Glyncastle Mining and Resource

North Sea oil and gas production in decline for over a decade

Glyncastle Plc offers for sale all the shares held in Glyncastle Mining Limited t/a Black Diamond. Glyncastle Mining and its subsidiaries will be sold without debt. The opportunity is to fund the outright purchase or buy as part of a syndicate with the investment managed by Cork Gully LLP and/or another.

Black Diamond’s resource is 973Mt of high grade and ultra-high grade anthracite which has wide domestic and industrial use throughout the United Kingdom and Europe given its high carbon content and calorific value. The anthracite resource can be readily exploited, as the working licences and infrastructure are already in place. Black Diamond is well placed to become the only producer of high grade anthracite in Europe by 2018. Black Diamond is forecast to generate:

• Revenue of £68.4m pa
• Taxable profit of £41.9m pa
• NPV of £362m before tax
• Tax credits of up to £28m
• Lifetime of the mine 30 years +

The above figures are based on producing initially 500ktpa of anthracite, using double entry shortwall mining and selling to niche anthracite markets where prices are robust. Should all the anthracite be heat treated then Black Diamond would generate:

• Revenue of £180.0m pa
• Taxable profit of £153.5m pa
• NPV of £1.17bn before tax

The Black Diamond website can be accessed at www.blackdiamondanthracite.com.

Black Diamond anthracite has an extremely low ash and high carbon content as compared to overseas ultra-high grade anthracite, the mine is capable of producing designer products through sizing, blending and calcination. Through calcination the product becomes almost pure carbon. The quality of the anthracite produced at Black Diamond is high grade and ultra-high grade anthracite. The National Coal Board (NCB) ranked the coal as “High Grade” 100 anthracite. Hardgrove Grindability Index (HGI) is 55.

Welsh anthracite delivers the highest energy per its weight and burns cleanly with little ash, making it ideal for domestic and industrial heating as a “smokeless” product. The anthracite is sold for between £140-255/t for this purpose as a sized product, and anthracite fines are utilised in the manufacture of anthracite ovoids. The sized anthracitecoal can also be sold into Europe, the German market in particular favours sized anthracite and will pay a premium. Historically anthracite fines have been used in the production of steel as a carbon additive. High grade anthracite is also used in the production of other more niche ferro-alloys where the high carbon content is relevant. The required specification of the anthracite very much depends upon the type of alloy, prices are conservatively estimated at £115/t ex mine in the forecasts. Global economic growth will increase demand for ferro alloys and prices for high grade anthracite will increase accordingly. Producers capable of supplying high quality PCI such as
Black Diamond (low volatile matter and low ash) are likely to see strong demand through the medium-term. PCI prices in the UK peaked at £200/t in 2009. High grade anthracite is screened, washed and dried to produce a comprehensive range of filtration products. The price in the model for this sized raw product is £225/t, when sold to the end user the product can achieve in excess of £384/t. Welsh anthracite is recognised by water treatment experts as having unique characteristics which support the ongoing need to maximise water quantity and quality worldwide. Activated carbon or activated anthracite, is a form of carbon that has been processed to have small, low-volume pores that increase the surface area available for adsorption or chemical reactions and can achieve a price in excess of £4,800/t for liquid and gas purification, sold in 55lb bags. Calcined anthracite (ECG/GCA) is manufactured by heat treating high grade anthracite which results in reduced volatility and the development of a graphite structure. ECA/ GCA was sold for in excess of £528/t. Other uses include using anthracite/calcined anthracite as a carbon additive in steel making, coke replacement, substitute for coke breeze and processed carbon products. The market for carbon raw material is set to increase as the uses for carbon become more developed. The overall demand for anthracite in the UK is 1.595Mt pa. The European market demand for anthracite is 7.023Mt, excluding the UK. Further detail on its uses, demand, supply and prices are available upon request.

The mine management team has over 15 years experience of long/short wall mining in South Wales, UK. The CEO has over 40 years experience in coal mining, 10 of which were in international coal trading. In addition Cork Gully are prepared to manage this project on behalf of investors and to provide all the resources at their disposal including accepting key board positions.

Black Diamond will use shortwall mining as a method of extraction as recommended by international mining consultants, DMT Group to produce over 500ktpa. Black Diamond also has the support of leading geologists, geotechnical and ventilation experts. The mine’s capacity is 1.3Mt pa so the mine will be operating well within capacity. There is a skilled local labour force and a highly developed infrastructure for the distribution of coal. In addition, low geopolitical risk (EU sales forecast at 4%) and a favourable regulatory regime mean the South Wales coal field is a very attractive operating environment.

Black Diamond will produce initially 500ktpa of high grade anthracite and 53ktpa of coal from the “opencast” quarry operation. This will generate revenues of over £68.4m pa following the installation of the short wall faces. Coal will be sold during the development phase in order to reduce the working capital requirement. This will also allow for markets and relationships to be re-established prior to full
production. The financial forecasts presume sales will be concentrated on the high value domestic and industrial heating market together with industrial processes requiring high carbon content and low contaminants. There would be no reliance on the lower value bulk markets, such as power generation
and blast furnace PCI. Sales to the EU within the financial model represent only 4% of revenue. The focus is the UK domestic market. In reality the EU must import anthracite coal from either the UK, Russia or Ukraine. There will be no alternative source of anthracite coal in the EU. In terms of the global market we have already been approached by Glencore who wish to sell our anthracite to South Africa. Another future export market is of course India. Such exports are not included within the financial model and could justify increased production. Black Diamond should breakeven within Yr 2 following which the mine should be cashflow positive with repayment of capital in Yr 3. Continuing production at the forecast levels would be funded out of free cashflow. The annual profit and loss forecast for the first 3 years is summarized as £(3.4)m, £42.0m and £40.9m with cash from operations of £36.5m pa thereafter. Growth strategy over the next 5 years would be optimise sales through product mix and use of special products. The extension of the wall length where possible with the potential to introduce a second face in the Peacock seam should increase production to well over 800ktpa.

In order to achieve full production, there is a working capital and unfunded capex requirement of £6.12m. This includes an allowance for aged debtors and suitable stock levels. The initial capex will be purchased over two years, with the first year requirement being £11.3m which will in part be funded by agreed finance/deferred payment terms on the equipment. The cost can be reduced still further by buying reconditioned rather than new equipment, cost £9.3m. The Welsh Government should provide financial support to develop the surface infrastructure, as required. Grants should also be available in due course to support job creation and inward investment. Management and Cork Gully LLP have offered to provide up to £5m of equity funding, subject to the purchase price.

Should production levels be achieved and given anticipated demand for the product, steps could be taken to consider an exit from this investment after 5 years. This should coincide with a recovery in steel prices and therefore increased investor demand. Further mine development should be
actively considered to increase the proven reserves. We would assume in due course an enterprise value in excess of 6 times EBITDA for Black Diamond, in due course, given the nature and longevity of the asset. This would assume an enterprise value in excess of £252m leading to a potential return of 30 times capital with a sale in Yr 5, subject to equipment finance.

Black Diamond is a current trading name for Glyncastle Mining Ltd and Glyncastle Resource Ltd.