Australian-based Allegiance Coal (ASX: AHQ) has entered into a joint venture agreement with commodity trading house Itochu Corporation of Japan, which will see Itochu provide financial and operational support for the development of the Tenas coal deposit in Canada.
Under the terms of the joint venture, Itochu will make a multi-million dollar investment in Allegiance’s wholly-owned subsidiary Telkwa Coal Limited (TCL), operator of the Telkwa metallurgical coal project on the western side of British Columbia, which comprises the Tenas, Goathorn Creek and Telkwa North coalfields.
Located within close proximity to each other, the deposits have a combined 126 million tonnes of coal resource, with Tenas being the flagship project and first in line for development.
Tenas is currently at definitive feasibility and permitting stages for a 750kctpa operation to deliver a mid-volatile, semi-soft coking coal to the seaborne metallurgical coal market over an initial 22-year mine life.
The new agreement will see Itochu provide financial support to Allegiance in return for 20% shareholding in TCL and being the sole and exclusive sales agent for all coal produced at Tenas under the joint venture.
Stage 1 support
Itochu’s support will be split into three stages, with Stage 1 comprising a staggered investment over two payments of $1.59 million each which will see the trading house earn a total 10.1% interest in TCL.
A final payment of $3.82m for an additional 9.9% interest in TCL will be made following lodgement of an environmental assessment application.
The second and third investments will be subject to Itochu’s approval at the time.
Stage 1 represents an enterprise value for TCL of $35m and is conditional upon the company holding $1.59m cash at bank prior to Itochu’s investment.
This cash will bump up to $8.59m once Stage 1 is finalised and is expected to fully-fund TCL through to completion of the Tenas permitting process.
Stage 1 of the joint venture agreement also allows for Itochu and Allegiance to appoint a total of five directors to the board of TCL.
Itochu will appoint a marketing director, and will take overall charge of marketing the Tenas project’s 21 million tonnes of saleable coal reserves to customers.
Pre-feasibility studies have previously declared a total 42.5mt of saleable coal reserves for the greater Telkwa project, positioning it in the lowest five percentile of the global seaborne metallurgical coal cost curve.
Allegiance, via TCL, will take responsibility for the daily operations of the Tenas coal mine.
Stage 2 of the agreement will give Itochu the right to make a further investment in TCL following the granting of permits for Tenas, to a maximum 50% of TCL’s issued share capital and based on a “post permits to mine” valuation.
Allegiance said the quantum and size of the Stage 2 investment will be determined following completion of the Tenas DFS in early 2019.
The Telkwa coalfield, which houses the Tenas deposit, sits on the southern edge of the Bowser Basin in the northwest of British Columbia.
The coalfield is small and largely undeveloped but is estimated to host more than 900mt of high-volatile bituminous and semi-anthracitic coal.
The Tenas deposit holds a total coal resource of 36.5mt, of which an estimated 23.7mt of coal will be mined for a production rate of 750,000 saleable tonnes per annum over 22 years.