Friday, 27 September 2013

#BHR A Beacon of Hope for investors in BHR?

Beacon Hill
Today saw BHR release their long awaited JORC compliant reserves report. Expectations were running high after the company promised this by the end of Q1. (The delay is another matter altogether I shan't comment on that!). When it arrived it was met with some confusion on certain boards as some PI's, already under water, made a comparison with the earlier resources RNS and compared apples with pears, panicked, and promptly sold up. Fine if all you want to do is trade, but not a great time to sell out in you have been invested for many months in my opinion as the share price is now at all time lows. 

The earlier year resource statement (22.02.12) reported a 31% increase in resources to 86.8m tonnes. Today's updated reserves statement showed a total run of mine proven and probable reserves of 39.4m tonnes and total saleable proven and probable reserves of 16.16m tonnes. Easy to think in the heat of a 7am bleary eyed scan of an RNS that we've lost several million tonnes of coal. (For more detail on the difference between reserves and resources please see my other page linked above on the headings)

However, I've read a bit more about the difference between resources, probable reserves, and proven reserves, and I actually think today's statement, in light of the recent weakness in the price of coking coal which I shall come onto in a minute, could be reassuring. Especially when you consider that to class coal as proven, it needs to meet the following strict criteria (from the Joint Ore Reserves Committee of The Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and the Minerals Council of Australia)

30. A ‘Proved Reserve’ is the economically mineable part of a Measured Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified. A Proved Reserve represents the highest confidence category of reserve estimate.  

In other words you've got to be pretty damn certain that it is there and is economically viable to extract - which means it has to take into consideration the currently depressed price of coking coal and still be viable. Here's the bit from the report where it comments on the factors that must be taken into consideration when reporting something as proven:


  • The derivation of, or assumptions made, regarding projected capital costs in the study.
  • The methodology used to estimate operating costs, 
  • Allowances made for the content of deleterious elements. 
  • The source of exchange rates used in the study
  • Derivation of transportation charges
  • The basis for forecasting or source of treatment and refining charges, penalties for failure to meet specification, etc
  • The allowances made for royalties payable, both Government and private.
Market assessment

  • The demand, supply and stock situation for the particular commodity, consumption trends and factors likely to affect supply and demand into the future.
  • A customer and competitor analysis along with the identification of likely market windows for the product
  • Price and volume forecasts and the basis for these forecasts
  • For industrial minerals the customer specification, testing and acceptance requirements prior to a supply contract

  • The inputs to the economic analysis to produce the net present value (NPV) in the study, the source and confidence of these economic inputs including estimated inflation, discount rate, etc
  • NPV ranges and sensitivity to variations in the significant assumptions and inputs

So all in all I'm reading this that today's news confirms that we have over 16.16m tonnes of proven and probable reserves of saleable coal, of which at least 8.3m tonnes is coking coal which is viable to produce under today's known conditions. 

This report is presumably based on current and future prices of coal. This is where it gets interesting compared to the maiden reserves report which was released on 2nd February 2012 - over 18 months ago. Take a look at the price of coal at this time versus now:

At this time coking coal was around $210/tonne which I presume explains why that JORC statement reported 23.45m tonnes of saleable proven and probable coal.

Todays price is around $140/tonne and yet it looks to me like we are still able to say, that we have 16.16m tonnes of saleable proven and probable coal. This presumably helps explain why the difference between the two reports of proven hard coking coal is fairly small (8.7mt Feb 2012 vs 8.3mt Sep 2013) as it remains less susceptible to the economic "viability" question as it remains higher priced?

I don't think today was the time for long term holders, or new investors to sell out based on the reserves report. In my view we've just had confirmation that we have proven reserves, that are economically viable even at the current prices (which do look like they are moving up) and having reflected myself I added to my holding today by another 33% at a price of 2.14p. The wording from today's RNS paints a positive picture and might be worth reflecting on again:

Beacon Hill CEO, Rowan Karstel said, "This Reserve statement not only demonstrates that Minas Moatize remains robust during this period of depressed coal prices, but also acts as an important step in optimising the Company's reserve inventory to provide significant upside as coal prices recover.  In January 2013 the Minas Moatize Resource statement was increased by over 30% to 86.8 Mt and by following the same methodology, through additional exploration work and value engineering, we expect to make further improvements to our Reserve base.  We are also active in reviewing opportunities in adjacent properties for expansion of our life of mine, scale and efficiency, with the aim of generating significant additional value upside.

 "This Reserve statement has been developed concurrently with our development objectives at Minas Moatize, as we continue to ramp up coking coal production following the completion of the first phase of our wash plant upgrade.  This development work is anticipated to further demonstrate Minas Moatize as a low cost producer with access to an economically efficient logistics solution, being the SENA rail access to the Port of Beira, Mozambique.  Together with this Reserve statement, I believe Beacon Hill continues to demonstrate its advancement towards developing a tier 1 asset at Minas Moatize."

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