Ascot Resources Limited (AZQ) is a coal explorer with a strong management team. It has an early stage metallurgical coal project in Colombia, Titiribi, where AZQ believes it can facilitate the development of a low capital and operating cost mining operation by the end of 2014.
Mine development is anticipated to commence production at 250ktpa expanding to 500ktpa within 12 months. AZQ is undervalued in comparison to its peers and we are initiating coverage with a Speculative Buy rating.
Near term catalysts include Pre-Feasibility studies and resource definition.
A number of small cap companies listed on the ASX are developing metallurgical coal projects. The majority of these projects have given investors some indication of the size, capital required and estimated development time to first coal sales.
Based on our analysis, the market is placing a higher in-situ value on companies with proposed operations outside of Australia with near-term production.
Path to production
The Phase 1 drilling program resulted in a maiden resource of 8.1mt which includes 5.2mt in the measured category and 0.7mt in the indicated category.
Following the release of the maiden JORC resource, AZQ will finalise a Pre-Feasibility Study (PFS) based on open-pit mining of a semi-soft, high volatility metallurgical coal that will include a "starter operation" to commence in 2014.
The coal deposit is situated in a valley on the western flank of the Andes and adjacent to a major highway that hosts coal transport trucks. The Project site is located 70km from the State Capital, Medellin, and it is close to existing utilities and
infrastructure including the Pacific port of Buenaventura, 500km by road.
It is envisaged by AZQ that mining will focus around three primary seams, truncated by a number of cross-cutting faults and exploitable by open-cut mining methods.
Coal quality results were received from independent verification and testing specialists SGS. This testing confirmed that the product was a high energy coal (≈ 7,000kcal/kg) with a relatively high Free Swell Index (FSI>5), high volatiles, low ash levels (<10%), moderate sulphur (≈ 1.0%) and low phosphorous.
These properties are typically consistent with a metallurgical coal. The marketability of the coal in local and export markets will be investigated in the Pre-Feasibility Study based on the coal quality analysis completed concurrently with the JORC compliant resource definition.
AZQ acquired a 90% ownership in the Titiribi Coal Project for a consideration of 3.0m shares and $0.5m cash. Mr Kopejtka then joined the board as the Executive Chairman and he will receive further consideration in the form of 58.26m performance shares as performance hurdles are achieved.
These will have a material impact on the shares on issue and those controlled by the Executive Chairman. The Managing Director, Andrew Caruso, will receive up to 16.5m performance rights as performance shares hurdles are achieved - these were re-allocated to Mr Caruso from Mr Kopejtka (from the initial consideration issued by the Company).
Investment thesis and valuation
Ascot Resources (AZQ) owns 90% of the Titiribi Coal Project in Colombia. It is an early stage metallurgical coal project where AZQ believes it can facilitate the development of an initial 250ktpa "starter operation" by the end of 2014 expanding to a long term production rate of 500ktpa within 12 months.
The early analysis conducted by the Company indicates the mine to be a relatively low capital intensity operation with low operating costs.
The resource is outcropping and drilling to date has defined a measured and indicated resource to support an operation of this size. There are limited regulatory hurdles that need to be cleared and Titiribi is well located near a sealed road with links to both Atlantic and Pacific ports.
We are initiating coverage of AZQ with a Speculative Buy as we believe the upcoming Pre-Feasibility studies and further resource definition will provide the catalysts for share price appreciation.
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