SINGAPORE (March 12): Location is everything in real estate, developers often profess. The same is true in mining, according to newly listed BlackGold Natural Resources, which believes it has an edge over other coal miners in Indonesia when it comes to meeting the country's power needs.  

BlackGold, which came to market through a $187.5-million reverse takeover by building-materials supplier NH Ceramics, has three coal concessions in Sumatra's Riau province spanning an area of 48,910ha. Coal in Sumatra is mostly of a lower grade and consumed domestically as it tends not to be suitable for export. Yet demand is by no means weak.

In seeking to reduce reliance on diesel for power generation, while mindful of a lack of adequate transport infrastructure for coal miners, the Indonesian government has been promoting so-called mine-mouth power plants to meet the country's electricity needs.

These plants are built close to coal mines so that freight costs are kept to a minimum. Off-take agreements between coal producers and owners of such plants tend to last many years.

"Riau has a power deficit of 1,800mw. They are importing power from neighbouring provinces. The power plants within the province are fuelled by diesel, which is very expensive," James Rijanto, BlackGold's chief investment officer, told theedgemarkets.com.

Diesel is about 600% more expensive than coal on a per kilowatt basis, besides being "the dirtiest fuel" in Indonesia, according to BlackGold CEO Phil Rickard.

"It costs around US$7 billion ($9.7 billion) to US$8 billion a year in government subsidies just to keep the diesel-fuelled power plants in Indonesia going," said Rickard. "By switching to coal, the government will save US$7 billion to US$8 billion in subsidies. There is massive demand."

According to Indonesia’s Ministry of Energy and Mineral Resources, national electricity demand is expected to continue growing 8.4% annually from 2013 to 2022. Electricity demand in Sumatra is projected to increase 10.6% yearly.

Plans are underway by the government to set up coal-fired power plants near BlackGold's concessions in Riau. The company has yet to start production, but expects to do so next year.

It inked deals with two domestic power producers last November to supply 60,000 tonnes of coal a month. It also has a memorandum of understanding with a coal trader to deliver 100,000 tonnes of coal monthly. Its biggest customer is state-owned power generation firm PT PLN (Persero), to which it has committed to supply 500,000 tonnes of coal a year.

BlackGold versus peers
BlackGold is the third Indonesia-focused coal mining company listed in Singapore, after Geo Energy Resources and Resources Prima Group. United Fiber System ( Financial Dashboard) recently secured approval from shareholders for its proposed reverse takeover of PT Golden Energy Mines, a coal company controlled by Indonesia's Sinar Mas Group.

Unlike BlackGold, Geo Energy and Resources Prima operate in Kalimantan, where competition among miners is keen. Both companies export some of their coal, making them vulnerable to price volatility, which has been particularly acute over the last few months with prices of coal and other commodities plummeting amid reduced demand from China.

"We're targeting domestic power plants. What we produce will be sold in Indonesia," said Rickard. "Indonesia - specifically Sumatra and Java - needs at least an additional 24,000mw of power over the next five to seven years, translating to roughly 160 million tonnes per year of new coal supply."

Of the three listed miners, BlackGold has the most coal resources and reserves certified by JORC, the Joint Ore Reserves Committee, which sets minimum standards for the public reporting of exploration results, mineral resources and ore reserves. In Riau, it is the only miner with JORC-certified coal resources and reserves, according to Rickard.

"Even coal companies already in production never got a JORC report," he said. "Most Indonesian coal companies had just been producing because coal was so abundant and prices were so high some years ago. But for power plant companies, they need a supplier with JORC-certified resources. If they don't have one, they can't get bank financing."

BlackGold is also the only one among the three Singapore-listed miners that will benefit from a revision last year to a piece of legislation loosely dubbed Regulation 10, which guarantees coal producers that supply to mine-mouth power plants a profit margin of 25% over a government-approved cost of production.

"If it takes too much money to take coal out from the ground, you can't sell it or export it. With the fall in coal prices, the government introduced Regulation 10," said Intekhab Khan, BlackGold's non-executive chairman. "As long as our costs don't spiral out of control and are within the parameters stipulated by the government, we will make a 25% margin."

Regulation 10 does not apply to Geo Energy and Resources Prima for now, according to Rickard, as "they don't have power plants in their region that they can supply to".

Expansion plans
Of the three concessions it owns, BlackGold has explored only one so far. The exploration licences for the other two concessions expired last month but the company has received in-principle approval for their renewal. The fair value of the three concessions, as determined by Jones Lang LaSalle, is about US$169 million. To date, the company has more than 200 million tonnes of coal resources and about 32.6 million tonnes of probable reserves.

The plan is to start production early next year and ramp up output to four million tonnes annually by 2018. In the meantime, BlackGold will build the necessary mining infrastructure, including a jetty. Over the longer term, it may consider buying concessions for other minerals and upgrade its technologies to improve the quality of its coal.

Some of these plans will be funded by the $25.4-million proceeds raised from a share placement it just completed to comply with free-float listing rules. The placement price of 29.5 cents a share is similar to the price NH Ceramics offered BlackGold for the reverse takeover.

"The money from the placement is more than enough for the first 18 months to get positive cash flows," said Rickard.

BlackGold, which has yet to generate any revenue, expects to turn profitable from the first year of production, he said. "We are going to increase production to four million tonnes a year by 2018. On our bottom line, we are looking to earn US$38 million to US$40 million a year by then." It had a pre-tax loss of US$528,486 in 2013.