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Montem Resources (MR1) - Premium Price Canadian Coal Takes Off

Coal investment isn't for everyone, but it is an important industrial material. Coking coal, met coal or steelmaking coal are all the same thing.

Coal investment isn't for everyone it seems, but it is nevertheless an important industrial material, not just for energy. Coking coal, met coal or steelmaking coal are all the same thing and used in the production of steel. Without it, we'd be in trouble.

We talk to Peter Doyle, MD & CEO of Montem Resources (ASX:MR1). Montem IPO'd in September following 3 years as a private company. Doyle talks us through the team (ex-Glencore - who tend to think big) and their plans to get their assets in Alberta, Canada back into production. Tent Mountain is the smaller of the 2, but comes with a mill and permits and can be produced in 2022. The numbers are IRR 17.3% at base case, pre-optimised financing and  without an extension on the current 14 year Life of Mine. This will provide the cash flow for the getting the 2nd larger asset, Chinook, into production.

Company Overview 

Montem Resources is newly listed on the ASX. They are a coking-coal company operating in Canada with a number of development assets in the centre of coking-coal production area called Crowsnest Pass. They have one mine that they're bringing back into life which should be producing in 2022 and are planning to use those profits to invest in large development assets that are adjacent to that mine.

Montem Resources (MR1) - Premium Price Canadian Coal Takes Off

Uses for Coal: Still Needed in the Future? 

There are 2 types of coal, or there are 2 uses for coal: the first and the majority of coal around the world is used to produce energy, mostly in the form of steam which is then turned into electricity called thermal coal or steaming coal. Montem Resources has the other type of coal which is called coking coal or metallurgical coal which, because of confusion between the 2 by investors, the company has started referring to as steelmaking coal.

Coking coal is quite rare; it makes up around 10% of global coal resources and is a precious resource. It's fundamental to modern steelmaking which is vital to modern society. It is used in everything from infrastructure to batteries to cars, in schools and in transport. To make steel from a blast furnace, which accounts for 70% of new Steel production, you take iron ore, put it in a blast furnace with coke made from coking coal, which produces pig iron which gets refined into steel.

The Business Plan: Team, Approach, & Assets

Montem Resources has an asset base in the Crowsnest Pass in Southern Alberta, Canada which is directly on the railway line that goes to the port for the export of this coal and is adjacent to Tech Resources, which is the 2nd-largest exporting coking coal company in the World after BHP. Canada is the 3rd-largest exporter of seaborne coking coal behind Australia and the US. 

Montem has 3 assets, the first is the Tent Mountain Mine - an existing mine with existing permits where they have been working for the last 3-years. They are a newly listed company, but the company was formed in 2016 when they bought these assets in Canada.

Montem Resources (MR1) - Premium Price Canadian Coal Takes Off

Location of The Tent Mountain Mine - Montem Resources website Nov. '20

The Tent Mountain Mine is planned to go into production in 2022 and is now in the final stages of planning, having completed 2.5-years of environmental monitoring, engaging with the local community and completing a Definitive Feasibility Study (DFS). The mine is halfway through its mine life and operated a contract with the Japanese in the ‘70s and ‘80s. The Tent Mountain Mine should get into production quickly and plans to produce around AUD$60M per annum for 14-years.

The Tent Mountain Mine is the platform into 10Mt. It already has a permit which is quicker than a green fields development. It takes around a minimum of 5-7-years to start a green fields operation, the exploration, the environmental work, the planning and then get the approvals. The Tent Mountain mine should be going by the end of 2021. 

Montem Resources (MR1) - Premium Price Canadian Coal Takes Off

The plan is to put the profits from the Tent Mountain Mine into their Chinook project. They have just finished drilling their first season at Chinook and released the exciting results to the ASX about 2 weeks ago. The Chinook project sits on top of 3 old underground mines that used to export to Japan in the ‘70s and ‘80s. Montem is exploring for open-cut resources next to them. They have done a concept study on the existing asset base and some drilling and found coal seams, on average, at 22m thick, which for hard coking coal is extraordinary. They will work over the next 2-years to bring that up to a Pre-Feasibility Study (PFS) and apply to the government to open that mine, hoping to start production in about 5 years. This would take production levels from just over 1Mt to upwards of 6Mt.

Montem Resources (MR1) - Premium Price Canadian Coal Takes Off

Location of the Chinook project - Montem resources website Nov. '20

Hurdles to Overcome: Financing, Permits & Licenses

Montem has recently raised AUD$1M and has started utilising this money in the latest drilling programme. At the start of October they had AUD$7M and expect to go into the new year with about AUD$4.5M. They raised enough money at the IPO to get to the start of construction at Tent Mountain which is estimated at AUD$168M from the Feasibility Study. AUD$73M of that is mobile fleet which they expect to get as a lease.

Montem Resources (MR1) - Premium Price Canadian Coal Takes Off

 Exit Goal & Focus: JV Route

The remaining AUD$100M will be financed by a combination of debt and the plan to sell part of Tent Mountain to a joint venture partner who would be interested in both the Tent Mountain project and the upscale to the next project.

Timing & Process for Chinook

Developing coal projects in Western domains is not straightforward, but Montem has been planning for the Chinook project. The government in Alberta, Canada is an extractive-based economy and wants to develop the large met coal resources. The difficulties facing them will be financing the project and getting the work done. They have done the first phase of exploration and have 2 more seasons of drilling to go to bring the project through Pre-Feasibility Study, do the EIA and then apply for the mine. They expect to get approval in 2026 and production in 2027. 

Montem Resources (MR1) - Premium Price Canadian Coal Takes Off

 Understanding Coking Coal: Types & Premiums Applied

Premium-grade coking coal is the headline price and all other coal is benchmarked against that price and sold at a discount. The Tent Mountain coal is expected to sell at a 13% discount to headline prices. The Chinook project will release the coal quality results in January and grade expectations are higher there than the Tent Mountain coal.  

Competition, New Entrants, Price, & Politics

If you came to the market today and you wanted to buy 100,000t of hard-coking coal from Queensland, it is AUD$100/t whereas 100,000t from Canada is AUD$140/t. This is because the Chinese and Australian governments are are in disagreement at the moment. The Australian has banned China from buying coking coal. The company is not banking on this arrangement but is a reflection on the geopolitical tension between China and Australia. Something we are starting to see with many countries currently across many commodities.

There are not a lot of new competitors coming into the space. There are only 4-5 big producers of hard coking coal currently and supply is constrained so that the market doesn't get over-supply. The average price for the last 10-years for hard coking coal is AUD$180/t and a small new company should aim to get producing assets that will make a profit at AUD$100/t. 

Supply is constrained and there's nothing slowing down the demand side which is increasing and is driven by government spending on infrastructure. Steel utilisation in China is the highest it's ever been. There are more cars being made in Japan now than ever before. The expectation is that in the next 2 years, coal prices will go dramatically high. 

The capital required to take a project from a green field to full development can be huge which is why Montem saw the attraction of the permits at Tent Mountain as a great advantage to get into production quickly. The location is good too as it is an extractive-based economy and the infrastructure is excellent. 

Team Track Record & Note-worthy Investors

The Montem board and senior management have extensive experience in global coal markets. They believe that they can ultimately produce up to 10Mt of coking coal, which would be a multi-billion-dollar company and think they have the asset base to support it. 

Montem Resources (MR1) - Premium Price Canadian Coal Takes Off

To find out more, go to the Montem Resources website. 

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