Better than Uranium
Uranium is getting hot. The price is now $113 a pound, up from $6 and change five years ago. It's getting too popular and I hate popular investment ideas. A year ago housing was the most popular idea on the block. I hate popular, it goes against my contrarian philosophy.
But believe it or not, there is an energy investment way overlooked by the crowd. It would be accurate to call it even unpopular. Right now it's the best energy investment on the block. The magic energy: coal. And I'll bet you were tempted to think, COAL=UGH. If you did, you just made my point. For most of the past 200 years, coal was THE energy source, it's only been the last 90 years or so that petroleum has been so popular. Coal mines made many fortunes but coal has been pretty much ignored by investors for the last 50 years. The sound you hear is opportunity screaming, "Buy me, Buy me."
Let me give you some numbers; it costs about $6-$8 to produce 1 million BTU from natural gas, relative to oil natural gas is way undervalued. And it costs $8-$12 to produce the same million BTU from oil. Coal costs a mere $1-$2 per million BTU. For coal, the future is bright indeed. Peak oil is not only real, peak oil is here, and actually it appears we have passed peak oil. Americans are casually assuming that as Canadian production of natural gas increases, it will flow to them. Actually more and more Canadian natural gas is being diverted to the shale oil projects and Canadian exports of natural gas to the US are decreasing.
The world has an energy issue even before you consider increased demand from China and India. I made my first trip to China in September of 2004. I happened to pick up a Chinese newspaper to read that between January 1st of 2004 and August 1st of 2004, Chinese imports of oil increased some 49%. That's enormous. So even if peak oil didn't exist (and it does) the increase in demand for energy from China and now India is enough to guarantee higher prices for all energy.
World wide, about 52% of all electricity is generated from coal. Coal used for electricity is called thermal coal. In recent years, Indonesia overtook Australia as the world's largest thermal coal exporter. I just came back from a trip to the island of Borneo in Indonesia where I visited a wonderful energy company, KAL Energy, trading on the OTC exchange. (Trading symbol KALG)
In late December of last year, I got a call from a good friend of mine in Vancouver. He and some partners had just done a deal to buy the Thatcher Mining Pte Ltd; a Singapore privately held company with significant coal holdings on Borneo. KAL Energy paid Thatcher shareholders 32 million shares for their coal properties and was in the midst of doing a $3.5 million dollar placement. My friend wanted to know what I thought about the deal.
Well, I thought; indeed, still think, it's brilliant. Indonesia is coal country and the two properties they picked up have about 192,000 million tons based on an estimate by Consulting Geologist Jonathan O'Dell. That number is not 43-101 or JORC compliant, it's an estimate of the potential based on a 4-5 meter thick single seam of coal.
I was interested enough to take part in their Private Placement and this was a couple of months before I even saw the property. This isn't like finding some moose pasture in Outer Mongolia because some geologist deep in his cups in a bar in Rio says there may be gold there. This is a deal with a known coal deposit surrounded by thermal coal producers, located on a deep river with full coal barges passing by hourly. It's not a theory, it's a fact.
Basically, KAL picked up two known coal properties and gave about 33% of the company away to get them. But their next actions were what really impressed me. They closed the placement in February and 24 hours later wired money to Indonesia to get their $2 million drill program started. The same day, a barge left carrying 5 drill rigs and all the equipment they need to get started. Plans called for starting drilling about March 8th.
I wanted to see the project first hand and I flew to Borneo to see it for myself. It took a grueling 30 hours of flying, a 6 hour drive down old logging roads and a 2 hour speed boat ride to get to the camp. In all I used five days to get there but it was worth it.
I arrived on March 12th; they had drills turning and were still building the camp. It was an adventure.
On Friday April 13th, KAL Energy announced completion of over 2000 meters of drilling of the 5000-meter program scheduled for phase 1 to define the limits of the coal deposit. They know there is one seam there, they want to find out what other seams are present and they must drill to determine that. And they want to determine grade. They have taken dozens of surface samples and know that grade but the surface sample mostly come from road cuts and streambeds where the water flow has washed away the sandstone. The initial testing from these samples shows the coal is low in sulphur and ash with higher KCAL, great for energy generation.
Other coal mines located nearby are mining multiple coal seams. The KPC pit (producing 25 million tons yearly) has in excess of 10 seams. The former KPC onsite production manager in now KAL's onsite production manager and obviously he knows coal and Indonesia. The number of 192 million tons is based on a single seam and obviously the number can go up a lot based on what they find in drilling.
Coal mining isn't rocket science; it's mostly earth moving. The samples they took look to be worth about $47 dollars a ton currently. Investors can use any number from $30 a ton to $60 a ton and will be in the ballpark. Based on today's price KAL can accept anything up to a strip ratio of 10-1.
KAL knows how much it costs to ship; they know what there loading costs are and how much it will cost to truck it to the loading point on the river. The biggest variable is strip ratio; coal mining is far more about moving dirt than anything else. This will be an open pit mine and costs are very predictable.
KAL has managed to build their 128-man camp and have completed 2000 meters of drilling in a month. The Phase I drill program will be finished in June and current plans call for beginning a bulk-sampling program in the 4th quarter of 2007. The bulk sample will mine 200,000 tons of coal. You can call it a bulk sample, I call it mining. Plans call for scaling up to 5 million tons of production within a few years and eventually up to 15 million tons.
This is a plan which KAL Energy management members have been thinking about for years and waiting patiently until they had all their ducks in a row. It's a production story and will be a wildly profitable story. Energy is going up and KAL is getting in on the ground floor but have waited long enough that price is working in their favor.
There will be some future dilution of the company. Once they have a JORC (Australian standard) resource and know details of strip ratios and depth of multiple seams, they can get into serious mine planning. At that point it's a question of how many D-11 Cats and dump trucks they can get their hands on. That requires cash but between the cash flow from the bulk sample and bank credit, I don't see any large dilution of the company. I would hope they are also looking for more properties to pick up. The idea is brilliant and they already have a home run on their hands.
I have a third party report on KAL Energy done by Tri-State Capital in early March. According to their figures, KAL Energy has a NPV (Net Present Value) of $776 million US. According to the stock market, the company has a market cap of about $91 million. I think Tri-State's figure is lot closer to reality and the stock remains very undervalued.
I was very impressed with the foresight of management. This game plan was thought about for years and so far their execution was brilliant. They have a complete team on the ground, a good theory, the drills are turning and results will be out shortly. The risk-reward ratio is about as good as it gets and if you are looking for a nice energy investment, KAL Energy should be right at the top of your list.
I want to thank all of the wonderful people at KAL who briefed me and led me on an incredible adventure deep in the jungles of Borneo. I was really impressed with both the project and the depth of management.
KAL is an advertiser. We also have taken a major position in the company with which we are very happy. I am biased so before investing make sure any investment fits your needs. It's your money, be responsible with it.
KAL Energy Inc
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June 2nd, 2020
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