Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Prophecy Coal Drives Chandgana Process Forward, 600 MW Plant To Go A Long Way In Addressing Mongolian Power Deficit

Prophecy Coal Corp. (TSE:PCY) forecasts aggressive growth ahead as the company plans to bring its 600 megawatt (MW) Chandgana power project in central Mongolia online by the first quarter of 2016, helping to relieve a major ongoing and growing power deficit in the country.

The project, for which the company has already officially submitted the power purchase agreement (NYSEARCA:PPA) to the federal government, would be the first thermal coal power plant in the country in over 20 years.

According to a company statement, the official submission followed "many months of work" with a designated working group of more than 20 government members.

The next step will be to reach an agreement on tariff, followed by execution of the PPA. The company is seeking an off-take deal, under which the government agrees to buy power from the plant at a specified rate during that time, subject to adjustments for inflation-related and certain other cost increases.

Greg Hall, a director of Prophecy Coal, says there are already three "Soviet-era" coal power plants within Mongolia, but all are "heavily polluting", and suffer from frequent disruptions due to an over-taxed power grid.

"The power deficit is becoming much, much worse," says Hall, "and the Chandgana power plant will go a long way to addressing this."

The large power plant, which will be equipped with "the latest technology" in terms of clean coal energy, is expected to be close to what one would find in a modern North American natural gas power plant, Hall says.

"The plant will not only address the power shortage, but also the terrible pollution problem."

Prophecy is actively driving the process forward, and has recently signed a co-operation agreement with the Energy Authority (NASDAQ:EA) of Mongolia, another step toward getting the plant up and running in the next four years. The EA is the agency that implements governmental policy in the power and energy sector of Mongolia.

The co-operation agreement covers the basic rights and obligations of Prophecy as the seller and the National Electricity Transmission Grid Company of Mongolia (NETGCO) as the purchaser of energy.

The EA confirmed the need to purchase the net electric output of the plant to satisfy the electricity energy demands of the country's central and eastern regions.

As such, the company said that the plant will supply electricity to the central and eastern energy systems in Mongolia, with an expected 100 MW net electric output starting from the first quarter of 2016, up to 200 MW from the third quarter of 2016, 300 MW from the first quarter of 2017, and 400 MW from the third quarter of 2017.

At the start-up date in 2016, Hall says the plant will only be able to meet about two thirds of the country's deficit, leaving the government to seek additional power sources.

For example, the power needs of the Oyo Tolgoi mine in Mongolia owned by Rio Tinto (NYSE:RIO) (LON:RIO) and Ivanhoe Mines (TSE:IVN) (NYSE:IVN) will require the companies to purchase electricity from China for the first five years of production beginning in 2013.

Prophecy plans on increasing output from its Chandgana plant from 2017 to 2020 by adding 3,600 MW of capacity, selling excess power to Chinese markets and to industrial users, who typically pay a higher rate than governments. The initial life of the plant is estimated to be around 30 years.

The Chandgana coal property consists of three licenses: Chandgana Tal, which has a measured resource of 141 million tonnes and includes two licenses, and Khavtgai Uul - which contains one license and is located in the southwestern end of the basin - and has a measured resource of 509 million tonnes and indicated resource of 539 million tonnes.

Coal for the Chandgana plant will be sourced from the company's Chandgana deposit, for which it has obtained all necessary permits and licenses to initiate production.

Regarding financing, Hall says the company has had discussions with a number of the major energy players in the business, as well as with large Asian coal companies. Discussions with other interested parties are also in progress.

"The execution of the final power purchase agreement will make the Chandgana project bankable, and after this, Prophecy will enter into firm discussions with potential joint venture partners," Hall adds.

Though Hall cannot disclose the price it is negotiating with the government for the power purchase agreement, he says it is competitive and in line with current rates in North America.

The EA will monitor the Chandgana power plant construction process to ensure the power plant is constructed within Mongolian regulations and approved technical and design specifications.

Prophecy also holds the licenses and owns the mining equipment of the Ulaan Ovoo coal mine, which lies in the northern part of Mongolia, and is within close proximity to the Russian border.

The property, which is already in production and is supplying coal to two major coal-fired plants in the north, consists of "good quality thermal coal", says Hall, and has an expected mine-life of over 20-years, and an efficient strip ratio of 1.8:1 for the near term.

The Ulaan Ovoo deposit hosts a measured resource of 174 million tonnes and has an indicated resource of 34 million tonnes, of which 20.7 million tonnes are classified as a reserve.

Recently, the company announced that it will sell 22,100 tonnes of thermal coal from its Ulaan Ovoo mine to a local, direct reduced iron (NYSE:DRI) manufacturing plant.

DRI product is one of the chief raw materials in steel-making as it has higher qualities and advantages compared to scrap irons and pig irons. DRI products typically sell in China at over US$300 a tonne.

Prophecy's "high quality thermal coal" is ideal for DRI, which is also known as sponge iron.

The company said the undisclosed buyer has indicated that it would eventually like to increase the supply from Prophecy to 300,000 tonnes on an annual basis.

Hall says there is market demand to warrant doubling current production at Ulaan Ovoo, which can be done without further capital investment.

Looking ahead, the company continues to make progress on opening the Zheltura border crossing - 17 kilometres from its Ulaan Ovoo mine - to facilitate coal export to Russia, which would increase the total demand for coal from the Ulaan Ovoo mine.

"With the opening of this crossing, Russian trucks could potentially come directly into Mongolia and load at Ulaan Ovoo's mine mouth, eliminating a major component of our costs and allowing us to sell very competitively to Russia," Hall affirms.

When asked about the new foreign investment act in Mongolia that recently passed, Hall says he is not concerned and feels Prophecy is in a position to benefit from the passage of that act.

"The act is similar to Canada's in that it gives the government the chance to review transactions over a certain size and allows the process to be more transparent.

"This isn't a negative - governments should be involved so every party is familiar with the rules."