Allegiance Coal (AHQ) - $25M Raise Restarts Mining Operation

Allegiance Coal is listed on the Australian Securities Exchange (ASX:AHQ). Its investment focus is advanced, near production, or producing steelmaking coal projects in countries with low political risk. Allegiance is also committed to the development of sustainable working relationships with indigenous peoples and the wider community with whom the company is engaged in relation to its projects.

We caught up recently with Mark Grey, Chairman and Managing Director of Allegiance Coal. He spoke to us about recent happening at his company, especially in light of the whole current concept hanging over the coal marketplace - some people love it, others hate it.

Company Overview

Allegiance Coal is an Australian company focused on near-production and producing steel-making coal projects in countries with low political risk. Critical for Allegiance is that projects do not require prohibitive CAPEX spends and sit at the lower end of the cost curve. The company is listed on the Australian Securities Exchange under the symbol AHQ.

Management and Board

In addition to Mark Grey, management and direction is handled by Malcolm Carson, Larry Cook, and Bernie Mason, Non-Executive Directors; Jonathon Reynolds, Finance Director; Amon Mahon and Dan Farmers, COO’s of New Elk Coal Company; and Angela Waterman, Environment and Government Relations.

Company Projects                                    

Allegiance is involves with 2 coal projects: the Tensas project in British Columbia, and the New Elk coal mine, in southeastern Colorado.

• Tensas is located within the Telkwas coalfield, 375km by rail to a deep-water port at Prince Rupert. Telkwas has had a coal mining history since the early 20th Allegiance acquired its properties in 2016 and has completed environmental baseline and pre-feasibility studies. The company is now in the pre-application environmental assessment and permitting phase for the project.

• The New Elk mine, containing 744Mt of coal, was acquired by Allegiance in October 2020. It is located in the prolific, coal-bearing Raton Basin. The company plans to return the mine, which contains about 656Mt of hard coking coal, to production in 2021. This year the company will begin rail shipments of metallurgical-grade coal to a Gulf of Mexico port in Houston, about 850 miles southeast of the mine site.

Grey’s “One-Minute” Company Overview

We asked Grey if he could tart off with a one-minute company overview: “Absolutely. Allegiance Coal is an ASX-listed company focused on developing metallurgical coal assets in Canada and North America. We have 1 project in British Columbia on the western side, which is a green fields project currently going through the permitting phase. Then of course last year, we completed the acquisition of the New Elk coking coal mine in southeast, Colorado, and we are very much focused on returning that asset into production over the coming weeks”.  

Allegiance’s Funding Choices

When we spoke earlier to Allegiance, we were told that the company would principally use debt and term sheets to fund their path forward. Now we see that they have chosen the equity route. We asked Grey about this apparent change in financing.

“Yes, things have changed”, he replied. He summarized the situation in detail: “It's well-publicized in our ASX announcements that we have an AUD$25M debt term sheet from a New York debt fund. That fund was undertaking due diligence, and was nearing the completion of the due diligence actually. In my capital structure I always have a pull between the amount of debt I want. I didn't want to borrow the full AUD$25M. I had $15M in my mind, as far as gearing the balance sheet is concerned. Hence, I always had a small shortfall which I needed to fund by way of equity”.

He continued: ”I asked my broker's to reach out to institutional investors to see what interest we could get by way of an equity placement. We went out looking for AUD$10. We got AUD$15M, and a week after we completed that placement, a European fund manager reached out to us as well and said we'd like to be involved in the raise. Thus, altogether we raised $25M”.

As it turned out, “We had fantastic support from the equity market … being equity funded to start up a mine gave … a lot of comfort that we didn't need the debt”. Additionally, “We didn't anticipate the level of equity interest - simple as that. And we were overwhelmed by the interest and we accepted it”.

No External Pressure

We dug in a little deeper with our inquiry about this switch, asking Grey for a little more insight in the company’s internal conversations and decision-making process. He told us that as CEO he feels “No external pressure” and wants to do what is best for the company.

He indicated that they were “Fortunate in that we acquired (an) asset (New Elk Mine) that is already built”. All he said he really needed to refurbish the mine was “Something in the order of AUD$20M-$25M, and in the overall scheme of things that's not a lot when it comes to equity funding”.

Timeline For Cash Flow

We queried Grey as to the commencement of cash flow from the New Elk operation. He replied that “We will start cutting coal in the week commencing 19th April, and we will be loading our first train by the second week in May, and we should have about 80,000t land at the port of New Orleans by the second week of June. We are targeting early-mid June for our first shipment”. Allegiance will be paid, and become a cash-flowing company, once the coal has landed in port, he told us.

As far as the payment mechanics go, Grey indicated that they “Will start with spot on the spot market with spot cargoes”. Then they plan to “Do something with selected steel mills, people who we want a long-term relationship”. He envisions that they’ll start in June with the first shipment and get about 3 shipments away before we sit down and have serious conversations with selected steel mills for calendar year 2022”.

AHQ Share Price Concerns?

We noted that the price of Allegiance’s stock has essentially been moving sideways. We asked Grey if this concerned him.

His response was ”I can't predict the way the share market performs. I can only focus on my business, which is getting coal to the port at the cost that we believe it should be and selling it on the market in the current pricing environment. If I do that then we're able to generate a strong EBITDA earnings, then hopefully, the market can reflect on what our margin looks like and sit down and do their multiple valuations on us and make an informed decision”.

Is Coal a Dirty Word?

We then turned the conversation to a topic quite in vogue these days and asked Grey what he thought about the market and public perception about coal. In a short, is coal too dirty a word for some? Furthermore we noted that he does not yet have an IR company working with the yet and asked him about that as well.

He replied that, indeed, they don’t yet have an IR firm lined up. He said: “There are plenty of IR companies out there, and I have been approached by many, but I just haven't been convinced by the value that they really bring”. He does admit, however, that many people in the sector are focused elsewhere and it is “Hard to drag them away and get them back into coal”.

He then acknowledged the real importance of metallurgical coal in the manufacturing of a broad spectrum of today’s in-demand products: “High-quality steel … is inextricably linked to the battery mineral space. It cannot advance, it cannot proceed, it cannot come to be without having high-quality hard steel”.

Any Impediments Going Forward?

We closed the interview with the CEO by asking him to share any impediments that Allegiance may run into going forward. He informed us ”As I sit here now, I can't see it, but I'm prepared for anything. It's really now about getting those spot cargos moving”.

To find out more, go to Allegiance Coal's website.