Erdene Resource Development in Mongolia

This is the first time I have mentioned Erdene Resource Development (ERDCF / ERD.TO) on my blog.  It may also be the last time, unless they do something really impressive with their projects in Mongolia.  That country has a nasty habit of punishing foreign investors when it goes through fits of resource nationalism.

Mongolia ranks 83rd out of 175 on Transparency International's corruption index and 97th out of 178 on the Heritage Foundation's Index of Economic Freedom.  Those are really poor conditions in which to operate a foreign-owned business.  I remember the last time some mining executive (at another company) tried to tell me they knew the inner workings of Mongolia so well that their project could navigate any political pressures.  They were blindsided when Mongolia rolled up their project "for the good of the people," as kleptocrats always describe such actions.

The management bios show a geologist CEO who also holds leadership roles in other TSX-listed resource companies.  I am usually very skeptical of top executives who take a "lottery ticket" approach to stakes in other producers rather than focus exclusively on making one project succeed.  Other folks on the management team also have geology degrees, which is nice.

Erdene has several projects in Mongolia.  They have located deposits of gold, silver, molybdenum, and copper in various places.  They're also looking for coal.  The 43-101 compliant information they posted is of limited use if it only discusses MII resources at low ore grades.  I am not ready to invest in any resource company that cannot demonstrate comprehensive 2P reserves at economically viable grades.

Check out the financial reports on their website.  Their quarterly statement for June 30, 2014 shows a net loss more than 3x their cash on hand.  Erdene must continue to raise capital just to stay in business, putting their shareholders at risk of further dilution.

The stock trades in the pennies for pretty good reasons.  All of the geology expertise on the planet means little in an inhospitable political climate.  The best thing to come out of Mongolia so far has been the Mongolian BBQ cooking style.

Full disclosure:  No position in this company, ever.

SouthGobi Resources (SGQRF) And Mongolian Coal Adventures

SouthGobi Resources (SGQRF / SGQ.TO) is a junior coal miner focused on Mongolia.  It has historically been part of Turquoise Hill Resources' project portfolio but Rio Tinto's backing of that parent company has new implications for SouthGobi.  Aluminum Corp. of China (aka Chalco) failed to acquire Turquoise Hill's stake in SouthGobi due to Mongolian political concerns over resource security, so Rio Tinto may decide to accelerate whatever development plan it has for SouthGobi.  More bad luck came SouthGobi's way when their legal counsel also ran afoul of Mongolian politics.  Mongolia's political spasms are typical of a resource-rich emerging market.  I blogged about Turquoise Hill Resources recently and noted that doing business in places Mongolia has a fair share of risk.

The CEO and VP Investor Relations have complementary backgrounds, but IMHO they should switch jobs because their respective backgrounds make them better suited for such a move.  Think about it; a sales dude should do external relations and a mining engineer should make decisions on mining operations.  Rio Tinto wants them there, so ultimately they will execute their part of a much larger plan.  The ultimate strategy for the Ovoot Tolgoi project is to ship coal to China.  Infrastructure for rail shipment and coal washing won't be problems.  They have MII resources but I would like to know their estimated cash cost of production.

Rio Tinto is now stuck with this project and I am not clear on how hard they will press for full development in light of SouthGobi's recent problems.  That's why I'm not an investor.

Full disclosure:  No position in SouthGobi Resources at this time.  

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.