Churchill Mining (AIM: CHL) appointing Credit Suisse as strategic advisor with regard to the development of the East Kutai coal project in Indonesia may have come as a big surprise to many market watchers. After all, the Zurich-based group is a major player in the Indonesian market and has been involved in some massive deals involving coal assets in the country – and Churchill’s current market capitalisation of just above £100 mln do not put it amongst the largest fish in the pond.
Nevertheless, managing director Paul Mazak, while appreciating that some may be surprised by Churchill bringing this massive player to the table, is adamant that Credit Suisse has good reasons to be attracted to the group: “They agreed because of the quality of Churchill’s assets.”
The East Kutai coal project currently which has a JORC compliant reserve of 956 million tonnes of thermal coal and resources of 2.481 billion tonnes, is planned as a 20 million tonnes per annum operation. The appointment of Credit Suisse as strategic advisor, announced earlier this week, should help turn Churchill into a major exporter of thermal coal to the expanding Asian energy market.
Credit Suisse will work with Churchill to complete a strategic review process, evaluating options for financing the project, which will include the development of East Kutai with a joint venture partner or the conclusion of a long-term off-take agreement.
Back in October 2009 Churchill appointed Pala investments as a strategic advisor. Pala’s objective was too to assess the company's structure with a view towards increasing its operational and capital-raising flexibility and maximising tax efficiency. Pala’s job is now almost done and Churchill is shifting into a higher gear.
There has been plenty of interest in East Kutai in the past few months. Mazak said the group has been inundated with proposals for its flagship project, and to streamline this process, Churchill put out to tender the position for a strategic advisor for the development of East Kutai and was approached by 9 investments banks. Enter Credit Suisse, which emerged as the leading candidate through its exceptional expertise in the Indonesian energy markets and impressive track record. “We wanted an outside firm with a good reputation – and we got it,” the MD said. However he would not be drawn on commenting market speculation that Credit Suisse has agreed only to be paid on a success basis.
Churchill calls Credit Suisse the “market-leading investment bank to the coal sector in Indonesia, working with leading companies such as PT Bumi Resources, IndoCoal, Adaro Energy and others.”
In 2009 alone, the bank acted as sole or joint bookrunner or sole arranger for US$1 billion worth of bond and loan offerings for PT Bumi in four deals and was sole arranger of a US$800 million bond offering for Adaro. It also arranged and advised on a number of loans and acquisitions for resource companies active in Indonesia. In all Credit Suisse has completed over US$13 billion of Indonesia-related coal transactions over the past five years.
Along with the current group of potential investors and JV partners that Churchill has been working with, Credit Suisse will start an open invitation process, funnelling down potential candidates through the different stages, and in the process create competitive tension to help provide the best deal for Churchill shareholders. As interested parties move through this filtration process they will be privileged to more data on the internal economics. Releasing more detailed information on the internal economics is something some UK brokers have criticised Churchill for but in a competitive bidding situation it is in the interest of shareholders to negotiate the best deal.
Credit Suisse with its exceptional reputation and financial clout is in a position to advise both Churchill and the buyers on any transactions.
In the meantime, Churchill is continuing to advance the project by putting key infrastructure items such as the mine stockyard, overland conveyor, port/ship-loader and power station out to tender. The company said that, to date, the bids received have been well under predicted costs due to the resurgence in global manufacturing and engineering capabilities following the global financial crisis.
The project construction work at East Kutai is expected to take approximately two years to complete.
The company is looking to capitalise on the growing Asian demand. According to Churchill, India will need a minimum of 100 million tonnes per annum of new EKCP-styled coal to meet expected future energy needs. The company’s representatives have recently visited 17 companies on India's East Coast to discuss the project and potential off-take agreements.
Disclosure: The author holds no positions in the company