure for the benefit of other projects and the public.
The updated DFS has confirmed robust economics for the Arctos project with rail transportation of metallurgical coal to the port of Prince Rupert. The potential to expand production from a world class resource base, combined with anticipated strong prices for metallurgical coal for the foreseeable future, makes Arctos a compelling development opportunity to service a global steel industry in need of new sources of supply of its critical raw materials. After successfully securing POSCAN as its initial joint venture partner, Fortune is working with Deloitte to attract a second stage strategic partner to complete project financing.
About Fortune Minerals:
Fortune is a diversified resource company with several mineral deposits and a number of exploration projects, all located in Canada. The Company is focused on the development of the Arctos Anthracite Project (formerly Mount Klappan project) in BC and the NICO gold-cobalt-bismuth-copper deposit in the Northwest Territories ("NT"). As part of the development of the NICO deposit, Fortune is developing the Saskatchewan Metals Processing Plant in Saskatchewan to process NICO concentrates to high value metal products. The Company has acquired and dismantled equipment from the Golden Giant Mine at Hemlo, Ontario for relocation to NICO. In addition, the Company owns the Sue-Dianne copper-silver-gold deposit and other exploration projects in the NT. Fortune is focused on outstanding performance and growth of shareholder value through assembly and development of high quality mineral resource projects.
This press release contains forward-looking information. This forward-looking information includes, or may be based upon, estimates, forecasts, and statements as to management's expectations with respect to, among other things, the proposed development of and anticipated production from the Arctos project and, the establishment of a railway link to Prince Rupert. Forward-looking information is based on the opinions and estimates of management at the date the information is given, and is subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking information. These factors include the risk that the Company may not be able to arrange the necessary financing to construct and operate the Arctos mine and/or the railway link to Prince Rupert, the risk that the AAJV may be terminated in accordance with its terms, the risk that the Company may not be able to conclude an agreement with CN for the transportation of coal from the Arctos site to Prince Rupert, the possibility of delays in the commencement of production from the Arctos project, the inherent risks involved in the exploration and development of mineral properties, the risk that actual capital and operating costs for the Arctos project may differ from those anticipated, uncertainties with respect to the receipt or timing of required permits and regulatory approvals, the uncertainties involved in interpreting drilling results and other geological data, fluctuating metal prices and other factors. Readers are cautioned to not place undue reliance on forward-looking information because it is possible that predictions, forecasts, projections and other forms of forward-looking information will not be achieved by the Company. The forward-looking information contained herein is given as of the date hereof and the Company assumes no responsibility to update or revise such information to reflect new events or circumstances, except as required by law.
SOURCE: Fortune Minerals Limited
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