KAL Energy: Avoid This Stock At All Costs

Important note from SA Editors: Seeking Alpha received a letter from KAL Energy's lawyers alleging that the article below, originally published June 12th, "is replete with false and misleading statements", expressing concern that the purpose of the article was "to manipulate the Company's stock price", claiming that "the falsehoods in the article are in fact defamatory and libelous", and demanding that Seeking Alpha immediately remove the article under threat that "KAL will vigorously pursue claims for defamation and liable (sic) and the Company's rights under the federal and state securities laws". A separate letter to Mr Turner, forwarded to us, outlined the alleged inaccuracies.

Mr Turner, who is not a Seeking Alpha employee and whose opinions are not those of Seeking Alpha, assured us that "neither myself or any other member of Hallgarten and Company... directly nor indirectly, has benefitted financially in any way from our coverage of KAL Energy... when we were first falsely accused of having a short position in the company by KAL we immediately sent a mail to KAL Energy HQ explaining that this was not true". Mr Turner adds that he "stands by every word" in the article.

Seeking Alpha is committed to open discussion of stocks that adheres to honesty and full disclosure. We have therefore asked KAL Energy's lawyers for permission to publish the section of their letter to Mr Turner outlining the alleged inaccuracies immediately below the article on this page, so that readers may judge the issues for themselves. When we receive their permission, we will publish that letter. We would also welcome a submission from KAL Energy itself clarifying the issues discussed.

We believe that KAL's counsel's demand that Mr Turner "cease and desist from making any further statement regarding KAL and investments in KAL" does not further the cause of open and honest discussion for the benefit of investors.

Our request to KAL Energy's lawyers to publish their discussion of the alleged inaccuracies in the article has not yet been answered.

First, Wikipedia gives us the background on the Portuguese fable “Stone Soup”:

According to the story, some travellers come to a village, carrying nothing more than an empty pot. Upon their arrival, the villagers are unwilling to share any of their food stores with the hungry travellers. The travellers fill the pot with water, drop a large stone in it, and place it over a fire in the village square. One of the villagers becomes curious and asks what they are doing. The travellers answer that they are making "stone soup", which tastes wonderful, although it still needs a little bit of garnish to improve the flavor, which they are missing. The villager doesn't mind parting with just a little bit to help them out, so it gets added to the soup. Another villager walks by, inquiring about the pot, and the travellers again mention their stone soup which hasn't reached its full potential yet. The villager hands them a little bit of seasoning to help them out. More and more villagers walk by, each adding another ingredient. Finally, a delicious and nourishing pot of soup is enjoyed by the travellers.

Kal Energy Inc (KALG.OB) is a modern day version of stone soup.

Late last year, a London-based private equity group called Mining House Ltd took over a virtually untraded Nasdaq listed company with a market cap of just under U$6m and previously run by a Brooklyn real estate businessman. Once in charge, the first thing they did was change the name of the company to KAL Energy Inc and then quadruple the number of fully diluted shares to 47.3 million. A little later they reverse-mergered privately owned Thatcher Mining of Singapore into the newly named KAL Energy Inc and paid off the previous owners of Thatcher with a small cash sum and 32 million shares of newly created shares. Our eyebrows raised when we found out the Thatcher Mining began life as a company as late as June 2006 and that at least one of the shareholders of Thatcher, David Pope, is also a member of the key management group at Mining House Ltd.

So from seemingly nothing they found themselves with a NASDAQ listed company and managed to quickly fill it with a tasty ingredient, namely the main assets of Thatcher; two large unexplored coal mining properties in Indonesia that seem to hold around 192million tonnes of thermal coal. A neat trick, but it was just the start of it all.

Next, they needed some working capital. So they ran a private placement in February this year, selling 17.6m shares to floor-level investors for 20 cents a share (which must have been a popular offering to those lucky enough to get on, as shares in KALG.OB were trading at around 80 cents at the time. Why pay 80 when you can pay 20?). After commission costs and such, they were left with about U$3.4m. So the stock dilution had gone from under 12m shares to over 97m in a single quarter, but they now had a company, an asset and some working capital. Not bad for three months’ work!

With that capital, they started a drilling program at the site to find out exactly what they had under the ground. The problem was that although a promising site, it had never been professionally surveyed to Canadian 43-101 or Australian JORC standards. That is something that costs money. So KALG laid down the lion’s share of their U$3.4m to drill and explore at the site.

Meanwhile, they were not averse to spending cash in other places. They had a company, an asset and working capital, but they still needed to “get known”. So KALG went on the publicity trail and paid several different research analysis companies between $6500 and $10,000 a piece to publish positive reports on the company (all of which can be found on the KAL website). KAL also received excellent publicity from Bob Moriarty of 321gold.com and 321energy.com fame. Mr. Moriarty, as a friend of one of the original investment group, was invited to buy part of the original 20 cent placement. He was taken on the grand tour of the property in Indonesia. Then on April 17th he published a wonderfully positive report on KALG for all to see in his own inimitable style. He did mention that he was a shareholder in KALG and advised readers to do their own due diligence into the company before making any decisions, but all the same it would seem that a lot of people took him at his word. KALG.OB moved from 0.98c to over $1.40 soon after publication of Moriarty’s note, all on much improved volumes.

So what now for KALG? We are told by the company that while the necessary drilling program is going on, KALG will be able to sell 200,000T of bulk sample to be mined this year on the open market. This will provide cash flow for the future, and the company plans to ramp production to 5MT per annum by 2010. The bulk sample certainly will help, but if the approximate $2m profit they bring in from 2007 bulk samples sales is enough to cover expenses going forward we would be extremely surprised. As for the future production plans, maybe the company is jumping the gun slightly as it does not have the necessary work contracts or environmental permits to allow it into commercial production as yet.

Mr. Moriarty, in his glowing note, said he didn’t see any large dilution in the future. This could have been one of the main attractions for those who bought KALG after reading his article. Of course Moriarty is entitled to his opinion, especially as he is a shareholder in KALG (we presume that he has not sold out as yet, of course), but we certainly beg to differ on this point. It is estimated by one published report available on their website that KALG will need at least U$100m to ramp the project in the next four years, and with the lack of cash at bank they are almost certain to use heavy dilution for financing. It has therefore certainly benefited the company to have a share price lifted by “third party reports” and favourable articles by website owners with large retail followings, as raising U$100m in share dilution is far easier when your stock is worth $1.38 and not half that amount, or even a quarter of it.

So if we assume for argument’s sake that the company is fortunate enough to place new shares at $1 each on average, this means there would be at least 200 million shares in existence by full production time (quite possibly a lot more). If we use the company report’s own estimated net profit margins of U$10 per ton of coal, this would give us an estimated net profit of U$50m, or an EPS of U$0.25 per share, for the year 2010.

Today, KALG.OB stands at U$1.37. Those that buy the stock today are looking at a company with an estimated forward PE of 5.5X on 2010 earnings.

A company that has gone from a $6m market cap to a $130m market cap in just 6 months without producing or selling anything.

A company that still does not have the necessary permits to operate their mine.

A company whose asset is still non-industry standard compliant.

A company with little cash at bank and whose board expects shareholders to pay for the necessary working capital and pay their salaries for the next years.

A company that keeps very quiet about the significant amount of dilution it will need to do to go into full production.

A company that has already earmarked 1,750,000 as yet un-issued options to two of its executive members, and has approved a plan to give away a maximum of 12 million options to directors and management of KALG in 2007 alone.

A company that offers cheap shares and guided tours to influential website owners who then write glowing reviews on the stock (with all the necessary caveats at the end of the note, of course).

A company that pays thousands of dollars to research houses in return for reports recommending KALG to one and all.

Not surprisingly, we take a different view. Avoid this stock at all costs.

Disclosure: none

Comments

[dlfordfff:]

PAUL HENDRY,

Just curious, are you someone that I know from Investorvillage.com from the CANROYS message board. If not sorry I bothered you.

DL

2007 Jun 24 12:22 AM

[sicophiliac:]

I am curious if the grade of coal KALG has stated in the JORC report would be classified as lignite coal ? In response to kambingramah looking at Kal Energy's official website they do have maps that give topographical information on the blocks of land they have rights to. I have also google maped the rough locations of the blocks they have rights to and have found the topography to be relatively flat. Variations in elevation rarely go up more than 100 feet or so. Also they have some information on their site stating there are indications of a "low strip ratio" Perhaps somebody who is much more knowledgeable when it comes to geology and coal mining could take a look at that. BWT that pdf file on the Wara coal reserves wouldnt load worth a crap on my comp. I did some other research and found that there is some growing demand for the lower grade Indonesian coals due to environmental benefits of the low sulfer and ash content. Also Kambingramah you should look at the numbers on the test results from the coal from the other land block they have. In my admittedly ignorant opinion they look to be much better, higher caloric values/ lower moisture content ect.

2007 Jul 05 09:03 PM

[kambingramah:]

in the resource report it is clearly stated that the topographic information in the companies possession is unreliable.

this is entirely normal in Indonesia where the best quality government maps are 1:50,000 scale and generally accurate to +/-25m. The sorts of features you have pointed out from Google earth can be almost entirely absent from such maps. It is normal for operators to commission survey themselves. It is generally accepted that given the coverage by foilage Laser survey is the best method for Kalimantan. That is all ahead of Kalenergy

Why is this significant. I have tried to prepare a little table below to show you. I have used the variation you report of 100 feet ( say 30metres). The resource report is a little unclear on the average thsicknees. It just reports a range. I have assumed a 5m thick Graha seam being well above the mid point of the reported range. At 30m the strip ratio is 4.6bcm per tonne. At 60m its 9.2

That is the difference between being interesting and being uneconomic at the grade of this deposit.

OB Depth Seam Thickness Seam Tonnes Strip ratio
30 5 6.5 4.6
60 5 6.5 9.2


Yes there is an emerging demand for these types of coal. There is no denying that. The question ultimately comes down to the total landed cost of energy. I am sure there are people on this board far more knowledgeable than me on that subject who could perhaps educate us on this. A good USA example would be the Powder River Basin in Wyoming. There is huge demand for its coal but the sale price is pretty low compared to Appalachian coal.

Now that you mention Blok 16 I have had a closer look

Yes the sampled coal quality looks good and by itself would attract about $50/t FOB vessel in todays market. Blended with Blok 24 on a 1:1 basis would give something like the Adaro envirocoal people quote so e easily $40/t.


Thats where the good news ends,

They spent 90 man days in the area and 190 man days in block 24. They found a fraction of the outcrops of coal in Block 16 compared to Block 24. this will give you an indication of the relative prospectivity of the areas

A key reason for this is that the coal is likely to continue under the low lying areas - aka the swamp.

What coal they have found is generally thin except for one nice 3.5m outcrop. The dips are very steep, 50 degrees being normal. This tells me that economic tonnes are likely to be small as the coal gets very deep very quickly.

The range of dips and dip directions is curious as well. Too little information to draw any real conclusions but given elevated energy I woudl look to tectonic activity (faults etc) as an explanation. this would tend to lower prospectivity.

It will be interesting to watch as the area is drilled.

2007 Jul 07 01:09 AM

[sicophiliac:]

Ok forgive my ignorance but could you explain a bit more on what strip ratio is exactly? Is it the ratio of top soil needed to be stripped in relation to the amount of coal recoverable underneath? I wasnt too sure what was implied in your statement about the topography and its significants, I thought maybe if there were huge mountain ranges or canyons in the block it would make things a lot more difficult for them. That clearly is not the case but apparently smaller variations in topography are critical.

Looking at what you have said about the two blocks is it fair to say they have likely have a lot of the low grade coal and a little bit of the good stuff? I agree that the results from testing of block 16 will be interesting, they could very well make or break this company.

2007 Jul 07 06:50 PM

[kambingramah:]

No problems Sicophiliac. Strip Ration is the amount of waste material that needs to be moved for every tonne of coal. So a strip ratio of 4.6:1 means that to get 1 tonne of coal you must remove 4.6cubic metres of rock.

Now as each cubic metre of rock costs you $. The higher the strip ratio the higher the cost of producing a tonne of coal. In Indonesia the costs of contract waste removal range from about $1.40 for small scale local contractors up to $2.20. A lot depends on the scale and style of mining.

In any case you can see that going from 4.6:2 to 9.2:1 strip ratio adds 4.6bmc so between $6 and $10 per tonne to the costs of production.

Given the low sale value of this coal as-is these numbers are pretty significant in terms of project economics.

your summaryof "a lot of low grade coal and a little bit of the good stuff" is about where I see it given the current information.

2007 Jul 07 10:03 PM

[sicophiliac:]

Do you know if Indonesian coal from this region typically has a low strip ratio or not? Also if the strip ratio is low then in your opinion should these guys be able to profitably get this stuff out of the ground? Even the low grade coal.

2007 Jul 09 11:11 PM

[kambingramah:]

Typical is a difficult word to apply to strip ratio. There are large low strip ratio operations next to small high strip ratio deposits. Its not something that can be easily generalised.

2007 Jul 12 08:20 AM

[Lisa:]

Pity the article has been temporarily removed. Note the volume of comments, the level of animosity to the author, and the failure of most of the critics to address the substantive points in the article.

2007 Jul 23 03:11 PM

[kambingramah:]

does anyone know why it has been removed?

2007 Jul 24 07:12 AM

[danarog:]

Note from SA Editors: This article has been temporarily removed pending further clarification, due to a complaint by the company.

2007 Jul 24 09:16 AM

[kambingramah:]

yes spotted that but I was just wondering about the grounds for the complaint. Was there anything in that article that is inaccurate or misleading? As you may have gathered my expertise is on the technical side of coal geology and mining engineering and not the market finance side. Hence the interest.

2007 Jul 24 08:03 PM

[sicophiliac:]

I think the main concern brought up in the article was the possibility of share dilution. Other than that most of the points made seemed to be criticizing the fact that KALG was a new company and did not yet have the typical laundry list of things that would make them a save established investment. I mean no earnings, no guarantee of financing yet ect ect. Is that not the case more or less with any new company ? Also and I am biased since I own some shares, what new start up doesn't engage in a little hype to build up market capitol ? In all honestly I cant see how saying "avoid this stock at all cost" can be justified.If you want a stock to avoid at all costs try EBOF for example. Its a risky play for sure but that comes with the territory of penny stocks. However, they seem to have quite experienced management and they do have a decent amount of coal in their blocks of land.

2007 Jul 26 12:26 AM

[bob cat:]

I tend to agree, what puzzled me is why a financial journalist would write such an article without even contacting the company (according to them). If he did he would have known about the impending report etc....I may be skeptic but it does bring into question the integrity of the article and therefore it can be taken with a pinch of salt…That too can be added to his soup recipe

2007 Jul 26 04:04 PM

[kambingramah:]

what puzzles me is why the company has never responded to the serious technical issues in the underlying project. Forgive a simple mining professional but I would have thought that the issue of whether the project will ever make money or not woudl be more relevant. The company has not chosen to respond to direct questions or to posts. This is interesting to me when compared and contrasted to the original article.

2007 Jul 26 07:45 PM

[freeboof80:]

Sadly, kanmingrham (whatever it means) you are realy a simple mining professional with a very vindictive and superficial attitude. People like you should just relax and worry about their simple things. You seem to pose as an expert but what you really do is to put your miserable comments for whatever reasons to ruin some people who want to start something different. If you have no positive contribution why don't you just butt out of this and let people to decide what they want to do with their destiny? Did you work on this project before or what? you seem to know an awful lot about it, where is that coming from??? Please let us know, i'm waiting for more info. Thanks.

2007 Jul 27 06:34 AM

[kambingramah:]

and your point would be Mr Freeboof80?
Are you suggesting that people should invest in Mining projects without the benefit of advice from qualified and experienced mining professionals.?
Of course if people wish to do so then that is their choice entirely.

why that woudl then translate to personal attacks against me is not entirely clear to me but I am happy to listen to why.

2007 Jul 27 11:27 AM

[PugsleyAdams:]

Hehhe Kambing means Goat in Indonesian and Ramah means friendly...mmm friendly goat indeed.

caol prices are soaring in Kalimantan now with 5800/5600 TM 26-28% approximately USD44.00 per MT FOB Vessel and 6300/6100 is at USD61.00 - 63.00 per MT FOB MV - so, not a bad increase over the last few months. If you have operating coal mines in Kalimantan at present, you would be "killing the Pig" not the Kambing as one would say...

i have read through this feed and interesting from all parties to say the least

2008 Mar 01 04:42 AM

[be_careful:]

The coal is there, it is low CV coal but there is a lot of it. The real problem is the company has lost one lease and is could possibly loose the Graha block as well.
If you are a mum and dad investor do not risk your money.


On Jun 13 09:50 PM paul.hendry wrote:

> Mark, you raise some valid points although now the company has its
> proven resources of 204 million that takes the most important one
> of your list.
>
> You have gave this new founded company a complete bashing for being
> what..a new company. The have extremely good fundamentals and also
> have lots in their favour moving forward..lets remember they are
> a Junior Mining Company so therefore like all junior companies financial
> challenges lie ahead as they strive to go into production. Share
> dillution again like most Junior companies will happen but I think
> all who invest in the Juniors are aware of this as will probably
> be the case with KALG.
>
> When it comes down to Bob Moriarty..his reputation for investing
> speaks for itself can we say the same for you...lets wait and see..hope
> you put your money where your mouth is..I now where mine is!!

2008 Nov 28 01:04 AM

[User 210139:]

Kambingramah,

Thank you for providing such valuable insight which prevented me form going for this share. Thanks a lot.

Could you please explain what is the significance of formation data and dip/strike position.

For instance I have come across this info:

05. Formation : Ultramafic Rock (Mu),
Formation Manunggul (Km),
Formation Tanjung (Tet),
Formation Warukin (Tmw),
Formation Dahor (Qtd),
Alluvial Sendimtary (Qa)


06. Dip/Strike Position : 40 up to 120

How will you intrepret this information to find the mine is productive or not?

Thank you


Total Seam
SEAMS
Seam A – area 1
Seam A – area 2
Seam B – area 1
Seam B – area 2


:

4 seams
THICKNESS

0.20 Up to 3.15)
Deposited
:
6,735,446.845 ton

08. Laboratory Analysis

1. Total Moiture (ar)
:
4.4 %
2. Mointure In The Analisis Sample (ad)
:
2.0 %
3. Ash Contetnt (adb)
:
13.00 %
4. Volatile Matter (adb)
:
44.00 %
5. Fixed Carbon (adb)
:
41.00 %
6. Total Sulfur (adb)
:
0.81 %
7. Calorific Value (adb)
:
6.792 Kcal/Kg
8. Hardgrove Grindability Index (HGI)
:
36


On 2007 Jul 26 07:45 PM kambingramah wrote:

> what puzzles me is why the company has never responded to the serious
> technical issues in the underlying project. Forgive a simple mining
> professional but I would have thought that the issue of whether the
> project will ever make money or not woudl be more relevant. The
> company has not chosen to respond to direct questions or to posts.
> This is interesting to me when compared and contrasted to the original
> article.

Jul 06 02:21 AM