This means the potential for near to medium term cash flow from the already producing operation if Continental chooses to exercise the option.
Sales of hard coking coal are made at mine gate with current margins of around 75%. Sales directly to the export market are planned for 2013.
The potential cost of this acquisition is US$15 million.
Taking the option would enable Continental to operate, develop and expand an existing business, which consists of five mining concessions/contracts covering over 1,500 hectares, including the existing underground mine that has been in operation for 24 years and adjacent exploration ground.
Based on historic reports and its current due diligence, Continental believes annual production of 500,000 tonnes can be achieved in the medium term.
An independent technical review in 2010 determined that mine production can be increased from its current levels through the introduction of mechanisation, improvements to the mine infrastructure, a modified mine layout and an additional production shift.
Current underground production and access for the mine is through a series of declines to mine two seams with a total economic thickness of 1.7 metres.
Mining is by a modified room and pillar mining method and, given the high quality nature of the coal, no wash plant is currently required.
The mine has a life in excess of 50 years, although currently it has no JORC Reserves or Resources.
Continental has agreed to carry out an initial exploration program on the adjacent and near-mine exploration ground.
The company will fund and develop the existing operation.
Continental has received an indicative proposal for a new debt and commodity linked facility to fund the US$15 million potential acquisition cost.
The company has also finalised a convertible note facility with U.S.-based Bergen Global Opportunity Fund LP for up to A$5 million.
The facility will be made available to the company in three tranches, with the first tranche of $2.5 million already drawn and two subsequent tranches each of $1.25 million after 30 and 60 days.
The facility will be used for general corporate purposes and working capital and to assist in the evaluation of advanced and producing opportunities both in and outside of South Africa.
South African operations
Continental is set to increase cash flow in the short term with the advancement towards production at the Penumbra Mine in the second half of 2012.
Penumbra is set to become the company's third thermal coal mining operation in South Africa.
Sales of 500,000 tonnes per annum of a high quality export thermal coal product are forecast, generating annual free cash flow of around US$23 million based on prevailing prices.
Continental already has up to 500,000 tonnes of coal sold under existing offtake agreements.
The company recently increased its bank balance to further the development of the Penumbra, De Wittekrans and Vlakplaats Coal Projects with the financial settlement of its new partnership in South Africa.
Continental has now received the total ZAR140 million (A$16.9 million) payment from Broad Based Black Economic Empowerment Company, Sishen Iron Ore Company Community Development Trust.
Cash at the end of the March 2012 quarter was $6.6 million. This would imply cash backing of around $0.05 per share (or 38% of valuation) for a company whose share price is trading at $0.13.
In addition, Continental earned revenue of $20 million for the March quarter and EBITDA of $1.5 million.
All this indicates an under-valuation relative to cash generation and cash on hand.
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