Unearthing Value in the Coal Fields of Indonesia

Since I last spoke with Ranjeet, CEO of Challenger Deep Resources (CDE-TSXV) a few weeks ago, a significant development has occurred; CDE has entered into a binding LOI with an Australian entity to acquire its Indonesian subsidiary for $2,000,000 and leave Challenger with a royalty for life of mine coal sales.

After this positive news broke I scheduled a call to get further details about the agreement and where CDE goes from here. Enjoy!
Scott: Ranjeet, congratulations on the great news! On April 02 Challenger entered into a binding LOI with a private Australian company. Share with us the terms.

Ranjeet: Thank you Scott. We have firmly set into play our first net royalty revenue stream. We will be receiving US$ 2 million from our partner in addition to receiving a royalty of $2 per ton of coal sold from our Barito Coal Project. Challenger’s 100% owned subsidiary controls all the mining and marketing rights to the Barito project as well as the associated infrastructure.

Scott: I understand that certain benchmarks must be achieved in order to receive the tranches of payment from the acquirer. Please explain what CDE must do to receive the full $2mm.

Ranjeet: Challenger’s primary concern was to secure the necessary capital required to develop this project without creating any dilution to our shareholders. Barito, over the next 12 months, will receive approximately US$10 million in direct investment from our partner to bring it into production and cash flow. In addition to financing the building of the mine and paying us a $2 per ton royalty, our partner will pay us $2 million directly in increments based on preproduction and time milestones.

Scott: So in this agreement Challenger will be guaranteed a $2 royalty for any coal being loaded at the jetty owned by Challenger’s Indonesian subsidiary.

Ranjeet: Correct; the royalty agreement covers current licenses already under our control as well as any other licenses within an area of influence that Challenger might obtain the mining and marketing rights to. There are 2 adjacent coal-bearing licenses that are being targeted right now to bring into the project as it develops, resulting in a larger coal resource; beyond that there are even more coal licenses that we will be investigating in the future.

Win/win agreements with owners of the neighboring and regional license holder shouldn’t be all that difficult to implement because we already own the required infrastructure including coal roads, a river jetty and have received all of the necessary permits required to transport and export coal in this area.

Owning the infrastructure is the key to getting these future deals done and as per our agreement with our partner all of the coal produced in our area of interest will have a $2 per ton royalty payable to Challenger.

Scott: Kindly provide some colour on capacity of the jetty and the size of the “area of influence” you have referred to?

Ranjeet: The current capacity of the jetty stockpile is 100,000 tons per month. The coal will be trucked to our jetty then transferred to an awaiting coal barge. Production is planned to start up at 50,000 tons per month and increase to 100,000 tons per month. An upgrade of infrastructure in conjunction with growth of the “coal hub” could increase these numbers as required. Again the advantage here is that we have significantly de-risked the project and that of all the surrounding licenses by virtue of the fact that most of the heaviest lifting (infrastructure implementation) has already been accomplished by Challenger.

The area of influence includes all licenses within 2 km from our current borders. The size license doesn’t matter as long as one of its borders is within 2km of ours. There are 2 very large additional licenses that contain significant coal resources that fall into this category, hence the wording in the area of influence.

Scott: In effect CDE is positioning itself to become a coal royalty company. Upon completion of the Barito transaction what can we expect to follow? Does CDE have other properties in the area it will be able to leverage through its receiving a royalty through use of the local infrastructure?

Ranjeet: In the immediate region of Barito we are now a preferred player because we have the infrastructure already built and under our control including coal roads, river access—which includes a jetty—and their associated licenses. We have already met most of the production requirements.

The Barito coal project consists of 2 licenses and recent work by the Challenger team has identified additional large coal resources on adjacent licenses that are not under our control as of today. Owners of these licenses know of our activity in the area and that we have the only approved coal road and jetty in the area. It shouldn’t be all overly onerous for us to establish win/win scenarios with motivated regional license holders in the future. Any coal licenses that come into our “sold” subsidiary that produce and sell coal will have Challenger receiving the $2 royalty under our agreement with our partner. Once in full play I anticipate expanding Challenger to other coal regions in Indonesia as well.

Scott: So the long term vision is to become a company with multiple assets beyond Kalimantan. With the current project, what is the timeline to achieve production and when can we expect the preliminary forest permit to be approved?

Ranjeet: The Barito project is in a region where coal mining is prevalent and permitting is commonplace as long as you adhere to proper practices and quality mining and environmental procedures; also keep in mind that all of this is pointless unless you have a means to profitably transport your coal to market (infrastructure). You simply need to move through the governmental processes with an understanding of the necessary requirements and adhere to them. Challenger’s management has significant experience in this and has moved far down the production path already; as well we’ve already successfully addressed all of the transportation issues. I would think the principle approval, which will allow mining, is 6 to 9 months away. Our partner is targeting initial production for Q2 2015.

Scott: And once Barito is operational what is your strategy to grow the company to the next level?

Ranjeet: Great question; the Barito royalties which we anticipate being in receipt of are significant and a company maker by themselves. Project tonnage potential ranges from 10 to 30 million tons based on the various progression scenarios and the surrounding licenses that I spoke of earlier. That being said, we would like to repeat the Barito model beyond our area of influence and I have several projects and areas already under review, but we are in no hurry to enter into anything outside of the Barito area immediately.

We plan to build on the success of Barito so Challenger can grow one step at a time. I am also looking at projects outside of the coal business for CDE, if something interesting and of benefit to the shareholders should arise then we could split the company into 2 listed vehicles for the benefit of all shareholders. I have seen this done quite successfully in the past and I have done it successfully before myself, but of course splitting a company into two needs to be asset driven.

Scott: On that note, what can a shareholder of Challenger expect in the next 12 months?

Ranjeet: As the Barito project advances you should hopefully see a direct correlation between cash flow and Challenger’s market cap. Our current market cap is $2 million, this is incredibly low considering we anticipate being in receipt of $2 million in working capital and are exempt from costs directly related to bringing the Barito Project online. For us it represents a near risk free opportunity. Therefore any valuation using even the most conservative evaluation methods would show us currently (and I hope temporarily) at a sharp discount based on our current stage of development. This does not even bring into account any value from other potential future deals Challenger may undertake.

I am one of the largest shareholders of the company and have invested significantly into it to get us to this stage and I’m looking forward to what’s next for all our shareholders immediate, mid and long term.

Scott: Ranjeet, this is exciting news and I look forward to seeing Barito and future projects executed upon as demand for high calorie coal is not doing to abate any time in the near future.

Ranjeet: I anticipate issuing a series of corporate related to the advancement of Barito and perhaps other business in the weeks and months to come. For any of your readers who may be interested in learning more about Challenger Deep please visit our website at www.challengerdeep.ca. Your readers are also invited to contact me directly (info@challengerdeep.ca) and upon their request I’ll be happy to add them to our email list.
We’re happy to congratulate Ranjeet and his team. Indonesia, like many emerging markets can be a difficult place to do business. Challenger Deep has obviously risen to this “challenge” and we’ll be keeping a close eye on the company’s progress.

– Scott

“I hate imperialism. I detest colonialism. And I fear the consequences of their last bitter struggle for life. We are determined, that our nation, and the world as a whole, shall not be the play thing of one small corner of the world.” ― Sukarno


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