HARARE – The London-listed company, Contango Holdings expects to deliver 10,000t of thermal coal and 10,000t of coking coal per month from its Hwange Lubu coal project, with plans to begin delivering thermal coal in H1 2023, subject to finalizing transport and export routes.
This comes after the company stated that it has recently received a number of unsolicited approaches from thermal coal buyers ranging from trading houses to industrial consumers from Africa, Europe, and Asia, which has pushed the demand in the last 12 months on its 70% interest in the Lubu Coal project in Zimbabwe.
The Lubu deposit contains significant amounts of both coking and thermal coal and has a current NI 43-101 resource of over 1 billion tonnes of coal.
The company wishes to profit as thermal coal prices have risen significantly from approximately US$125 per tonne to US$450 per tonne due to increased demand from energy displacement and severe supply shortages caused by the closure of thermal coal mines.
According to group CEO Carl Esprey, noted that what was initially a by-product in its coking coal and coke development plan is now a highly profitable and complementary product as the global energy crisis has seen a dramatic increase in demand for thermal coal, which has been reflected in the thermal coal price, which has nearly tripled over the last year.
“ While no one can be certain how long the market imbalance and demand for thermal coal will remain at these levels or potentially higher, given the synergies with ongoing operations and limited additional costs, the ability to initially generate over $10M of additional earnings per annum by selling our thermal coal makes clear financial sense
At over a billion tonnes of coal, the Lubu Project is vast. The company always intended to expand its production capacity of coking coal and coke given the size of the deposit and highly attractive economics. The foreseeable market conditions will also now enable thermal coal to be brought into the development scenario during H1 2023,” Esprey said.
The Company initially focused on extracting coking coal from Block 2 because the seams have strong coking coal characteristics and thermal coal was historically viewed as a by-product. Block 2 is expected to extract approximately 60% thermal coal and 40% coking coal.
Contango believes that selling thermal coal on a global scale can significantly increase shareholder value.
The development of thermal coal sales would necessitate only minor capital expenditures, funded by internal cash flow, to expand the scale of operations and infrastructure, while mining costs would be negligible because thermal coal is effectively a by-product of coking coal mining.
Given the volatility of thermal coal prices and the current level of interest in the product, the company is now investigating the feasibility of exporting thermal coal internationally via ports other than South Africa which no longer has export capacity.
The Company remains focused on delivering coking coal and coke development, and it expects to begin first sales of washed coking coal under its existing initial 10,000 tonnes per month off-take agreement with AtoZ Investments (Pty) Ltd (“AtoZ”) by the end of the year.
This contract’s margins are expected to start at $70-80 per tonne, based on the Minerals Marketing Corporation of Zimbabwe (“MMCZ”) market price of $120 per tonne, with the potential for further increase given current global benchmark pricing of around US$340 per tonne.
Furthermore, the group is continuing to advance discussions with other groups about financing coke batteries through pre-pay off-take agreements.
The coke batteries will allow the company to produce a higher-value product with potentially $350 per tonne long-term margins.
However, if the company does not secure financing for the coke batteries as a result of the discussions, the cash flow from the sale of coking coal and, potentially, thermal coal will be sufficient to cover any capital requirements.