Monday, December 24, 2012

Prophecy Coal (PRPCF) Bets On Mongolia

Prophecy Coal (PRPCF / PCY.TO) is trying to make a go of the resource sector in Mongolia.  It's too bad Genghis Khan isn't around today or he'd whip that whole country into shape.  In the meantime, folks have to do business the modern way.

The management team has experience in everything but coal mining.  It's nice to have local connections in Mongolia, but at some point after your local contacts have accelerated your permit applications you'll have to demonstrate the ability to pull coal out of the ground.

Their main project is coal from Ulaan Ovoo.  Their 43-101 report from 2009 reveals MII resources but no 2P reserves yet.  The single most important number at this stage is their estimated cash cost of production at $56/ton.  That is an extremely high figure, far above the preferred threshold of the lowest quartile on the world's cash cost of production curve.  Mongolian utilities would be better off importing coal from Indonesia, where the average cash cost is about $35/ton.

Their proposed power plant at Chandanga has been permitted but they have not begun construction.  The coal project at Chandanga that is supposed to fire this plant has a 43-101 report, estimating the cash costs of production here at under $38/ton and declining in future years (according to their latest update dated November 2012).  That is a far more price-competitive project than Ulaan Ovoo.

Prophecy Coal does have other projects but the key takeaway is that they all have 43-101 summaries of MII resources.  None of the properties they're exploring or developing have 2P reserves, so more exploration needs to de-risk this enterprise.

The company's most recent financial statements for Q3 in 2012 show C$4.5M in cash on hand as of September 30.  Note that this does not include the C$10M in restricted cash the company has pledged to obtain exploration licenses from Tethys Mining LLC; that cannot be used to cover operations.  Prophecy Coal's burn rate is about C$1M/month, so they will have to raise more capital before their cash runs dry in mid-March 2013.

Their plan seems to be to initially sell coal directly to Mongolian power plants, but Mongolia is a small energy market.  I've never heard of a penny stock building a 600MW power plant; that's something a large utility would normally do.  They will have to raise a tremendous amount of money to build that power plant and extract coal.  That's a bit too risky for me.

Full disclosure:  No position in Prophecy Coal at this time.