KAL Energy (OTCPK:KALG) is a junior mining company focused on exploring and developing the Thermal Coal resources of Kalimantan, Indonesia. KAL Energy has secured rights to two large scale coal concessions, Block 24(24711 acres) and Block 16 (24711 acres), both situated near the Mahakam River in North Eastern Kalimantan. River barging via the Mahakam River provides year round, low cost transportation to sea ports. Preliminary sampling indicates that product has very low sulphur and ash content, with high caloric value making it well suited for power generation. The company is currently carrying out a Phase 1 drilling program (5000 meters) and plans to begin production of around 200,000 tonnes by the end of the second quarter of 2007 and scaling to 5 million tonnes (Mt) /yr within 4 years, and a long-term production target of 15Mt/yr. Kal’s chief geologist Jonathan O’Dell estimates the coal concessions at blocks 21 and 16 to be greater than 192 million tones. Estimation of the potential is based on a 4-5 meter thick single seam of coal.
Shares Outstanding: 97,602,772
Market Cap: 97,602,772 * 1.11 = 108,339,076
Insider Ownership: 76%
Cash: Have secured financing (US$ 3,500,000) from an institutional investor for Phase 1 of a $2 million drilling program.
The Indonesian government's desire to attract foreign direct investment to develop the countries vast energy resources has yielded significant improvements in the regulatory and taxation environment. I am almost certain that Kal Energy will have to pay the Indonesian government a royalty between 3 and 6% when production begins and am okay with that fact.
News Release April 18th, 2007
KAL Energy, Inc. is pleased to confirm a second coal seam has been discovered on its East Kalimantan Coal Concession. The drilling results of the previously announced $2,000,000 Phase 1 exploration program indicate that the new seam is approximately 1.5m thick with extent and quality to be determined by further drilling; the new seam was not part of the original 192 million ton geological resource estimate. This additional seam can drastically increase the amount of coal that can be mined by KAL Energy on their concessions.
Cameron Reynolds [CEO]: Mr. Reynolds has served as the Company’s Chief Executive Officer since February 9, 2007. From March 2006 to the present Mr. Reynolds has been a Director of Mining House Ltd., which is located in London, England and is in the private equity business. As a Director of Mining House Ltd., Mr. Reynolds is responsible for the chairmanship of the Mining House board, business development and implementing strategy. From May 2004 to October 2006 Mr. Reynolds was a Director at Aberdene Mines Limited which is located in Nevada, USA and is in the Mining exploration business. As Director at Aberdene Mines Limited, Mr. Reynolds was responsible for corporate development. He is also a director of Carbon Mining and has served on the boards of Great Bear Resources PLC and Canyon Copper Inc. He holds a Bachelor of Commerce degree and an MBA from the University of Western Australia.
Jorge Nigaglioni [CFO]: Mr. Nigaglioni has served as the Company’s Chief Financial Officer since February 9, 2007. From December 2006 to the Present, he has been a Director of Thatcher Mining Pte. Ltd. From January 2006 to December 2006, Mr. Nigaglioni has been the Vice President of Finance at Amylex Corporation which is located in Petaluma, California, and is in the environmentally friendly dinnerware business. As Vice President of Amylex, Mr. Nigaglioni was responsible for assisting Amylex, a start-up company, with its fundraising activities and managing its finances and internal controls. Nigaglioni has over 12 years accounting and finance experience with PricewaterhouseCoopers and Agilent Technologies.
In his last two years at PWC, he was involved in auditing and consulting for startup companies. As a Controller at Agilent, he guided the turnaround of two divisions to profitability. He has a Bachelor’s of Science degree in Business Administration from Bryant College and an MBA from the University of Wisconsin-Madison.
Laith Reynolds [Chairman]: He is the father of Cameron Reynolds, the CEO of KAL Energy. From February 2002 to April 2004 Mr. Reynolds was the Chief Executive Officer and Director of Asia Energy PLC which is located in Bangladesh and is in the coal mining business. As CEO and Director of Asia Energy PLC Mr. Reynolds was responsible for the launch of final feasibility studies and mine design of the Phulbari coalfield and electricity generation project in Bangladesh. From February 2002 to December 2003, Mr. Reynolds was a Director of Deepgreen Mining Ltd. which is located in Melbourne Australia and was in the business of mine project de!
velopment. As a Director of Deepgreen Mr. Reynolds was responsible managing coal related activities.
Mark Sinton [Operations Manager]: Sinton has extensive open pit coal mining experience. Prior to joining the Company, he served in the Philippines, bringing the country’s largest coal mine into profitability, and Indonesia, where he was involved in managing the mining operations of Kaltim Prima Coal, the world’s largest export coal mine.
Pat Carroll [General Manager – Indonesia]: Carroll has over 40 years’ experience in mining and drilling in Indonesia, Malaysia and Brunei. He has worked on projects across the Indonesian archipelago, undertaking large-scale exploration, sampling and drilling programs on a turnkey basis, often in extremely remote areas. He has a proven track record for maximizing the utilization of local labor, having implemented training programs that launched Indonesian personnel into senior positions.
Jonathan O’Dell [Chief Geologist]: Is a consulting geologist with more than 30 years’ experience in the coal mining and exploration industry. He has recently worked on the development and management of an exploration program, with geological planning for mine design in Iran and the assessment of coal reserves to international standards in Iran, Indonesia and Russia. He has specialized knowledge of the coal industry in Bangladesh, having spent an extended period as a geologist and engineer overseeing the construction of the Barapukuria Mine.
Cash flow Analysis
Current export prices range between $30 and $60 a tonne.
Assuming Kal meets their production targets:
2007 at 200,000 tonnes that works out to $9,000,000 at $45 a tonne
2008 at 800,000 tonnes that works out to $36,000,000 at $45 a tonne
2009 at 1,800,000 tonnes that works out to $81,000,000 at $45 a tonne
2010 at 3,600,000 tonnes that works out to $106,200,000 at $45 a tonne
2011 at 5 million tonnes that works out to $225,000,000 at $45 a tonne
Eventually at 15 million tones that works out to $675,000,000 at $45 a tonne
Company Price P/E P/S
2007 $1.11 12 11
2008 $1.11 3 2.8
2009 $1.11 1.33 1.25
2010 $1.11 1.01 0.96
2011 $1.11 0.48 0.45
If Kal Energy were valued at the average P/E (29)
I am obviously making some assumptions here (like no more share dilution will take place and that everything at Kal Energy works out according to their plan) that will be contravened hence making this analysis a little outdated. However, I hope it gives you some sort of idea of the potential inherent in Kal Energy, even baking in additional share dilution and production mishaps.
Location of blocks 16 & 24
Both blocks are easily accessible by road and water.
Resource Potential Estimate
While the resource size at the main seam is estimated at 192 million tonnes the in situ resource is estimated at 280 million tonnes. The main seam is up to 6.7 meters thick with low dips with 90% of the dips estimated at being 10 degree or less. This indicates a low strip ratio thereby lending to open pit mining being the method of extracting the coal. Keep in mind however, that these resource estimates and predictions are not NI 43-101 or Australasian Joint Ore Reserves Committee Code [JORC] compliant. Kal is currently in the midst of drilling 5000 meters in order to come up with a JORC complaint resource estimate and estimates this to be done by the end of the second quarter of 2007.
Given that I think the coal industry and coal stocks are going to be the next hot sector, I pick Kal Energy as my way to play that boom. While I am not as comfortable with investing in Indonesia as Canada, the United States or even Europe and I confidant that my reward in this case far outweighs the risk. With impending production in less than a year, low cost mining, easy access to transportation/ infrastructure and capable management I don’t think I am taking too much of a risk in this play. I am willing to hold Kal Energy for a year or two to see if their plans work out but will as always be keeping a close eye on their news releases and developments to see if they remain on the right track.
Much of the information in this write-up has been taken from a research report done by Tri-State Capital which can be found on Kal Energy’s website.
Disclosure: Author is long KALG.OB
KALG 1-yr chart