www.finnewsnetwork.com.au September 24, 2013
Transcription of Finance News Network Interview with Aspire Mining Limited (ASX:AKM) Managing Director, David Paull
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from Mongolian focused coking coal developer, Aspire Mining Limited (ASX:AKM) is its Managing Director, David Paull. David welcome to FNN.
David Paull: Thank you.
Lelde Smits: Aspire Mining’s wholly-owned Ovoot Coking Coal Project has achieved a number of milestones over the past few months. Could you detail the highlights?
David Paull: Yes certainly. We’ve had a increase in our reserves, we’ve increased it some 40 million tonnes and increased our mine life to around 21 years. So it’s a very significant project. It’s actually the second largest in the country of Mongolia, the largest project being Tavan Tolgoi which the Government currently owns. And that’s actually the second most important item we’ve identified, is that we have this terrific ability to blend our coal with non-coking coals from Tavan Tolgoi. So we’ve actually become very important to the country. I think it’s a very important thing to understand. We’ve got the second largest coal deposit, the only large coal deposit in the north of the country. And we’ve also found ourselves to be very valuable to the development of Tavan Tolgoi.
The third most important thing I think is an understanding of the value of our coal in the Chinese market. It’s a deep market; it uses around 100 million tonnes per annum of fat coal, which is the type of coking coal that we would produce. The Chinese have been using this coal for many years to blend, to upgrade coals and we’ve demonstrated this with Tavan Tolgoi. They’ve been doing it for 100 years and that’s why this particular coal is attractive.
Lelde Smits: Now the Company recently announced a significant reduction in CAPEX from about half a billion dollars to US$144 million. What were the reasons behind cutting costs and how will you achieve the savings?
David Paull: Well, every company is obviously looking to reduce capital, so it’s a very important tick in this climate. We’re fortunate to be able to identify these savings and I guess it goes back to those previous successes we’ve had over the last few months. We were able to identify in the resource, a significant amount of what we call bypass coal, that’s coal that doesn’t need to be washed and goes directly to customers. That’s in the first few years and that’s important, because it means you don’t have to build as much washing capacity, in the first few years. So that’s one saving in capital.
Two – we looked at how we could develop the planned railway directly to the Ovoot project itself, without having an interim phase where you had to have a long haul road. By delivering the railway directly to Ovoot at day one, we were able to drop another US$100 million of capital off the road. I guess the other point to note is that rail is one third the cost of transport to road. So we could reduce our costs through having rail directly to the mine site to start with, and that offset to a degree the higher costs from using a mining contractor.
Lelde Smits: And David, how do you see the mine capital being funded?
David Paull: There are three sources of funding we can identify right now. One is with the mining contractor itself, because a large portion of that US$144 million is a pre-strip to get down to the top of coal. The next part is the wash plants themselves and we’ve identified potential export credit agency supported funding, for between US$40 and US$50 million to fund all of that capital. So that would be obviously a major tick. And the third source is the Noble Group, they’re currently 15 percent shareholders and we have an existing working capital facility with them.
Lelde Smits: Now Aspire’s development strategy relies heavily on the construction of the Northern Rail Line, the extension of the Trans-Mongolian Railway from Erdenet to Ovoot. How are these plans progressing and what levels of interest are there in the railway?
David Paull: Look there’s considerable interest in the railway, mainly because it’s a well-developed project; it’s one that’s development ready. And the Mongolian Government’s certainly looking for new projects to boost economic growth in the country. We’ve got it to pre-feasibility study stage and we’re, as I said, ready for development. We’ll now, once we get a rail concession and various Government approvals to construct, we’ll then entertain EPC contract proposals. And we’re looking for those proposals that give us tied funding as well. That can come from export credit agencies or development banks. We have identified and have held early discussions with several suitable international EPC Infrastructure Contractors and even some potential financiers for Northern Railways. These initial discussions can be further progressed once we receive the grant of a rail concession, which we are happy with the reception and progress of this so far.
We also have as another source of funding, the Noble Group who has agreed to fund up to 10 per cent of the total capital of the project. So that combined with export credit agency and development bank money, could contribute between 50 and 70 percent of the total funding package.
Lelde Smits: So David if we consider both the Ovoot project and the Northern Rail Line. What does the timeline look like for both these projects?
David Paull: Well the critical path for us is the railway. So if we’re able to achieve a rail concession and a funding package by the end of 2013, we could be in production in 2017. That’s an aggressive target, but it’s certainly one that’s possible. From the mine site point of view, a mine could be created within 18 months of turning soil. So for us, it’s really a three-year construction window for rail which drives our timeline.
Lelde Smits: There are many perceptions about Mongolia; one is that Aspire will be forced to take a discount at the China border. Could you explain the situation regarding sales in China and what Aspire is doing to reduce the risk?
David Paull: There is certainly something called the Mongolian coal discount, and it’s driven by a couple of factors. One is that most of the coal shipped from Mongolia is unwashed. So there’s no product quality, no product quality control, no brand you could market, so that inherently means a discount. And the other factor is that the infrastructure defines the market area where coal ends up. So it’s a very small area that you can actually access, so therefore, there is this coal discount.
For us, we’re in the north of the country and we have a decision point. Once we access the Trans-Mongolian Railway, we can either go north or south and therefore, that provides us with a degree of negotiability. We can negotiate pricing, infrastructure costs etc. with that optionality. And I think the optionality is something that our Mongolian competitors in the south, just don’t have.
Lelde Smits: And what about the Trans Mongolian Railway – does it have the capacity to handle the Company’s volumes?
David Paull: It does have capacity heading north into Russia, because there’re very little Mongolian products heading north along the line. There is limited capacity heading south at the moment, but there are certainly plans in place for significant expansions of that railway. There’s pressure not just from the Northern Rail Line and Ovoot Coking Coal Project, but certainly from other iron ore projects in the north for increased capacity. And another important point to make is that increased capacity means lower tariffs.
Lelde Smits: Mongolia’s political situation is often in the headlines, along with Rio Tinto Limited’s (ASX:RIO) Oyu Tolgoi copper and gold mine. How does Aspire fit into this environment and what is your view on the country’s approach to foreign investment?
David Paull: Sure. Look I know Mongolia gets a bad rap perception-wise for foreign investment, particularly all the news around the Oyu Tolgoi development and investment agreement. That’s a pretty specific unique situation, the Government does own 34 per cent of Oyu Togoi and is contributing partner for what is a massive, massive project.
For us, look we’re 100 per cent owned. As I mentioned earlier in the interview, we’ve identified a way for us to 100 per cent fund our development. So we’re in quite a different situation. For us, we find that the Government and the economy of Mongolia are very dependent on foreign direct investment. And that’s a good thing, because it means they need to attract it and create an environment to attract it.
Lelde Smits: And David, how important is the development of the Ovoot project and Northern Rail Line to the people of Mongolia?
David Paull: It’s very important, because the Ovoot project is in the north of the country and that’s an area that has not had any resource development at all. All the developments you hear about in Mongolia are all in the south. So that’s very important, there’re a lot of people that live up in that part of the world as well, which would benefit. Most of the investment relating to our project of course, is relating to a railway which will support it. Now the railway will be there long after the mine is finished. It’s a long term piece of infrastructure, it’ll benefit the people in the area, it’ll benefit agriculture, tourism and manufacturing. So it’s a multi-faceted benefit for the country.
Lelde Smits: Finally David, what is Aspire Mining hoping to achieve over the next 12 months?
David Paull: One is to continue building momentum within the marketplace for our coal. We’ve had a terrific start; we’re looking to continue with that. Rail is then very important for us – initially a rail concession from the Government, which provides all the approvals and permit packages that we need. And then towards the end of this year, discussing with the potential EPC contractors to build and include a funding package associated with that. If we can start putting that away, I think there would be enormous value seen for our current shareholders. And then after that, it’s really an exciting period of pushing towards construction and development.
Lelde Smits: David Paull, thank you for the update on Aspire Mining.