Churchill Mining moved up sharply last week, on reports they might be in talks with NTPC regarding
a possible deal on the East Kutai Coal Project, Churchill’s flagship.

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Churchill Mining Plc – Our views on the rumors and speculations

Churchill Mining (LON:CHL) moved up sharply last week, on reports they might be in talks with NTPC regarding a possible deal on the East Kutai Coal Project, Churchill’s flagship. We are also convinced NTPC is the company whom Churchill is talking to, so we thought it might be useful to give a background story on NTPC, and why we think they are extremely interested in access to the East Kutai Coal Project.

Company Summary

Churchill Mining is a coal exploration and development company with its key asset being the 75% owned East Kutai Thermal Coal Project in East Kalimantan, Indonesia. In July the company planned to raise the coal production to 35 million tpa, to become a major exporter of thermal coal to meet the growing demands of the expanding Asian energy market. The company has been evaluating various options for the project including a joint venture partner or a long-term offtake arrangement.

NTPC Background

NTPC was founded in 1975, and is a parastatal corporation, being 79% owned by the Indian Government. They currently have a 35.000MW capacity, producing almost 29% of India’s total power generation, and are looking to add another 20.000MW capacity for 2015. The company currently uses 120M tonnes of coal per annum, and by 2015 they’ll need an additional 130M tonnes per annum to meet their demands.

Where to find the coal they need?

Here comes the main issue for NTPC. It’s almost impossible to exploit new domestic projects, due to geographical or political reasons, and relocation is not an option. Tata Motors, for instance, had to move their production unit from the State of West-Bengal to Gujarat, as the communist majority in West-Bengal strongly opposed any relocation of the inhabitants. Thus, higher domestic production seems to be impossible, so the coal- hungry company needs to look somewhere else to find the coal they so desperately need. Indonesia is an attractive candidate to find coal mines, as it lies much closer to India than for instance South Africa or Australia.

Why is churchill a valuable indonesian partner?

There are three main reasons why Churchill might be the ideal partner for NTPC. First of all, they have the potential to reach gigantic output. The company is currently finalizing an updated Feasibility Study to support a 35M tpa production plan (of which 5Mtpa has already been assigned to PLN, the Indonesian utility group). NTPC isn’t looking for projects smaller than 1Mtpa, but wants big ones to fill the gaps of shortage in the future.
Secondly, the characteristics of Churchill’s coal are perfect to blend with the coal they are using now. Coal India (also a parastatal corporation) currently is NTPC’s main supplier of coal, as they are responsible for almost 85% of all coal production in India. Their coal has a high-ash and a low-moisture-content, which makes it ideal for NTPC to blend with Churchill Mining’s low-ash high-moisture coal.
Lastly, we believe NTPC missed out on two possible acquisitions over the last twelve months, because they waited too long to make a final offer for one project in Australia, and one in Mozambique. We can imagine they are becoming increasingly nervous, as they absolutely need to secure some agreements to support their growth plans for the future.

What timeframe are we thinking about?

NTPC announced they wanted to strike a deal before March 2011, which is consistent with the timeframe we had in mind. We think NTPC will make a firm offer during the formal bidding process Churchill and Credit Suisse (CS) want to set up, after releasing the Feasibility Study. There will be a deadline on that bidding process, so we believe NTPC will bring out an excellent offer, as they really need to secure their coal supplies for the future.

What kind of deal are we talking about?

We think NTPC will make an offer for an equity stake in the project, combined with signing an offtake agreement for the majority of the production. An offer to acquire the whole company is also possible, but we think the first scenario is more likely, as NTPC only wants the coal, and are not interested in operating coal mines.

What offer are we talking about?

It’ll be interesting to see what deal Essar and Kangaroo Resources (ASX:KRL) will strike. Essar wants to buy Kangaroo’s GPK coal mine. The GPK-project is very similar to the East Kutai Coal Project, as it’s also a high- moisture coal with approximately the same calorific grade as Churchill’s coal. We believe this will set a negotiation benchmark for talks between NTPC and Churchill Mining. Let’s not forget NTPC has over 6 billion dollars in their war chest. When asked for comments on this report, Paul Mazak, Managing Director of Churchill Mining, stated that “Whilst Churchill and its advisors Credit Suisse are in discussions with a number of parties, it would be inappropriate to comment on any particular potential bidder.” Exciting times are ahead for Churchill and their shareholders!

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