TRANSCRIPTION OF FINANCE NEWS NETWORK INTERVIEW WITH ZYL LIMITED (ASX:ZYL) MANAGING DIRECTOR, DR ERIC LILFORDNicholas Hayes: Hello I’m Nicholas Hayes for the Finance News Network. Joining me from coal mining and development company ZYL Limited
(ASX:ZYL) is Dr Eric Lilford. Eric welcome to FNN. Can you start by introducing ZYL and the decision to focus on metallurgical coal?
Dr Eric Lilford: ZYL was historically an industrial company and it’s gone through a receivership, a DOCA Deed of Company Arrangement - came out the other side and we’re looking for assets to bring into it. My background as a mining engineer, I’ve spent a lot of time in the coal industry as well, thought that coal would be a good target asset or commodity to place into it and specifically metallurgical type coals.
So anthracite being one of your highest rank metallurgical coals, I thought this would be a very good place to play considering that the world is in high demand of metallurgical coal. But then my guess about anthracite, it is quite a specific commodity, so my thinking was let’s do metallurgical coal, I’ll start off with specifically anthracite and then we’ll broaden in due course to incorporate things like your hard and soft coking coals as well.
Nicholas Hayes: And where do you operate and what size is the project?
Dr Eric Lilford: We currently have shareholding in one asset and I put on record that we’re not going to be a single asset company. But that one asset is sitting in the Mpumalanga Province of South Africa. It’s about 120 kilometres by rail of the Port in Matola which is in Mputo Mozambique. The rail infrastructure - that’s already there, so there’s a very nice story to tell around the attractiveness of this specific anthracite deposit.
The South African anthracite producing regions have typically been south of Swaziland which is in the KwaZulu-Natal area. Entities and companies including ZAC which is in an anthracite calorie, which is a subsidiary of Riversdale which we all know is under offer at the moment, or has been bought out effectively - that’s all in the KwaZulu-Natal Region.
So north of Swaziland you have a series of four or five large concessions which are similar coal seams, specifically anthracite. There is no metallurgical coal within those measures; they do have various grades of anthracite within those measures. Of course though, you’ll look at washing some of the product, but it’s a fairly undeveloped region as far as anthracite is concerned.
So again from a ZYL point of view, we’ll be looking at consolidating an area in a very much attractive anthracite producing region.
Nicholas Hayes: Thanks Eric. And for investors hearing about ZYL for the first time, what’s your market cap?
Dr Eric Lilford: Current market cap is approximately $110 million. We went through a process of Chapters 1 and 2 in becoming a mining company, away from the technology sector and we started trading, re-trading or we reintroduced to the ASX very recently. So we’re talking a very short time ago. And we’re now in a position where our shares, thankfully are back in the market and we are subject to shareholder attraction or not.
Nicholas Hayes: Now to your key project the Kangwane Anthracite. What is your stake in the project and how did ZYL become involved?
Dr Eric Lilford: Our stake is ultimately going to be 50.12%. We will take control, we will have management control effectively and the project is currently managed under a Bankable Feasibility Study Committee. So the project is going through a full BFS and we at ZYL will have representatives on the Board and I am one of them – on the Board of the Bankable Feasibility Study Committee.
As far as getting involved is concerned, there was an option out that ZYL managed to secure over the rights to this particular property. And in South Africa, as one would understand, there are a lot of empowerment groups that are looking to invest in the resources sector. There’s a big drive to having previously disadvantaged South Africans and South African groups, getting involved in one of their primary industries being mining. What we offered to do through this option was to bring a significant amount of capital to develop the project in exchange for which we obtained, or we will obtain ultimately a 50.12%. We currently have in excess of 45% in the project as we speak right now and we’ve got a farming arrangement where that will increase over the next few months.
Nicholas Hayes: Your project is an anthracite project. How does the anthracite differ from other coals?
Dr Eric Lilford: Interesting question because there’s a plethora of misunderstanding of what anthracite actually is. It’s a very high rank coal, rank as in very high carbon content. It has very low inherent moisture; it also has a fairly low ash content. One of the key differentiators with a coking coal is that it also has a very low volatile content. Now your volatile matter is effectively the impurities sitting within a coal that allows a coal to become a good reductant or not. So coking coals will have a higher content of volatile matter and hence when it is converted into coke, it’s a more porous material and acts as a better reductant.
Anthracite, therefore, does not make the best reductant in the steel works industry or the production of steels. However, it can be used as a reductant but again the volatile matter counts against it. What you typically do find is that because it’s got a very high calorific value which is its actual energy content, what you do is you will use amounts of anthracite mixed in with maybe a coking coal, or sometimes even a thermal coal in a power station. Understanding that it’s a very high value commodity; it’s a very high value product. So you are not going to find anthracite substituting coking coal. But you will certainly find it as an additive in assisting and increasing certain of the components and capacities of coking coals and thermal coals.
Over and above that the high carbon content lends itself very well to carbon fusion or a carbon distribution within the production of high carbon steels, high carbon ferrochromes and high carbon ferromanganeses. So it’s used as a source of carbon as well. In parts of Europe, sorry just to continue, parts of Europe it still uses a household heating fuel because it’s a very smoke free fuel. Because of its low impurity levels, typically you produce a smokeless heat source. So Europe still uses that and again because of the high carbon content, you can actually use it as a cathode paste. Where carbon is a very good conductor of electricity, you can use it as a cathode paste in furnaces.
Nicholas Hayes: What is the size of the resource?
Dr Eric Lilford: We currently have a JORC Statement Resource in excess of 114 million tonnes of contained anthracite. We have a target well in excess of that, probably three times that of the order of 400 - 400 million tonnes. Understanding that anthracite is a specialist product and we have what’s called an ultra-high-grade anthracite product - that has a global market of somewhere in excess of 75/80 million tonnes a year. So what you don’t want to do is try and flood the market, it’s quite difficult to flood the market in a product like this.
So with a resource in excess, a target resource in excess of 400 million tonnes, it’s likely that at a conservative production rate of maybe 2 up to 4 million tonnes a year, you can see that we are going to have a life of in excess of 100 years. So a very long life asset and again I reiterate this is just one asset in a portfolio that is looking very attractive for the future.
Nicholas Hayes: What stage is it?
Dr Eric Lilford: We’ve almost completed Bankable Feasibility Study; we have another few months to go. We have a drilling programme that is on the go right now. We’ve drilled in excess of 4,000 metres of holes already and all the cores have been sent to a laboratory in the Middleburg region of South Africa, which is a very well-known coal producing region. The drilling programme will continue for another approximately three odd weeks and that will see us completing a 7,000 metre drilling programme - so a total of 7,000 metres.
With the results of the drilling programme as well as a Geomagnetic Aerial Survey we conducted a few weeks ago, that will then form the basis of actually going into the design component of your Feasibility Study. So the BFS itself, the Bankable Feasibility Study is still on target to be completed by year end.
Nicholas Hayes: And when is production scheduled?
Dr Eric Lilford: Completion of Bankable Feasibility Study will lead us straight into construction commissioning construction period. It’s a simple process; coal is all about washing it’s not really metallurgy, so we don’t really have any long lead items. We anticipate and forecast production before the end 2012, so we have approximately a one year construction commissioning period.
Nicholas Hayes: What is the mine life based on and current resource and proposed production rate?
Dr Eric Lilford: We’ll start off, as I mentioned just now, that if we had to assume a 2 million tonne run of mine per annum production rate, we could have a life in excess of 200 years. But let’s assume that the project is attractive enough and we continue with our feasibility work. Even once we’re in production; it’s highly likely we’ll increase that production rate to beyond possibly 4/5 million tonnes per annum run of mine.
The washing rates, what you do is you have - associated with your washing plant you’ve got yields. So although you might be producing at 2 million tonnes per annum, a 65% yield is what our initial washability curves are suggesting, we’d be selling about 1.3 million tonnes of washed coal per annum into the markets. Out of that, probably 1 million tonnes per annum will go into the export markets and the international markets, seaborne trade and maybe 200,000 to 300,000 tonnes will stay internally inside South Africa to feed the domestic market.
Nicholas Hayes: What about infrastructure and costs. How does that position Kangwane with say production in the Hunter Valley or other regions?
Dr Eric Lilford: The fortunate position that Kangwane sees itself in is that we have rail network right on our property. We’ve got a rail siding that’s actually on our property. Fortunately it doesn’t sterilise any coal, the coal sits at over 200 metres below surface at that particular point. The coal does subcrop, so our first number of years in excess of ten years will be all open pit mining, where your strip ratio as you can imagine, is 1 to 1 or even less. We have an ultimate strip ratio of somewhere around 7 or 8 to 1, again that depends on economics.
Outside of the rail network which links us directly to the Matola Port, as well as going in the westerly direction to the high fault of South Africa where other consumers are, we have an existing operation to the south of us. They produce small volumes of anthracite from the same coal measures or the same coal seams, and they currently feed or take electricity off the grid supplied by Eskom. So we have the electricity grid right next to us as well, within 18 kilometres.
We have the Incomati River that runs very close to the property, again fortunately it does not sterilise any of our coal because it lies towards the east of our subcrop. So it’s very convenient to have that river there. Our southern neighbour consumes or takes water from that river; obviously you reprocess as much water as possible, but fresh water comes from the river. We will with our water use applications and water use licenses that have been submitted, we also get water from the Incomati River as well.
So from an infrastructure point of view, we are in a very enviable position. We don’t really require much as far as infrastructure is concerned. The only thing we need to do is develop a mine.
Nicholas Hayes: Now to corporate matters, you recently raised $30 million from institutions. What was the purpose of the raising and what is the Company’s cash position now?
Dr Eric Lilford: The Company recently raised its $30 million as part of our Chapters 1 and 2 re Compliance. The money will be fully allocated to the construction and development of Kangwane. So that gives you an idea of the type of capital spend we’re looking at for this first project of ours. We don’t believe it will cost much more than $30 million to fully develop to bring into production. And again, it’s so low as a consequence of not requiring any money for roads and rails and water, and maybe a few water pipes to bring it in, but we’ve got all the infrastructure in place. So the $30 million will be used mostly to develop the Kangwane Project alone.
Nicholas Hayes: Are you funded for the rest of 2011?
Dr Eric Lilford: As far as 2011 is concerned we certainly are fully funded. We have a cash balance of just over $30 million now with that $30 million raising, and we are probably fully funded if you consider Kangwane as a project in isolation requiring the capital we’ve raised, we’re fully funded to the end of 2012. That said - we’re not going to be a single asset company. So it’s in all likelihood, we will require an additional capital for the additional projects we have in our sights in the not too distant future.
Nicholas Hayes: Last question. Where would you like to take ZYL in the next six to twelve months?
Dr Eric Lilford: Without disclosing too much of what our exact intentions are, we have a regional presence in that Mpumalanga area. So suffice to say that there are a few targets there that are very interesting and they are complimentary to what we’ve got. They’ll all be serviced under exactly the same infrastructure; we’ll have the same management team. So logic dictates that it would be prudent for us to actually grow the business in the area we are operating in.
Nicholas Hayes: Eric Lilford thanks for introducing ZYL.
Dr Eric Lilford: Thank you very much.
ENDS
