DeadlockWeek of August 13, 2007
Another rough week especially for the smaller companies. The TSX.V is now back to January levels as 6 months worth of gains have been wiped out in 3 weeks. Stocks get overbought going up, and oversold going down. Many investors trade purely on emotion and with the smaller companies, bids disappear and panic selling causes excessive price volatility (and portfolio hardship). Buying in this type of market can often be highly profitable but you're a salmon swimming up stream. You'll either breed... or get eaten
For those of you with bottom fishing blood left, take a close look at EEC. A strong play on the growth in China through their enormous demand for steel and subsequent demand for coking coal. Data for the last quarter pushed China to the forefront dislodging the United States from its long reign as the main engine of global economic growth. China's demand for steel and energy will continue to push the boundaries of supply.
East Energy Corp. (EEC.V $0.69)
www.eastenergy.com
52 week High $1.18 / Low $0.64
Shares Outstanding 34 million
Approx. Cash: $8 million
EEC is a Met coal play in China - "metallurgical coal" is a grade of coal suitable for making steel, such as coking coal, which is used to make coke, and PCI coal, which is used in the steelmaking process for its calorific value (about 70% of the world's steel production uses coal in the manufacturing process). East Energy is run by the former VP of Mining for Luscar/Sherritt - one of the largest coal mining companies in North America. This past week they hired Garnet Clark who spent 11 years as the chief financial officer of Sherritt International's metals, oil/gas and coal businesses. Mr. Clark is also former vice-president of finance and chief financial officer of Luscar - so they have strong credibility.
The company is apparently looking to expand internationally but right now their main asset is the Jiangcang metallurgical coal project in China's Qinghai province.
The joint venture project has a current in-place coking coal resource (independently prepared by Norwest Corporation in compliance with National Instrument 43-101) of 311.5 million tonnes suitable for surface mining. This is a huge deposit and it appears there is plenty of room for expansion. East Energy's 12.74% share of this inferred resource is 39.6 million tonnes. Prices can vary significantly but U.S. $90/tonne is a current average.
Because the property is located directly within China, it could become very valuable. Even if we assumed their coal was only worth $5/tonne to a major miner or steel producer (vs. put into production and sold for $90), EEC's share would be worth something in the range of $200 million. With 34 million shares out, that is worth almost $6/share. Even assuming $1/tonne, the 40 million tonnes is worth $40 million. They have $8 million in the bank so if we low-balled a value of $48 million divided by 34 million shares out, we still get $1.40/share.
There is some element of political & country risk here - but hardly enough to justify the current valuation given the sheer size and quality of this coal project. Even in this market its worth looking at in the $0.60's and $0.70's as China's appetite for steel is not going to disappear overnight.
Market Fundamentals
In early 2006 steel producers were predicting big price reductions when they negotiated contracts (U.S. $125/mt was being paid for metallurgical coal). Prices dropped somewhat but global delivery prices remain in the range of U.S. $90 per metric tonne (mt). The coal-consuming economies of China and India continue to put constraints on the market. Russian exporters face rail car shortages and rising production costs, while globally the exporters face high oil/fuel prices along with machinery and tire shortages. This makes "local" supplies all the more attractive and price competitive.
According to the National Development and Reform Commission, China accounted for 26% of the world output of steel, while Chinese crude steel production for the January to September 2006 period increased 18.4% on year to 308 million mt. Chinese Export coking coal prices are in the $85-90/mt level. Traditionally the Chinese Met coal prices established a benchmark in talks between Australian producers and Japanese steel mills.
Indian coal consumers have been forced in many areas to rely on imported coal, as their own coal reserves are often undeveloped and poorly managed. India wants its annual steel output to climb to more than 160 million mt by 2020. Obviously Indian consumer demand will become even more important to the global coal markets and overall pricing.
Property Overview
In a 43-101 compliant report dated June 19, 2007, it was estimated that the Jiangcang project contained an inferred resource of 311.5 million tonnes of coking coal that is potentially surface minable (EEC currently has a 12.74% interest). The 311.5 million tonnes of inferred resource estimate is based on 138 drill holes and on two of 20 coal seams in the area. These two seams have an average thickness of 3.7 metres and 13.6 metres, respectively, and contain medium-volatile Bituminous coking (metallurgical) coals, which are used in China's steel industry. As a Canadian comparison, the coal is described as similar to higher volatile seams found in southeast British Columbia.
The EEC JV (joint venture) properties are located in the Jiangcang coal basin, which are situated 300 kilometres (186 miles) northwest of Xining City, the capital of Qinghai province. This is a major coal basin hosting 1.7 billion tonnes of metallurgical coal according to estimates released by the Chinese government. The Qinghai government is actively encouraging investment and is showing its support by investing in power lines, rail connections and road upgrades, among other initiatives in the Jiangcang coal area. In addition, several mining companies are active in the area.