King Coal – Driving Indonesia’s Economy

In June of last year our colleague Scott caught up with Ranjeet Sundher, CEO of Challenger Deep Resources (CDE:TSX-V), a company focused on coal development and production in Indonesia. Whilst in Singapore he penned a summary of their conversation, Conquering the Indonesian (and Mongolian) Frontier.

Scott sat down again with Ranjeet to see how things have progressed

With a strategy to secure joint venture partners to fund development on current and future projects, Challenger Deep Resources will generate cash-flow to fund its business and create new opportunities within the coal sector, while creating shareholder value through cash-flow and earnings. The Company will capitalize on high-quality production projects while leveraging off owned mining and production infrastructure in Kalimantan, Indonesia.

The current portfolio includes the Barito Coal project, comprising 2 licenses and owned infrastructure. Mining permits are in place and scoping studies have demonstrated robust economics with a low capital expenditure and less than 12 months to cash-flow. Ranjeet is working to bring in the necessary financing to move the project into production and retain a free carried interest or royalty going forward.

The company’s Tabang project is a large tonnage exploration project, where the Company is currently looking at options to bring in the necessary partner to fund current development in line with its corporate strategy.

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Scott: Ranjeet, give us an update since we last spoke on where you’re at with the Barito coal project and the surrounding properties.

Ranjeet: Scott, The past 12 months were spent by my team getting the project to the pre-production stage via extensive exploration and permitting. We were successful with securing the mining and marketing rights on 2 contiguous licenses (production permits in place) as well as purchase agreements in place on the infrastructure. Owning the infrastructure is the key; it comprises a haul road, stockpile and jetty that provides complete control of the coal in the area and establishes a new regional coal hub that we control.

Scott: Owning the infrastructure creates an immense value proposition. This project is in a proven coal basin on Kalimantan. What makes the project unique and why have you invested so heavily there?

Ranjeet: The upper Barito will be an area of major focus over the next few years. Our project in particular has a very high calorific value in the 6100 GAR range making it a very marketable product. Also our haul road is only 11km from mine site to jetty which will help keep the costs low and economics robust. We are as close to ideal as you get in this business and we now have “all our ducks in a row” so to speak.

Scott: CDE is in the process of seeking a joint venture partner. Share your vision for the structure of a JV and does this serve as a model for future deals?

Ranjeet: We have taken the project to the current stage with our treasury. We will now rely on another company to fund the project to production. This saves us from having to dilute our shareholders and protects their investment. The capital expenditure required to production has been carefully budgeted at $6.5m and could put us at cash flow positive by mid-2015. Challenger is looking at a structure that gets us our investment back into our treasury and a royalty for the life of mine.

Scott: That’s a solid and proven strategy with mining. It’s finding that partner that’s the challenge. What are you looking for in the perfect JV partner? I have to assume there are vultures seeking to buy mining projects “on the cheap” at this point in the investment cycle, no?

Ranjeet: The partner that this project is capable of attracting is one that wants the product and wishes to see “coal on a barge” as soon as possible. This would result in Challenger receiving its royalty and being in a cashflow positive situation—an enviable place to be for a junior miner like ourselves. We will then attempt to repeat this model regionally. During the next month I anticipate we will get our partner and the financing finalized, we are just working through the best option for the Company and our shareholders.

Scott: It’s no surprise that as China decreases investment in unproductive industries coal demand will likely slow. How does this affect Indonesian coal exports, many of which are of high quality?

Ranjeet: Indonesia is the largest exporter of coal in the world. Its proximity to markets and the lower cost of operations keep it ahead of others. Also Indonesia itself is a growing consumer of coal and they are looking at being a competing buyer at a domestic level with the exporters.

Scott: It is great you mentioned that note. Indonesia has acted several times in limiting or prohibiting unprocessed minerals from export, this being in an effort to create a value-add industry domestically. We see this happening in Sri Lanka for example with their graphite mines. What is the current word from Indonesian authorities on this?

Ranjeet: There is nothing in the laws effecting coal exports, the national changes you mentioned impact other commodities such as unrefined gold, nickel, etc. However, coal runs Indonesia on many levels. Most mines are Indonesian owned which helps keep this sector stable. There’s a lot of foreign money in Indonesian coal and it’s vital to the national economy and their domestic supply needs.

Scott: That’s encouraging since we have seen in other markets like Sri Lanka, which I just mentioned, calls for bans on exports of unprocessed minerals. Clearly Indonesia doesn’t want to disrupt its robust coal sector. What infrastructure is in place on Kalimantan to support export of coal to regional markets, as far as it regards Challenger?

Ranjeet: Infrastructure is always key; we have it all in place. It includes land purchases of the initial mining area, 11km of haul road, stockpile land with a 100,000 ton capacity as well as the jetty, honestly it doesn’t really get better than what we have put together.

Scott: It’s not often such a confluence of assets is owned by a single entity, especially a junior, but then again you have been doing this for a while. In 2009 you successfully founded and sold another junior company, Red Hill Energy which we discussed in a previous interview. What can shareholders expect from Challenger in the future? Can you do this again?

Ranjeet: Yes in 2009 we did very well for our shareholders and planned to use that momentum going into Challenger. Unfortunately the junior markets had a bit of a meltdown since then. Market caps plummeted and available financing for development dried up. I share the opinions of many top mining analysts that the markets have bottomed and are on the way back up. I have seen strong evidence of this over the last couple of months. Challenger’s market cap is at its “ever-low” range and the asset has never been closer to getting the production financing it needs. In my opinion it is an excellent time for investors to have a serious look.

Scott: What do you have planned for post-Barito?

Ranjeet: We will look to repeat. That being, use the cash from the Barito transaction to put together another coal project in Kalimantan. We will then bring in a partner to finance to production and leave Challenger with a royalty stream. Having a royalty in several coal mines is a real asset that can be leveraged on and we intend to grow through cash flow.

Scott: In the lead up to signing a JV agreement will you need to do another capital raise?

Ranjeet: We are looking at something very small. Interested parties can reach me directly through info@challengerdeep.ca should they wish to learn more about our Company and our plans going forward. Our intention is to grow organically through cash flow. Most juniors merely explore and dilute shareholders, our plan is different and we are close to completing phase 1.

Scott: For those interested in learning more about Challenger Deep Resources we suggest visiting their website at: www.challengerdeep.ca.