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Universal Coal Moves Closer To Cash Flows With Eskom Power Deal

Universal Coal (ASX: UNV) will make the transition from an explorer into a producer after signing a binding term sheet with South African power utility Eskom for the supply of about 2 million tonnes of coal per annum.

Development of the Kangala thermal coal mine about 65 kilometres east of Johannesburg is expected to start in the second half of this year with first saleable coal delivered a year later.

The supply agreement has an initial term of eight years with an option for another eight year renewal once the resource base increases through Universal's adjacent property holdings.

"As our first mine, having off-take already secured de-risks the project for our shareholders, and generates stable and predictable cash flow for the company moving forward as we continue to develop the company's larger thermal and coking coal resources," non-executive chairman John Hopkins said.

BFS metrics confirmed

Universal confirmed that Kangala will be an open pit operation, with a 1.7:1 stripping ratio, which allows for a low average life-of-mine operating cost of less than A$13.50 per run of mine tonne.

The total additional capital required to bring the project into production is about $50 million at current exchange rates, including working capital and contingencies.

Annualised projected average earnings before interest, taxes, depreciation and amortisation are $15 million per annum.

Funding

Universal said has been engaging with various financial institutions and other interested funding parties for project funding and will use the next calendar quarter to secure the best solution.

This is currently anticipated to be split evenly between project financing/debt and equity.

It reiterated that it is pursuing alternative forms of financing for the remaining required equity component similar to the recent convertible note structure secured with Susquehanna Pacific.

In April, Universal executed an agreement with Susquehanna International Group LLP, through its subsidiary Susquehanna Pacific, which provided for an initial drawdown of A$7 million in May.

"In tough capital markets, the funding solutions being pursued by Universal are also made easier having this off-take in place. The company will now take the time to ensure we achieve the most appropriate funding solution to put Kangala into production in line with Eskom's requirements for coal in late 2013," Hopkins added.

Reserves and upside

The Bankable Feasibility Study (NYSE:BFS) for the project had confirmed saleable coal tonnages of about 2.1 million tonnes per annum from a planned 2.4 million tonnes per annum run of mine production rate over the life of the mine.

While the initial pit has defined and proven reserve of 19.5 million tonnes, further upside is possible with the pit located adjacent to properties with an additional 65 million tonnes of Indicated and Inferred Resources, within a total resource base of 124 million tonnes.

Furthermore, the company was last month granted a prospecting right over certain portions of the farm Goedgedacht 228 IR, located just 8 kilometres east of Kangala..

The prospecting right, valid for four years from date of execution, covers an area of 215 hectares and is strategically located directly between Exxaro's Leeupan Mine and Stuart Coal's Mine, immediately adjacent to Exarro's coal load-out rail loop.

Analysis

This is a significant milestone for UNV, one that will bring them closer to much vaunted cash flows. Also, the type of funding pursued by UNV looks achievable in the current market conditions.

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