Viking Ashanti (ASX: VKA) and its 92.69% owned subsidiary Auminco Mines have clinched a future coal supply agreement with a Mongolian Government power authority for its Berkh Uul Bituminous Coal Project in northern Mongolia.
This is a significant endorsement of the rationale for the Auminco takeover and the capacity of the Berkh Uul project to deliver coal to the Authority. Viking has reached 90% acceptance levels with the takeover of Auminco.
The non binding MOU was signed with Darkhan Thermal Power Plant for coal from Auminco's Berkh Uul Bituminous Coal Project ("BU Project") in northern Mongolia.
Viking Ashanti Managing Director, Peter McMickan, said the MOU signed with Darkhan Thermal Power Plant (DTPP) was an important step for Auminco's Berkh Uul Bituminous Coal Project ("BU Project") in northern Mongolia.
"The fact that Berkh Uul Project has been recognised by the Mongolian Government as being a potential key supplier of coal to the DTPP is a significant milestone in the development of the Project," Mr McMickan said.
"Auminco's discussions with nearby cement works and power stations had already confirmed a local industrial demand for unwashed Berkh Uul coal, due to its low ash, low sulphur and relatively high calorific value.
"This MOU provides further evidence of the potential customer base for Berkh Uul's coal."
Background to DTTP
DTPP is a Mongolian Government entity and is the major supplier of electricity to Mongolia's second largest city, the commercial and industrial centre of Darkhan, and the northern region of Mongolia.
Currently the DTPP consists of a 47 Megawatt power plant that consumes approximately 400,000t of coal per year. An upgrade to add an additional 35 Megawatt capacity is due for completion in 2015.
The additional capacity will increase coal demand to approximately 600,000t per year.
The non-binding MOU, signed with Auminco's Mongolian subsidiary BRX LLC relates to the intent by DTPP to enter into future purchase agreements for BU Project coal.
It also establishes a basis for technical evaluation of the quality and quantity of coal prior to price negotiation, which includes testing of a 5,000 t bulk sample.
The BU Project is located 200km east of Darkhan City, within 40km of rail access to the existing Trans-Mongolian Railway, which provides a transport link to Darkhan to the south and Russia to the north.
This milestone agreement although not yet binding can propel development timelines for Berkh Uul and de-risk the project.
This could see a fast track the development of Berkh Uul over the next 12 - 18 months to capture the demand for high quality thermal coal from industry (including cement works) and power stations that have developed in northern Mongolian and Siberian markets.
We believe that Viking Ashanti can develop a small scale operation that could generate a conceptual free cash flow of up to US$3-5 million.
Our projected valuation for Viking Ashanti is $0.085 to $0.165 per share. This is relative to current share price of $0.042 per share. There is upside from this valuation as Viking adds a washing plant to Berkh Uul operations, the cost of which is expected to be less than $5 million.
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