We discussed with Pacific Asia China Energy (OTC:PCEEF) executive vice president Steve Khan the latest developments in the company’s coal-mine degasification strategy unfolding in China. The company’s subsidiary was recently awarded a multi-million dollar drilling contract with a subsidiary of China’s largest coal miner. Shenhua Group (OTCPK:CUAEF) awarded Pacific Asia China Energy its first drilling contract in northern China’s Ningxia province in February. The world’s third largest coal miner has 13 coal mines in China among other interests.
China faces serious safety issues in the country’s coal mines. Tunneling and other accidents reportedly kill more than 5,000 coal miners every year. About 80 percent of China’s coal mining-related deaths are attributed to methane gas explosions. China’s coal mines releasing methane gas are also responsible for nearly 40 percent of the country’s air pollution.
China has ordered its coal companies to improve mine safety or be penalized. The Canadian-based coalbed methane development company began offering its ‘de-gas strategy’ late last year. More than 25 Chinese coal mining companies are discussing the degasification service with Pacific Asia China Energy.
StockInterview: When it comes to Pacific Asia China Energy, also known as PACE, most investors focus on the CBM project in China, not the drilling component. Please tell us about your company’s recent drilling contract with the world’s third largest coal company.
Steve Khan: This certainly sets us apart from all the other CBM companies in China. China faces some very serious safety-related problems in their coal mining efforts. Last year, we presented our degasification strategy at a coal mining safety symposium. We were very well received. To that end we recently signed our first degas contract with the Shenhua Ningxia Coal Group, China’s largest coal producer. The contract was valued at over AUS $10 million for the degasification of one of their mines.
StockInterview: How many more drilling projects, like this one, are in the pipeline for PACE?
Steve Khan: We’ve received considerable interests from several coal companies, and have also signed an MOU for another project. We are at various stages now with numerous coal companies and discussing more degasification contracts with the Shenhua Group, which has 13 coal mines. Right now, our list is well over 25 companies in China, but it will take us some time to move through that list.
StockInterview: How much profit does PACE make on each one of these contracts?
Steve Khan: Each rig may be able to generate $8 to $10 million in revenue each year. We anticipate profit margins somewhere in the 35 to 40 percent range. We are currently limited only by the number of rigs and the manpower we can deploy. We are now looking at alternatives for financing and ramping up additional construction.
StockInterview: After you’ve paid off the drill rig, with the initial profits from the first contract, how much life does that drill rig have? How many more contracts can you use it for?
Steve Khan: These rigs were built for long lives. They were built in Australia with components from the United States. They are built to international standards and are reviewed by our operator, Mitchell Drilling. With the proper maintenance each rig should last many years. We anticipate multiple contracts for each rig.
StockInterview: Does your coalbed methane project in China still make sense with natural gas prices having dropped from their peak?
Steve Khan: Very much so, our costs are conservatively less, probably one-third to one-half of western standards, primarily due to the lower labor and operating costs. We still envision getting attractive pricing at the wellhead and, if compressed, even higher prices with very attractive margins. The demand for energy in China continues to grow, and coalbed methane gas is a clean source of energy.
StockInterview: Why should investors consider PACE as another way to invest in the energy bull market?
Steve Khan: First, we are helping China develop a cleaner fuel source. Second, and for the investors, to be part of a large and developing resource asset base in the CBM concessions we now have and what we anticipate to garner over the next year. The third part, which is a big part of the story, is to have downside protection with a cash flow component through our degasification drilling strategy. This latter factor is a great opportunity for PACE and a compelling reason for investors to take a look at our company.