Cline Mining (TSX:CMK) is a mine development company focused on the exploration and development of metallurgical steel making coals in Canada and the U.S., iron ore in Madagascar and the Cline Lake Gold Mine Property in northern Ontario, Canada.
The company is currently developing the New Elk Coal Mine, located in Las Animas County in Colorado, and has commenced production of high quality metallurgical coking coal. The economics of developing and operating New Elk are very compelling.
Assuming a gross coal price of US$168 per metric tonne, transport and handling charges of $46 per tonne, and operating costs of $51 per tonne, allows the operator to claim a cash margin of $71 per tonne.
This translates into an eye watering Internal Rate of Return of 98.65% and a Net Present Value of US$1.04 billion at a 10% discount. The Project is highly geared to any movement in coal prices, with the Internal Rate of Return soaring to 152.16%, and Net Present Value to US$1.51 billion, with coal at US$200 per tonne.
Projected production rate is 3 million tonnes per year, which should result in a free cash flow of US$213 million at US$168 per tonne. The stock price has reacted very bullishly to these projections, and may already be anticipating company plans to ramp up production.
The New Elk Mine commenced production of coal in 1953 and supplied coking coal to the CF&I Steel Company and to Wyoming Fuels until 1989. The mine was placed on care and maintenance in 1996 after CF&I Steel switched to using electric arc at its blast furnaces during the late eighties.
Cline’s New Elk Coal Mine has a mineral resource estimate of 315 million tons of coal in-place (87.6 million tons Measured and 227.4 million tons Indicated) as detailed in a technical report titled “NI 43-101 Technical Report of the New Elk Mine Project Los Animas County, Colorado, USA”. These resources are spread over four properties known as New Elk, DOW Lease, North Central Properties and XTO Energy Lease.
The New Elk Mine Project encompasses 6,118 acres, along with an additional 20,763 acres, some of which are under lease from the State of Colorado, other entities, and BLM lease applications. The Project includes both the New Elk and Golden Eagle underground coal mines, and a coal preparation plant, product coal silos, buildings, surface real estate, conveyor systems, electrics, underground workings with mine portal access from the plant site, mine permit and a permitted coal refuse disposal site, and about 13 miles of railroad right-of-way from the mine site toward the town of Trinidad.
The New Elk was designated as an “active” coal mine, which was in full compliance with Mine Safety and Health Administration (MSHA) requirements, allowing Cline to redevelop and fully permit the property over 2 years, at a very economic capital cost of $65 million. This is a fraction of the capital cost of developing a similar green-field coal mine in Canada, costing $400 to $750 million, and taking 3 to 4 yours to develop before dealing with EPA requirements and legal challenges.
Confirmation drilling of 16 drill holes at the New Elk Coal Mine has detailed and confirmed high quality metallurgical steel-making coking coal in the Allen, Apache and Maxwell coal seams. The drilling program has also been directed to the newly identified coal seams designated Red, Blue, Yellow and Green. These seams were found at shallower depths, sequential with the Maxwell, Apache and Allen seams and all relatively flat and parallel in sequence. The current drilling results indicates that the new seams appear to be metallurgical steelmaking coal similar to the previously mined Allen and Maxwell seams as well as Apache seam. Consequently, these additional seams could be a significant additional resource for the future. The quality of coal in the seams is reported as premium high grade steel making coking coal, and assays at FSI 7.0-8.0; Ash 8.5%; Moisture 8.5%; Volatiles 35%; Fluidity 30,000 ddpm; Reflectance 0.95%; Sulfur Max 0.5%; Btu/lb. 13,500-14,000.
The existing slopes and shafts constructed for the Allen Mine cut the Maxwell, Apache and Allen seams and have been developed to access nearby virgin ore in the Apache seam, which is the lowest cost production option, and carries a thickness in excess of 5 feet. The Apache seam lies from 25 to 50 feet below the Maxwell seam, and 20 to 50 feet above the Allen seam. The Allen and Maxwell seams vary, with mineable coal thickness of from 3 feet to approximately 10 feet. The minimum mining height is considered to be 5 feet, with the seams dipping to the northeast at 2 to 3 degrees.
A coal mining permit was approved prior to Christmas, and allowed production of coal from the Apache and Allen seams to commence. Coal is now being mined from the Apache seam utilizing underground continuous mining methods, and transported to the surface coal stock pile, from where it will be fed into the newly completed 3 million tonne per year metallurgical coal processing plant.
Cline is projecting coal production of 1.2 million tonnes for 2011, rising to 2.6 million in 2012 and 3 million tonnes in 2013. Current production is shipped by coal truck to a rail line. A 24 mile rail line will be rebuilt to the mine in 2012 at a cost of $20 million. This will provide quick access to steel mills and major coal export terminals at U.S. seaports.
The company has a highly qualified management team headed by Ken Bates and Dennis Mraz, who have had extensive senior management experience with coal operations at Sherritt Gordon Mines (TSX:S) and Denison Mines (TSX: DML, AMEX: DNN).
Management has stated that they want to fast track Cline into a 10 million tonne per year producer of coal. In addition to the New Elk Coal Mine, the company currently holds coal assets at the Lossan coal mine, located in northeastern British Columbia.